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, 2001
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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, 2001, 28,377,870 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, 2001
INDEX
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Condensed Financial Information:
Consolidated Condensed Balance Sheets - September 30, 2001 (unaudited) and
December 31, 2000 3
Unaudited Consolidated Condensed Statements of Income - Three Months Ended
September 30, 2001 and 2000 4
Unaudited Consolidated Condensed Statements of Income - Nine Months Ended
September 30, 2001 and 2000 5
Unaudited Consolidated Statement of Equity Accounts 6
Unaudited Consolidated Condensed Statements of Cash Flow - Nine Months Ended
September 30, 2001 and 2000 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 37
Item 2. Changes in Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EQUIVEST FINANCE, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
2001 2000
------------------ -------------------
Unaudited
ASSETS
Cash and cash equivalents $ 1,949,830 $ 4,805,366
Receivables, net 239,411,709 258,950,064
Inventory 87,193,759 95,577,521
Property and equipment, net 21,012,845 21,580,157
Goodwill, net 42,835,050 44,109,482
Other assets 13,351,510 11,951,491
------------------ -------------------
TOTAL ASSETS $ 405,754,703 $ 436,974,081
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 5,978,997 $ 9,624,115
Accrued expenses and other liabilities 27,063,238 23,194,002
Income taxes 31,448,657 29,974,986
Notes payable 248,668,649 288,374,503
------------------ -------------------
TOTAL LIABILITIES $ 313,159,541 $ 351,167,606
CONTINGENCIES, COMMITMENTS
AND LIQUIDITY
STOCKHOLDERS' EQUITY
Cumulative Redeemable Preferred Stock--Series 2 Class A, $3 par value; 15,000
shares authorized, 11,650 and 10,000 shares issued and outstanding at
September 30, 2001 and December 31, 2000,
respectively; $1,000 per share liquidation value 34,950 30,000
Common Stock, $.01 par value; 50,000,000 shares authorized; 28,377,870 and
28,089,722 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 283,778 280,897
Additional paid in capital 64,202,133 62,246,553
Retained earnings 28,074,301 23,249,025
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 92,595,162 85,806,475
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 405,754,703 $ 436,974,081
================== ===================
3
See Accompanying Notes To Consolidated Condensed Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30,
--------------------------------
2001 2000
---- ----
REVENUE
Timeshare interval sales $ 19,010,294 $ 31,085,826
Interest 8,739,172 9,890,703
Resort operations 4,651,669 4,792,716
Other income 228,050 482,168
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32,629,185 46,251,413
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COSTS AND EXPENSES
Interest 4,134,050 6,549,431
Cost of timeshare intervals sold 4,626,429 7,598,037
Sales and marketing 9,978,134 16,434,290
Resort management 3,830,806 3,058,477
Depreciation and amortization 1,225,853 1,194,885
Provision for doubtful receivables 4,264,661 2,451,371
Loss on sale of assets 241,314 -0-
General and administrative 3,177,562 2,759,950
------------------ ------------------
31,478,809 40,046,441
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INCOME BEFORE PROVISION FOR INCOME TAXES 1,150,376 6,204,972
PROVISION FOR INCOME TAXES 525,000 2,675,000
------------------ ------------------
NET INCOME $ 625,376 $ 3,529,972
================== ==================
Basic earnings per common share $ 0.02 $ 0.12
================== ==================
Diluted earnings per common share $ 0.02 $ 0.12
================== ==================
4
See Accompanying Notes To Consolidated Condensed Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
9 Months Ended September 30,
----------------------------
2001 2000
---- ----
REVENUE
Timeshare interval sales $ 49,708,023 $ 77,400,045
Interest 27,126,058 28,676,491
Resort operations 14,770,338 14,830,236
Other income 684,364 1,648,835
------------------ ------------------
92,288,783 122,555,607
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COSTS AND EXPENSES
Interest 14,704,361 19,144,421
Cost of timeshare intervals sold 11,567,619 18,551,164
Sales and marketing 24,665,271 42,354,159
Resort management 9,574,449 9,251,088
Depreciation and amortization 3,517,505 3,561,424
Provision for doubtful receivables 7,520,829 6,140,553
Loss on sale of assets 695,954 -
General and administrative 8,817,519 8,488,224
------------------ ------------------
81,063,507 107,491,033
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INCOME BEFORE PROVISION FOR INCOME TAXES 11,225,276 15,064,574
PROVISION FOR INCOME TAXES 4,750,000 6,400,000
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NET INCOME $ 6,475,276 $ 8,664,574
================== ==================
Basic earnings per common share $ 0.21 $ 0.29
================== ==================
Diluted earnings per common share $ 0.21 $ 0.29
================== ==================
5
See Accompanying Notes To Consolidated Condensed Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY ACCOUNTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001
Redeemable
Preferred Common Additional
Stock-Series Common Stock Paid in Retained
Total 2 Class A Stock-Shares Amount Capital Earnings
------------- ------------ ------------ ----------- ------------- --------------
Balances at December 31, 2000 $ 85,806,475 $ 30,000 28,089,722 $ 280,897 $ 62,246,553 $ 23,249,025
Dividends on Series 2 Class A
Preferred Stock paid with
1,650 shares of Series 2
Class A Preferred Stock --- 4,950 --- --- 1,645,050 (1,650,000)
Exercise of stock options 313,411 --- 288,148 2,881 310,530 ---
Net Income 6,475,276 --- --- --- --- 6,475,276
------------- ------------ ------------ ----------- ------------- --------------
Balances at September 30, 2001 $ 92,595,162 $ 34,950 28,377,870 $ 283,778 $ 64,202,133 $ 28,074,301
============= ============ ============ =========== ============= ==============
6
See Accompanying Notes To Consolidated Condensed Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2001 2000
--------------------- ---------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income $ 6,475,276 $ 8,664,574
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization and depreciation 3,517,505 3,577,716
Provision for doubtful receivables 7,520,829 6,198,559
Changes in assets and liabilities
Other assets (2,952,050) (7,061,518)
Inventory 8,383,762 (2,918,376)
Accounts payable and accrued expenses 15,381 5,082,676
Income taxes payable 1,473,671 105,253
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,434,374 13,648,884
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
(Increase)/Decrease in receivables, net 12,472,533 (19,804,973)
Purchase of equipment (56,589) (201,960)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 12,415,944 (20,006,933)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES
Proceeds from notes payable 99,732,139 185,081,232
Payments on notes payable (139,437,993) (184,580,246)
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (39,705,854) 500,986
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(DECREASE) IN CASH (2,855,536) (5,857,063)
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Cash and Cash Equivalents at beginning of period 4,805,366 8,010,888
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,949,830 $ 2,153,825
============= =============
Supplemental Cash Flow Information:
Interest paid $ 14,738,818 $ 19,141,063
============= =============
Income taxes paid $ 3,461,925 $ 3,844,661
============= =============
Noncash transactions
Dividends on Series 2 Class A Preferred Stock paid with shares of Series
2 Class A Preferred Stock
$ 1,650,000 $ 0
============= =============
Reclassification of investment in joint venture to inventory as
a result of foreclosure
$ 0 $ 4,415,780
============= =============
7
See Accompanying Notes To Consolidated Condensed Financial Statements.
EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated condensed interim financial statements as
of September 30, 2001 and for the three-month and nine-month periods ended
September 30, 2001 and 2000 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, 2001 are not
necessarily indicative of the results expected for the year ended December 31,
2001. For further information, please refer to the consolidated financial
statements and footnotes thereto included in Equivest Finance, Inc.'s (the
"Company") Form 10-K for the year ended December 31, 2000.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, Equivest Capital, Inc. (formerly, Resort
Funding, Inc.) and its subsidiary, BFICP Corporation (collectively, "Equivest
Capital"), 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.,
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
(the "Kosmas Acquisition"); Peppertree Resorts Ltd., and its subsidiaries,
Peppertree Resort Villas, Inc., Peppertree Resorts Vacation Club, Inc. (now
known as Equivest Vacation & Travel Club, Inc.), Peppertree Vacation Club, Inc.
(now known as Equivest 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
(the "Peppertree Acquisition")); and Equivest Texas, Inc, which was created in
connection with the acquisition by the Company of a resort development site on
May 3, 2000 (known as Riverside Suites). 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 timeshare intervals 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, 2001
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income $ 625,376
Less: Preferred Stock dividends (174,750)
----------
Basic earnings per share:
Income available to common stockholders 450,626 28,367,430 $0.02
=====
Effect of dilutive securities:
Stock options -- 33,965
---------- ----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $ 450,626 28,401,395 $0.02
========= =========== =====
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 $0.12
=====
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 $0.12
========== ========== =====
9
For the Nine Months Ended September 30, 2001
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net Income $6,475,276
Less: Preferred Stock dividends (483,000)
----------
Basic earnings per share:
Income available to common stockholders 5,992,276 28,183,684 $0.21
=====
Effect of dilutive securities:
Stock options - 155,477
---------- ---------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $5,992,276 28,339,161 $0.21
========== =========== =====
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 $0.29
=====
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 $0.29
========== ========== =====
Redeemable Preferred Stock
In June 2001, the Board of Directors declared $1,650,000 in Series 2
Class A Preferred Stock dividends. The dividends, which represented the
cumulative unpaid dividends through March 31, 2001, were paid through the
issuance of 1,650 shares of Series 2 Class A Preferred Stock. At September 30,
2001, the cumulative undeclared and unpaid dividends amount to $333,000.
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, became
effective January 1, 2001. SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of the derivatives are recorded each period in current earnings or other
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction, and if it is, the type of hedge transaction. The Company
currently has no derivative instruments.
10
SFAS No. 142 - Goodwill and Other Intangible Assets
In June of 2001, the FASB issued SFAS 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 is effective for the Company beginning
January 2002 except for goodwill acquired after June 30, 2001, which would not
be subject to amortization.
The statement will have a significant impact on the Company's future
reported income. Under SFAS 142, goodwill and certain other intangible assets
will no longer be amortized but shall be tested for impairment loss at least
annually. The impairment tests are to be at a reporting unit level (versus
Company wide) using the unit's fair value. Any goodwill impairment loss shall be
recorded in the income statement. Financial statements of prior periods will not
be restated; however, adjusted amounts, including per share amounts, will be
presented.
The Company has started its study of SFAS 142; however, implementation
of the accounting change will require careful detailed analyses which has to be
determined and completed.
Reclassifications
Certain amounts for the three months and nine months ended September
30, 2000 have been reclassified to be consistent with the year 2001
classifications.
C. Contingencies, Commitments and Liquidity
DG Credit Facility. In January 2000, the Company, through its
subsidiary EFI Funding Company, Inc., entered into a $150 million consumer loan
credit facility with DG Bank Deutche Genossenschaftsbank AG ("DG Bank") as Agent
for Autobahan Funding Company LLC ("DG Credit Facility"). The term of this
facility is five years, and the interest rate is based on the lender's
commercial paper rate plus 1.35%. The facility currently is the main facility
for funding all subsidiary consumer loans and third party loans. Under the terms
of the DG Credit Facility, the Company is responsible for all loan servicing,
administration and processing. The Company in cooperation with DG Bank is
seeking to increase the size of the total credit allowable under the DG Credit
Facility, though there is no guarantee that the Company will be successful in
achieving any such increases. Even if the Company does not obtain an increase in
the size of the DG Credit Facility, the Company believes that the facility will
be adequate to fund the Company's consumer loan portfolio for the foreseeable
future. As of September 30, 2001, approximately $131.5 million was outstanding
under the DG Credit Facility.
CSFB Credit Facility. Beginning in 1997, the Company entered into
several credit facilities with Credit Suisse First Boston Mortgage Capital LLC
("CSFB"), which ultimately provided more than $150 million in credit to the
Company. In August 2001, CapitalSource Finance LLC ("CapitalSource") purchased
the balance of the CSFB debt, which was then outstanding of $35 million, thereby
extinguishing all remaining debt with CSFB. This represents payoff of the CSFB
debt approximately five months before its maturity in February 2002, and
completed repayment of more than $150 million of CSFB debt by the Company during
the past two years.
CapitalSource Finance LLC. In September 2001, the Company entered into
new loan agreements with CapitalSource. As of September 30, 2001, the new
11
CapitalSource loans with an approximate balance of $24.5 million mature in
August 2005, while loans with an aggregate balance of $7.0 million mature in
August 2004. The Company will receive a 5% discount from the face amount of the
former CSFB debt upon full repayment to CapitalSource of each individual loan,
so long as no defaults occur thereunder.
Bank of America Loan. In November 1999, the Company entered into a
$20.7 million bridge loan with Bank of America, N.A. ("B of A Loan") in
connection with an acquisition. This B of A Loan had an outstanding balance of
$13.6 million as of September 30, 2001. The B of A Loan matures in February 2003
and is subject to certain conditions and debt covenants. These conditions
include a $1 million special principal payment in November 2001 and $2.5 million
in February 2002. The Company made the November 1st mandatory principal payment
prior to its due date, and has already paid a significant portion of the
required February 2002 payment.
Other Indebtedness. The Company has certain additional facilities that
were either undertaken or assumed in conjunction with its development
activities. These facilities include traditional timeshare industry lenders as
well as smaller regional or community banks. The aggregate balances of these
loans as of September 30, 2001, were approximately $36.3 million. The majority
of these other loans mature after the year 2001, and are repaid out of release
fees on sales of VOIs.
Beginning in September 1996, the trustee reached settlements of the
claims of certain lenders against the Bennett Estate (as defined more fully
under "Bankruptcy of Related Entities" in the company's 10-K filed April 2,
2001) relating to claims to certain lease collateral of the Bennett Estate.
These settlements required the settling banks to make new non-callable term
loans to Equivest Capital at concessionary interest rates of 0.5% to 4.0% (the
"Settlement Loans"). Equivest Capital is also obligated to pay the Bennett
Estate an annual arrangement fee of 3% of the unpaid principal balance of the
Settlement Loans in addition to the interest paid to the banks. The Settlement
Loans have a weighted average interest rate of 5.1% as of September, 2001,
including the arrangement fee. The Settlement Loans are also collateralized by
note receivables of the Company as to 100% of the face value of such notes. As
of September 30, 2001, Equivest Capital's total outstanding balance on the
Settlement Loans was approximately $16.1 million, and the weighted average
remaining maturity was 20 months. In addition to these Settlement Loans,
Equivest Capital also has an additional $7.0 million in loans from other
community banks. In 2001, the Company began refinancing the settlement loans.
Replacement loans may carry higher interest rates, and will most likely require
some level of additional collateralization.
12
Liquidity. At September 30, 2001, the Company's debt to equity ratio
was 2.7:1 compared to 3.4:1 at September, 30, 2000. The Company is seeking to
reduce its leverage further through a program of selected sale of land and other
assets, as well as normal debt repayment through timeshare release fees.
Aggregate notes payable decreased by $39.7 million due to net debt paydowns
during the first nine months of 2001.
The Company has high overall levels of debt, and substantially all of
the Company's assets have been pledged as collateral on its loans. The level of
indebtedness could have important consequences to investors including:
o Increasing the Company's vulnerability to general adverse
economic or industry conditions;
o Limiting its ability to obtain additional financing to fund
future lending, resort acquisition and development and general
corporate requirements; and
o Requiring it to dedicate a substantial portion of its cash flow
from operations to the payment of indebtedness, thereby reducing
operating flexibility and opportunities for growth.
The Company requires continuous financing to conduct its finance and
resort acquisition and development businesses. The Company needs sources of
liquidity to make new loans to consumers for the purchase of timeshare VOIs, to
replace existing facilities that are maturing, to acquire land and develop new
timeshare resorts, and to lend to third party developers. To meet its capital
needs, the Company plans to expand its equity base through retained earnings and
equity investments whenever possible; and to increase it's borrowing
availability under warehouse lines like the DG Credit Facility. In addition, the
Company is exploring the possibility of entering into additional financing
transactions in which it either sells or borrows against the collateral in its
loan portfolio, or issuing other debt securities in the capital markets as
operations and market conditions permit.
13
D. Segment Information
Financial information with respect to the financing and resort
development segments in which the Company operates follows for the periods
indicated:
Resort
Financing Development Total
--------- ----------- -----
Three months ended September 30, 2001:
Revenues from external customers $ 8,085,598 $ 24,543,587 $ 32,629,185
Intersegment revenues 1,108,805 --- 1,108,805
Segment Profit 882,989 846,682 1,729,671
Reconciliation of total segment profit to consolidated income before income
taxes:
Total segment profit 1,729,671
Unallocated corporate expenses (579,295)
Consolidated income before provision for
income taxes
$ 1,150,376
Three months ended September 30, 2000:
Revenues from external customers $ 10,160,507 $ 36,090,906 $ 46,251,413
Intersegment revenues 247,051 --- 247,051
Segment Profit 1,532,244 5,319,376 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
14
Resort
Financing Development Total
Nine months ended Sept. 30, 2001:
Revenues from external customers $ 26,768,184 $ 65,520,599 $ 92,288,783
Intersegment revenues 3,266,085 -- 3,266,085
Segment Profit 7,296,008 5,840,716 13,136,724
Reconciliation of total segment profit to consolidated income before income
taxes:
Total segment profit 13,136,724
Unallocated corporate expenses (1,911,448)
Consolidated income before
provision for income taxes $ 11,225,276
Nine months ended Sept. 30, 2000:
Revenues from external customers $ 29,700,348 $ 92,855,259 $ 122,555,607
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
15
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.
16
THREE MONTHS ENDED September 30, 2001
September 30, 2001 Compared to September 30, 2000
During the third quarter of 2001, the Company's results were
substantially adversely affected by the sharp reduction in travel that followed
the terrorist attacks in New York City and Washington, D.C. on September 11,
2001. Both rental occupancies and the number of tours by potential timeshare
purchasers declined significantly following the attacks. Because of the sudden
nature of the terrorist attacks, unlike seasonal downturns or other normal
business trends, the Company did not have any advance opportunity to implement
personnel or other cost reductions until after the events had taken place.
Timeshare marketing costs, for example, had already been incurred in order to
generate potential purchaser tours of the Company's resort properties, though a
large proportion of such tours were cancelled in the weeks immediately following
the attacks. The resulting drop in gross sales revenues caused sales and
marketing costs as a percentage of VOI sales to increase due to these events
completely beyond the Company's control. Similarly, transient rental income from
hotel operations declined significantly, distorting normal occupancy and other
operating statistics due in substantial part to these extraneous factors.
The impact of these extraordinary events was sufficiently large that
the Company believes that comparisons of operating statistics, revenues,
expenses or profit margins between the third quarter of 2001 and the third
quarter of 2000 or other prior quarters could be misleading due to the
inherently dissimilar conditions between the quarter ended September 30, 2001
and any other historic quarter.
In part due to the events of September 11 and their aftermath, pretax profit
margins fell from 16.9% of revenues in the six months ended June 30, 2001 to
3.5% of revenues during the third quarter of 2001, compared to 13.4% for the
third quarter of 2000.
Reflecting the factors described above, income before provision for
income taxes was $1.1 million for the quarter ended September 30, 2001, compared
with $6.2 million in the prior year, a decline of 82%. Net income was $0.6
million in the third quarter of 2001, compared with $3.5 million in the
comparable period in 2000, a decrease of 82%. Earnings per share fully diluted
were $0.02 per share in the third quarter of 2001, compared with $0.12 for the
same period in 2000.
In addition to the events of September 11, 2001, results during the
quarter ended September 30, 2001 were affected by the Company's decision to
increase significantly its provisions for potential consumer loan defaults in
light of the overall trend in national economic conditions. During the third
quarter of 2001 the Company increased total provisions for loan losses by
approximately $1.9 million compared with the total provisions taken during the
year earlier period. In order to generate these incremental reserves, the rate
of provisioning as a percentage of current VOI sales increased during the
quarter to 21.7% of VOI sales, compared with 7.9% of VOI sales during the third
quarter of 2000.
Total reserves against defaults on consumer receivables relating to
purchases of VOIs in the Company's own resorts rose to $9.5 million at September
30, 2001, representing more than 580% of the total of $1.6 million of such notes
that were 90 days or more in default at that date. At $9.5 million, total
reserves applicable to the Company's own purchasers were approximately 137% of
the target reserve level of $7.0 million suggested by the Company's "target
reserve methodology", or "TRM". See "Provision for Doubtful Receivables".
17
In addition to the events of September 11, 2001 and the increase in
loan loss provisioning, results in the quarter ended September 30, 2001 were
affected by the deferral of sales revenue relating to units under construction
in Newport, R.I., which reduced reported revenue and pretax net income by $2.0
million and $0.6 million, respectively. Also, the Company incurred a one-time
increase of approximately $0.8 million in cost of property management as a
result of contributions to certain homeowner associations.
VOI Sales
VOI Sales results were adversely affected by the sharp reduction in
travel that followed the terrorist attacks in New York City and Washington, D.C.
on September 11, 2001. The number of tours by potential timeshare purchasers
declined severely following the attacks. VOI revenues decreased 39% to $19.0
million for the third quarter of 2001, from $31.1 million for the same period in
2000 due in part to the extraordinary events and in part to the closing of five
sales centers and two telemarketing centers with excessive costs in 2000.
For the quarter ending September 30, 2001, the Company sold
approximately 960 fixed-week VOIs and 618 points packages, at a combined average
sales price of approximately $11,800. VOI sales revenues for third quarter of
2001 reflected a 2% increase in the average sales price of a VOI compared to the
same period in 2000. The Company now owns or manages 29 timeshare resort
locations with a completed inventory of approximately 25,450 VOIs. The Company
operates twelve sales centers, three of which sell points in the Company's
"Vacation Club", as described herein.
The following tables sets forth the number of timeshare intervals sold
and the average sales price per timeshare interval:
For the Quarter-ended
September 30, September 30,
2001 2000
---- ----
Timeshare intervals and points packages sold 1,578 2,725
Average Sales Price $11,787 $11,600
Number of VOIs in inventory at period end 25,483 27,610
Three of the Company's sales centers sell points in the Company's
Vacation Club rather than traditional timeshare weeks. Pricing policies for
vacation points involve a greater range of variation due to different sizes of
point's packages than prices for fixed or floating week VOIs. Sales of biennial
VOIs are counted as a 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 decreased 12% to $8.7 million for the third quarter
of 2001 from $9.9 million for the third quarter of 2000. The decrease in
interest income is due to lower average outstanding balances on the loan
portfolio by approximately $18 million. The majority of the decrease in
18
outstanding balances is due to a reduction to the acquisition and development
loans and to a lesser degree a slight decline in third party consumer
receivables. The declining interest rate environment positively affected the net
interest margin, which improved from 1.2% of average earning assets for the
third quarter of 2000 to 1.8% of average earning assets for the same period in
2001.
Interest income related to the consumer loan portfolio increased to 98%
of total interest income for the third quarter of 2001, compared to 93% of
interest income for the same period in 2000. The increase is primarily due to
lower average outstanding balances of A&D Loans. Interest on A&D Loans decreased
70% to $0.2 million for the three months ended September 30, 2001 from $0.7
million for the same period in 2000, mainly due to lower average outstanding
balances.
Resort Operations
Due to the sharp reduction in travel that followed the terrorist
attacks in New York City and Washington, D.C. on September 11, 2001, resort
operation revenue was significantly affected. Resort operations revenue
decreased 3% from $4.8 million for the third quarter of 2000 to $4.7 million for
the same period in 2001.
Other Income
Other income decreased 53% to $0.2 million for the third quarter of
2001 as compared to $0.5 million for the same period in 2000. The decrease in
other income is primarily due to a decrease in credit life proceeds and
commitment fee income.
Interest Expense
Interest expense, net of capitalized amounts, decreased 37% to $4.1
million for the third quarter of 2001 as compared to $6.5 million for the same
period in 2000. The decrease in interest expense is a result of lower
outstanding loan balances, as well as significant reductions in interest rates.
The average outstanding balance decreased approximately $35.0 million, while the
weighted average interest rate on outstanding debt decreased from 8.8% for the
third quarter of 2000 to 5.9% for the third quarter of 2001.
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. However, under the DG Credit Facility, the Company is
required to hedge within the facility once the interest rate spread has been
reduced to approximately 600 basis points. This is currently the largest
financing facility that the Company maintains. The significant reductions in
market interest rates experienced in late 2000 and continuing into 2001 result
in lower interest costs on virtually all the Company's debt while its interest
receivable rates are largely fixed.
Provision For Doubtful Receivables
In addition to the events of September 11, 2001, results during the
quarter ended September 30, 2001 were affected by the Company's decision to
increase significantly its rate of provisioning for potential consumer loan
defaults in light of the overall trend in economic conditions. During the third
quarter of 2001, the Company added approximately $1.9 million to reserves by
taking additional provisions against VOI sales compared with the prior year
period. In order to generate this level of new reserves, the Company increased
the rate of provisioning on new VOI sales to 21.7% of VOI sales, compared with
7.9% of VOI sales during the third quarter of 2000.
19
Total reserves against defaults on consumer receivables relating to
purchases of VOIs in the Company's own resorts rose to $9.5 million at September
30, 2001, representing more than 580% of the total of $1.6 million of such notes
that were 90 days or more in default at that date. At $9.5 million, total
reserves applicable to the Company's own purchasers were approximately 137% of
the target reserve level of $7.0 million suggested by the Company's "target
reserve methodology", or TRM. The Company has used its TRM successfully to
provide a disciplined approach to reserving for consumer loan delinquencies for
several years, and the Company believes that the TRM system produces reserves
that adequately provide for future losses. However, the data underlying the TRM
system reflects the prior decade, and consequently does not include significant
data concerning default rates during recessionary periods. Therefore, the
Company chose to reduce reported pretax income by approximately $2.0 million
during the third quarter to increase provision levels to reflect this
uncertainty, while an additional $2.0 million in reserves were released from
reserves for repaid construction loans and were added to reserves against the
consumer loan portfolio. In aggregate, during the third quarter the Company
added a total of approximately $4.0 million to its provisions for loan losses on
notes from its VOI customers. This represents approximately the amount of write
offs against reserves that would occur if the Company experienced an entire year
of consumer note defaults at a rate of 125% of the average annual rate of note
defaults over the past decade. The Company will actively review consumer default
trends during future quarters, and expects to maintain a higher level of
provisioning during coming quarters than was true during 2000 or the first half
of 2001, though lower as a percent of VOI sales than during the third quarter of
2001.
The Company's loan portfolio remains of generally high quality, as
evidenced by the low level of nonperforming loans. Nonperforming loans were $2.6
million or 1.0% of total loans at September 30, 2001 as compared to $4.8 million
or 1.7% of total loans for the same period in 2000. Net write-offs remained
relatively constant at $3.1 million or 1.2% of average loans for the third
quarter of 2000 and 2001.
The Company assumes all default risk for receivables relating to
purchases of VOIs in the Company's own resorts. However, the Company has a right
to "chargeback" 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.
As part of its TRM, the Company has established a Minimum Target
Reserve amount 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%
20
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.
As of September 30, 2001, the targeted reserve level based on the
outstanding principal balance less an inventory recapture amount was $7.0
million as compared to actual reserves of $9.5 million, reflecting an actual
reserve level of 137% of target. The increase in the reserve position represents
an improvement from the second quarter of 2001 when the actual reserve level was
$0.6 million less than the targeted reserve.
21
The following table sets forth the performance of the consumer
receivable portfolio at September 30, 2001:
Consumer Receivable Loan Portfolio
(In Thousands)
Current 30-59 days 60-89 days 90+ days Total
------- ---------- ---------- -------- -----
Subsidiary Consumer Loans $136,236 $4,200 $2,368 $1,629 $144,433
94.4% 2.9% 1.6% 1.1% 100.0%
Third Party Loans (1) $99,634 $2,846 $876 $572 $103,928
95.9% 2.7% 0.8% 0.6% 100.0%
Total $235,870 $7,046 $3,244 $2,201 $248,361
95.0% 2.8% 1.3% 0.9% 100.0%
(1) Includes the consumer receivables that collateralize the Hypothecation
Loans.
At September 30, 2001, 95.0% of the aggregate consumer receivable
portfolio was current, and there were 380 notes with a principal balance of $2.2
million that were over 90 days past due. Of this amount, $1.6 million relates to
the consumer receivables in the Company's resorts. During 2001, the company
wrote off 1,731 consumer notes with an outstanding principal balance of $12.5
million, leading to a charge against reserves after inventory recovery of $8.9
million. Total reserves and overcollateralization of approximately $32.3 million
at September 30, 2001 represented more than 1,200% coverage of the $1.6 million
in total consumer receivables that were 90 days or more past due. The following
table sets forth the current and historic composition of reserves and over
collateralization, reserves as a proportion of total loans, and the levels of
past due loans and chargebacks:
22
Loan Reserves Coverage
(Dollars in thousands)
As of December 31,
--------------------------------------------------- September 30,
1997 1998 1999 2000 2001
--------------------------------------------------- -----------
A&D Loans past due $9,485 $3,435 $3,821 $376 $363
Consumer Financing past due 1,458 1,790 2,708 4,600 2,201
Total past due loans $10,943 $5,225 $6,529 $4,976 $2,564
Total loans $136,530 $160,952 $260,090 275,082 245,621
Total past due loans as % of
Total loans 8.0% 3.2% 2.5% 1.8% 1.0%
General reserves $2,442 $3,835 $10,073 $11,763 $10,376
Specific reserves 17,320 18,392 18,507 17,406 15,255
Overcollateralization 1,006 3,588 4,308 5,981 6,713
Total reserves and
Overcollateralization (1) $20,768 $25,815 $32,888 $35,150 $32,344
Total reserves and
overcollateralization as % of
total loans 15.2% 16.0% 12.6% 12.8% 13.2%
Chargebacks 6,376 5,875 5,542 5,796 4,735
Chargebacks as % of
Consumer Financing (2) 6.6% 5.5% 5.1% 5.4% 5.1%
- ------------------------
(1) Specific reserves and the overcollateralized contracts relate to specific
developers, and any application of these reserves or overcollateralized
contracts to defaulted loans would be done on a developer by developer
basis.
(2) Chargeback percentage is based on Consumer Financing, because only these
loans can be charged back.
23
The following table shows changes in the Company's allowance for
doubtful accounts:
Consolidated
Changes in Allowance for Doubtful Accounts
(Dollars in thousands)
Year-ended December 31,
------------------------------------------------------------ September 30,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Allowance for doubtful accounts,
beginning of year $ 1,979 $ 2,442 $ 3,835 $ 10,073 $ 11,763
Allowance related to acquisitions -- 793 6,639 501 --
Provision for loan losses 925 791 2,192 9,078 7,521
Charges to allowance for doubtful
accounts (601) (424) (2,593) (7,889) (8,908)
Charges applied against specific
developer holdbacks (1) 139 233 -- -- --
------- --------- --------- --------- ---------
Allowance for doubtful accounts, end of
year $ 2,442 $ 3,835 $ 10,073 $ 11,763 $ 10,376
- ----------------
(1) In accordance with the terms of certain agreements with developers, the
Company charges certain bad debts directly against developer holdbacks,
rather than against the general allowance for doubtful accounts.
Cost Of Timeshare Intervals Sold
The cost of timeshare intervals sold for the third quarter of 2001
decreased to $4.6 million or 24.3% of VOI revenue, compared to $7.6 million for
the third quarter of 2000, or 24.4% of VOI revenue. The decline in dollar volume
is a result of the reduced volume of VOIs sold during the third quarter of 2001.
Sales And Marketing
During the third quarter of 2001, the Company's sales and marketing
costs were adversely affected by the extraordinary events of September 11, 2001
as described above. Timeshare marketing costs had already been incurred in order
to generate potential purchaser tours of the Company's resort properties, though
a significant number of such tours were cancelled in the weeks immediately
following the attacks. The resulting sharp drop in gross sales revenues caused
sales and marketing costs as a percentage of VOI sales to increase significantly
during the final weeks of the quarter.
Sales and marketing expense decreased 39% to $10.0 million for the third quarter
of 2001 from $16.4 million for the same period in 2000. The decrease in total
sales and marketing dollar expense is due to the decline in VOIs sold during the
quarter. Sales and marketing costs in the third quarter of 2001 decreased to
52.5% of VOI sales revenues from 52.9% for the third quarter of 2000 and 54.7%
for the year 2000.
24
Resort Management
Resort operation expense increased 25% to $3.8 million for the third
quarter of 2001 from $3.0 million for the same period in 2000. The Company
incurred a one-time increase of approximately $0.8 million in costs of property
management as a result of contributions to certain homeowner associations.
Rental occupancies and transient rental income from hotel operations both
declined.
Depreciation And Amortization
Depreciation and amortization increased 3% to $1.2 million for the
third quarter of 2001 from $1.2 million for the third quarter of 2000. The
slight increase is primarily due to $0.1 million increase associated with
depreciation expense.
Goodwill amortization remained constant at $0.4 million for the third
quarter of 2001 and 2000. Goodwill associated with the Peppertree Acquisition is
approximately $18.0 million and is being amortized over 20 years, while goodwill
associated with the acquisition of Eastern Resorts is approximately $25.7
million and is being amortized over 40 years.
Depreciation of the properties increased 25% to $0.4 million for the
third quarter of 2001 from $0.3 million for the same period in 2000. The
increase in depreciation is a result of a larger base of depreciable assets.
Loss On Sale of Assets
The Company recognized a $0.2 million loss on the sale of an asset
during the third quarter of 2001. The loss was incurred upon the sale of a
parcel of Peppertree property of $4.9 million. This transaction reduced notes
payable by approximately $2.5 million. The company is continuing its efforts to
sell additional surplus land.
General And Administrative
General and administrative expense increased 15% to $3.2 million for
the third quarter of 2001 from $2.7 million for the same period in 2000. General
and administrative expense as a percentage of total revenue increased to 9.7% of
total revenue for third quarter of 2001, compared with 6.0% of total revenue for
the third quarter of 2000. The following items contributed to the increase in
general and administrative expense: payroll costs, travel, outside service
costs, and servicing fees due to growth of the Company. General and
administrative costs may continue to increase in absolute dollars as the Company
invests in its management and organization infrastructure. Payroll related
expense comprises the largest segment of general and administrative expense,
representing approximately 49.8% of general and administrative expense during
the third quarter of 2001.
Provision For Income Taxes
The provision for income taxes for the third quarter of 2001 decreased
80% to $0.5 million from $2.7 million for the same period in 2000. The decrease
is attributable to the decrease in pretax income during 2001 as compared to the
same period in 2000. The provision for income taxes represents approximately
45.6% and 43.1% of pretax income for 2001 and 2000, respectively.
25
Inflation
Inflation has not had a material impact on the Company's revenues,
operating income and net income during any of the Company's three most recent
years. However, to the extent inflationary pressures affect short-term interest
rates, a significant portion of the Company's debt service costs may be
affected, as may be the interest rates the Company charges to its customers
(both customers and developers).
26
NINE MONTHS ENDED September 30, 2001
During the first nine months of 2001, the Company's results included
revenue and expense from the Company's subsidiary in Texas, Riverside Suites,
which was acquired in the third quarter of 2000. Other than the addition of the
Riverside Suites project, whose results were not material, results of the first
nine months for both 2001 and 2000 include the same locations.
Net Income
Income before provision for income taxes decreased 25% to $11.2 million
for the nine months ended September 30, 2001, as compared to $15.1 million for
the same period in 2000. Net income decreased 25% to $6.5 million for the nine
months ended September 30, 2001 from $8.7 million for the same period in 2000.
Diluted earnings per share decreased 28% to $0.21 for the nine months ended
September 30, 2001 from $0.29 for same time period in 2000.
The decrease in net income is primarily attributable to a reduction in
aggregate VOI income ("VOI Income"). While profits as a percent of VOI sales
revenue ("VOI sales margin") rose appreciably during the first six months of
2001 compared to 2000, aggregate VOI gross revenue fell significantly. This was
primarily due to a decline in the number of tours by potential buyers. During
the six months ended June 30 aggregate VOI profits were up slightly due to the
rise in VOI sales margin. During the third quarter the aggregate VOI sales
margin fell due to a result of the terrorist attacks on September 11, 2001, a
loss on the sale of an asset, and a decrease in resort operation net margin. The
reduction in VOI profits is a direct result of the reduced volume of tours by
prospective purchasers, driven by managements decision in 2000 to close two
telemarketing centers and five sales centers that were not cost-effective, as
well as the negative impact that the events of September 11, 2001 had on the
entire travel and tourism industry. Aggregate VOI income was also reduced by
several million in non-cash charges to increase aggregate loan loss provisions
due to overall economic uncertainty, there was also an affect from deferred
sales of approximately $1.7 million pending the completion of new construction
in Newport. Aggregate VOI income declined 42% to $5.9 million for the nine
months ended September 20, 2001 from $10.3 million for the same period in 2000.
Aggregate resort operations income ("Resort Income") decreased 7% to
$5.2 million for the third quarter of 2001 as compared to $5.6 million for the
same period in 2000, reflecting the lower demand following the terrorist's
attacks on September 11, 2001, a one-time charge of $0.8 million in costs of
property management as a result of contributions to certain homeowner
associations. Resort management expense as a percentage of resort operation
revenue increased to 64.8% for the third quarter of 2001 as compared with 62.4%
for the same period in 2000. In addition to the decrease in net VOI Income and
Resort Income, the Company incurred losses of $0.7 million upon the sale of
parcels of Peppertree property, which reduced notes payable by $3.5 million.
The Company's pretax income as a percent of revenues decreased to 12.2%
for the first nine months of 2001 from 12.3% for the same period in 2000. During
the same period, total expenses decreased 25% from $107.5 million for the nine
months ending 2000 to $81.0 million for the same time period in 2001. The
decline in expenses is primarily due to the decrease in variable costs (cost of
timeshares sold and sales and marketing costs) associated with the reduction in
VOI sales. The declining interest rate environment positively affected the net
interest margin, which improved from 3.6% of average earning assets for the nine
months ended September 30, 2000 to 4.8% of average earning assets for the same
period in 2001.
27
Total revenue decreased 25% to $92.3 million for the nine months ended
September 30, 2001 as compared to $122.5 million for the same time period in
2000. The decline in revenue is due almost entirely to a reduction in VOI sales
revenue, which fell $27.7 million during the first nine months of 2001 as
compared to the same period in 2000. This reduction in sales revenue is
primarily attributable to the closure of five former sales centers and two
telemarketing centers during 2000 at the Company's Peppertree subsidiary, and
the tragic events of September 11, 2001, which also resulted in lost VOI
revenue. The aggregate reduction in sales revenues also reflected reduced tour
volumes at non-Peppertree Resorts' sales centers, partly the result of the
Company eliminating higher cost tour sources, and partly the result of slower
overall economic activity. Of the total reduction in VOI sales, $20.2 million
was related to former Peppertree locations and $7.5 million was related to
non-Peppertree Resorts sales locations. Approximately $1.7 million of the $7.5
million decline in non-Peppertree Resorts VOI sales revenue during the first
nine months of 2001 was a result of deferred sales pending the completion of new
construction in Newport, a condition that did not occur during the same period
in 2000.
VOI Sales
VOI revenues decreased 36% to $49.7 million for the nine months ending
September 30, 2001, from $77.4 million for the same period in 2000. Vacation
ownership revenue decreased to 53.8% of total revenue for the nine months ended
September 30, 2001 as compared to 63.2% for the same period in 2000 due to the
decline in VOI sales revenues.
For the nine months ended September 30, 2001, the Company sold 2,691
fixed-week VOIs and 1,355 points packages, at a combined average sales price of
approximately $11,942. VOI sales revenues for nine months ended September 30,
2001, reflected a 42% decrease in the number of VOIs sold, and a 7% increase in
the average sales price of a VOI compared to the same period in 2000. The
Company now owns or manages 29 timeshare resort locations with a completed
inventory of approximately 25,450 VOIs. The Company operates twelve sales
centers, three of which sell points in the Company's "Vacation Club", as
described herein.
The following tables sets forth the number of timeshare intervals sold
and the average sales price per timeshare interval:
For the Nine months
September 30, September 30,
2001 2000
---- ----
Timeshare intervals and points packages sold 4,046 6,960
Average Sales Price $11,942 $11,146
Number of VOIs in inventory at period end 25,483 27,610
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 decreased 5% to $27.1 million for the nine months
ended 2001 from $28.7 million for the same period in 2000. The slight decrease
in interest income is primarily due to lower average outstanding balances on
acquisition and development loans and to a lesser degree third party consumer
receivables. The declining interest rate environment and debt repayment
28
positively affected the net interest margin, which improved from 3.6% of average
earning assets for the nine months ended September 30, 2000 to 4.8% of average
earning assets for the same period in 2001.
Interest income related to the consumer loan portfolio increased to 97%
of total interest income for the nine months ended September 30, 2001, compared
to 92% of interest income for the same period in 2000. The increase is primarily
due to lower average outstanding balances of A&D Loans. Interest on A&D Loans
decreased 57% to $0.9 million for the nine months ended September 30, 2001 from
$2.2 million for the same period in 2000, mainly due to lower average
outstanding balances. Third party A&D Loan originations declined 54% from $6.7
million for the first nine months of 2000 to $3.1 million for the same period in
2001. The decline in A&D loan originations is attributable to the continued
shift in the Company's consumer loan growth strategy from generating receivables
through new A&D lending to relying on captive originations from the sale of VOIs
in the Company's own resorts.
Net interest income improved to $12.4 million for the nine months
ending September 30, 2001 from $9.5 million for the same period in 2000. The
decline in earning assets is primarily centered in acquisition and development
loans and third party consumer receivables. The decline in A&D loans and third
party originations is primarily attributable to a shift in the Company's
consumer loan growth strategy from generating receivables through new A&D
lending to relying on captive originations from the sale of VOIs in the
Company's own resorts.
Resort Operations
Resort operations revenue remained constant at $14.8 million for the
nine months ended September 30, 2001 and 2000. However, resort management
expenses increased $0.3 million to $9.6 million for the nine months ended
September 30, 2001 compared with $9.2 million in the prior year. Resort
management expense as a percentage of resort operation revenue increased to
64.8% for the first nine months of 2001 as compared with 62.4% for same period
in 2000.
Other Income
Other income decreased 58% to $0.7 million for the nine months ended
September 30, 2001 as compared to $1.6 million for the same period in 2000. The
decrease in other income is primarily due to a decrease in credit life proceeds
and commitment fee income.
Interest Expense
Interest expense, net of capitalized amounts, decreased 23% to $14.7
million for the nine months ending September 30, 2001 as compared to $19.1
million for the same period in 2000. The decrease in interest expense is a
result of several loan facilities that were repaid during the 2001, as well as
significant reduction in interest rates. The average outstanding balance
decreased approximately $17 million, while the weighted average interest rate on
outstanding debt decreased from 8.8% for the first nine months of 2000 to 6.8%
for the same period in 2001.
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. However, under the DG Credit Facility, Company is required
to hedge within the facility once the interest rate spread has been reduced to
approximately 600 basis points. This is currently the largest financing facility
that the Company maintains. The significant reductions in market interest rates
experienced in late 2000 and continuing into 2001 result in lower interest costs
on virtually all the Company's debt while its interest receivable rates are
largely fixed.
29
Provision For Doubtful Receivables
The provision for doubtful receivables increased 22% from $6.1 million
for the third quarter of 2000 to $7.5 million for the same period in 2001. The
Company's rate of provisioning for doubtful receivables as a percentage of
timeshare sales increased from 7.9% of VOI sales during the nine months ended
September 30, 2000 to 13.8% of VOI sales for the same period in 2001. Total
reserves against defaults on consumer receivables relating to purchases of VOIs
in the Company's own resorts rose to $9.5 million at September 30, 2001,
representing more than 580% of the total of $1.6 million of such notes that were
90 days or more in default at that date. At $9.5 million, total reserves
applicable to the Company's own purchasers were approximately 137% of the target
reserve level of $7.0 million suggested by the Company's "target reserve
methodology", or TRM. The Company has used its TRM successfully to provide a
disciplined approach to reserving for consumer loan delinquencies for several
years, and the Company believes that the TRM system produces reserves that
adequately provide for future losses. However, the data underlying the TRM
system reflects the prior decade, and consequently does not include significant
data concerning default rates during recessionary periods. Therefore, the
Company chose to reduce reported pretax income by approximately $2.0 million
during the third quarter to increase provision levels to reflect this
uncertainty, while an additional $2.0 million in reserves were released from
reserves for repaid construction loans and were added to reserves against the
consumer loan portfolio. In aggregate, during the third quarter the Company
added a total of approximately $4.0 million to its provisions for loan losses on
notes from its VOI customers. This represents approximately the amount of
write-offs against reserves that would occur if the Company experienced an
entire year of consumer note defaults at a rate of 125% of the average annual
rate of note defaults over the past decade. The Company will actively review
consumer default trends during future quarters, and expects to maintain a higher
level of provisioning during coming quarters than was true during 2000 or the
first half of 2001, though lower as a percent of VOI sales than during the third
quarter of 2001.
The Company's loan portfolio remains of generally high quality, as
evidenced by the low level of nonperforming loans. Nonperforming loans were $2.6
million or 1.0% of total loans at September 30, 2001 as compared to $4.8 million
or 1.7% of total loans for the same period in 2000. Net write-offs of $8.9
million for the nine months ended September 30, 2001 represented 3.5% of average
loans, while net write-offs for the same period in 2000 were $6.5 million or
2.5% of average loans. The increase in net-write-offs is due in part to the
continued write-offs of the acquired Peppertree portfolio, which represent 57%
of net write-offs for the nine months ending September 2001, but also to a more
accelerated write-off process that reduced 90 day past due loans significantly.
Net delinquencies actually fell somewhat during the 2001 period compared to 2000
when the dollar amount of write-offs and 90 day past due loans are combined.
The Company assumes all default risk for receivables relating to
purchases of VOIs in the Company's own resorts. However, the Company has a right
to "chargeback" 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.
As part of its TRM, the Company has established a minimum target
reserve amount ("MTR") 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:
30
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.
As of September 30, 2001, the targeted reserve level based on the
outstanding principal balance less an inventory recapture amount was $7.0
million as compared to actual reserves of $9.5 million, reflecting an over
reserved position of $2.5 million. The increase in the reserve position
represents an improvement from the second quarter of 2001 when the actual
reserve level was $0.6 million less than the targeted reserve.
The following table sets forth the performance of the consumer
receivable portfolio at September 30, 2001:
Consumer Receivable Loan Portfolio
(In Thousands)
Current 30-59 days 60-89 days 90+ days Total
------- ---------- ---------- -------- -----
Subsidiary Consumer Loans $136,236 $4,200 $2,368 $1,629 $144,433
94.4% 2.9% 1.6% 1.1% 100.0%
Third Party Loans (1) $99,634 $2,846 $876 $572 $103,928
95.9% 2.7% 0.8% 0.6% 100.0%
Total $235,870 $7,046 $3,244 $2,201 $248,361
95.0% 2.8% 1.3% 0.9% 100.0%
(1) Includes the consumer receivables that collateralize the Hypothecation
Loans.
At September 30, 2001, 95.0% of the aggregate consumer receivable
portfolio was current, and there were 380 notes with a principal balance of $2.2
million that were over 90 days past due. Of this amount, $1.6 million relates to
the consumer receivables in the Company's resorts. During 2001, the company
wrote off 1,761 consumer notes with an outstanding principal balance of $12.5
million, leading to a charge against reserves after inventory recovery of $8.9
million. Total reserves and overcollateralization of approximately $32.3 million
at September 30, 2001, represented more than 1,200% coverage of the $1.6 million
in total consumer receivables that were 90 days or more past due.
31
The following table sets forth the current and historic composition of
reserves and over collateralization, reserves as a proportion of total loans,
and the levels of past due loans and chargebacks:
Loan Reserves Coverage
(Dollars in thousands)
As of December 31,
---------------------------------------------------------- September 30,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
A&D Loans past due $9,485 $3,435 $3,821 $376 $363
Consumer Financing past due 1,458 1,790 2,708 4,600 2,201
Total past due loans $10,943 $5,225 $6,529 $4,976 $2,564
Total loans $136,530 $160,952 $260,090 275,082 245,621
Total past due loans as % of
Total loans 8.0% 3.2% 2.5% 1.8% 1.0%
General reserves $2,442 $3,835 $10,073 $11,763 $10,376
Specific reserves 17,320 18,392 18,507 17,406 15,255
Overcollateralization 1,006 3,588 4,308 5,981 6,713
----- ----- ----- ----- -----
Total reserves and
Overcollateralization (1) $20,768 $25,815 $32,888 $35,150 $32,344
Total reserves and
overcollateralization as % of
total loans
15.2% 16.0% 12.6% 12.8% 13.2%
Chargebacks 6,376 5,875 5,542 5,796 4,735
Chargebacks as % of
Consumer Financing (2) 6.6% 5.5% 5.1% 5.4% 5.1%
- ------------------------
(1) Specific reserves and the overcollateralized contracts relate to specific
developers, and any application of these reserves or overcollateralized
contracts to defaulted loans would be done on a developer by developer
basis.
(2) Chargeback percentage is based on Consumer Financing, because only these
loans can be charged back.
32
The following table shows changes in the Company's allowance for
doubtful accounts:
Consolidated
Changes in Allowance for Doubtful Accounts
(Dollars in thousands)
Year-ended December 31,
------------------------------------------------------- September 30,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Allowance for doubtful accounts,
beginning of year $1,979 $2,442 $3,835 $10,073 $11,763
Allowance related to acquisitions
-- 793 6,639 501 --
Provision for loan losses 925 791 2,192 9,078 7,521
Charges to allowance for doubtful
accounts (601) (424) (2,593) (7,889) (8,908)
Charges applied against specific
developer holdbacks (1)
139 233 -- -- --
Allowance for doubtful accounts, end of
year $2,442 $3,835 $10,073 $11,763 $10,376
- ----------------
(1) In accordance with the terms of certain agreements with developers, the
Company charges certain bad debts directly against developer holdbacks,
rather than against the general allowance for doubtful accounts.
Cost Of Timeshare Intervals Sold
The cost of timeshare intervals sold for the nine months ended
September 30, 2001 decreased 38% to $11.6 million or 23.3% of VOI revenue,
compared to $18.5 million for the nine months ended September 30, 2000, or 24.0%
of VOI revenue. The decline in dollar volume is a result of the reduced volume
of VOIs sold during the first nine months of 2001.
Sales And Marketing
Sales and marketing expense decreased 42% to $24.6 million for the nine
months ended September 30, 2001 from $42.3 million for the same period in 2000.
The decrease in total sales and marketing dollar expense is due to the decline
in VOIs sold and to the reduction in sales commissions and marketing expenses at
Peppertree and other locations during the first nine months of 2001. Sales and
marketing costs for the first nine months 2001 decreased to 49.6% of VOI sales
revenues from 54.7% for the same period in 2000 and for the year 2000.
Resort Management
Resort operation expense increased 3% to $9.6 million for the nine
months ended September 30, 2001 from $9.2 million for the same period in 2000.
Resort operation costs for the third quarter of 2001 increased to 64.8% of
resort operations from 62.4% for the same period in 2000. The Company incurred
an increase of approximately $0.8 million in costs of property management as a
result of contributions to certain homeowner associations.
33
Depreciation And Amortization
Depreciation and amortization remained constant at $3.5 million for the
first nine months of 2000 and 2001. Debt issue costs declined $0.3 million to
$1.1 million for the first nine months of 2001 as compared to $1.5 million for
the same period in 2000. Although debt issue costs declined, both goodwill
amortization and depreciation expense increased during the first nine months of
2001.
Goodwill amortization increased 13% to $1.2 million for the first nine
months of 2001 from $1.1 million for the same period in 2000. Goodwill
associated with the Peppertree Acquisition is approximately $18.0 million and is
being amortized over 20 years, while goodwill associated with the acquisition of
Eastern Resorts is approximately $25.7 million and is being amortized over 40
years.
Depreciation of the properties increased 17% to $1.2 million for the
first nine months of 2001 from $1.0 million for the same period in 2000. The
increase in depreciation is a result of a larger base of depreciable assets.
Loss On Sale of Assets
The Company recognized a $0.7 million loss on the sale of assets during
the first nine months of 2001. The loss was incurred upon the sale of parcels of
Peppertree property of $5.4 million. This transaction reduced notes payable by
approximately $3.5 million. The Company is continuing its efforts to sell
additional surplus land.
General And Administrative
General and administrative expense increased 4% to $8.8 million for the
first nine months of 2001 from $8.5 million for the same period in 2000. General
and administrative expense as a percentage of total revenue increased to 9.6% of
total revenue for the first nine months of 2001, compared with 6.9% of total
revenue for the same period in 2000. The increase in general and administrative
expense as a percentage of total revenue principally reflects the decrease in
total revenue. Payroll related expenses comprise the largest segment of general
and administrative expense, representing approximately 53.4% of total general
and administrative expense.
Provision For Income Taxes
The provision for income taxes for the nine months ended September 30,
2001 decreased 26% to $4.7 million from $6.4 million for the same period in
2000. The decrease is attributable to the decrease in pretax income during 2001
as compared to the same period in 2000. The provision for income taxes
represents approximately 42.3% and 42.5% of pretax income for 2001 and 2000,
respectively.
Inflation
Inflation has not had a material impact on the Company's revenues,
operating income and net income during any of the Company's three most recent
years. However, to the extent inflationary pressures affect short-term interest
rates, a significant portion of the Company's debt service costs may be
affected, as may be the interest rates the Company charges to its customers
(both customers and developers).
34
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is currently subject to litigation and claims arising from
employment, tort, contract, alleged negligence and construction matters, among
others, all arising in the ordinary course of its business. Management does not
expect any of these lawsuits or claims, even if adversely decided, to have a
material adverse effect on the Company or its business. The Company is, however,
required to disclose any material proceeding to which any director or officer
has a material interest adverse to the Company, and any material bankruptcy,
receivership or similar proceeding with respect to the Company. The Company is
also required to disclose any proceeding that involves primarily a claim for
damages if the amount involved, exclusive of interests and costs, exceeds ten
percent (10%) of the current assets of the Company on a consolidated basis.
Except as set forth herein, there have not been any new developments
with respect to material proceedings to which any director or officer has a
material adverse interest, or any material bankruptcy, receivership, or similar
proceedings with respect to the Company, except as previously disclosed in the
Company's most recent 10-K filing for year ended December 31, 2000, the
Company's Form 10-Q filed May 15, 2001, for the quarterly period ended March 31,
2001, and the Company's Form 10-Q filed August 15, 2001, for the quarterly
period ended June 30, 2001.
As previously reported, the Company has filed a complaint against C.
Wayne Kinser ("Kinser"), a director and former principal owner of Peppertree,
and Pioneer Hotel Corporation, the sole general partner of Great Smokies Hotel
Associates, L.P. The complaint was originally filed with the Supreme Court of
New York but was voluntarily withdrawn and re-filed with the Superior Court
Division of the State of North Carolina. The complaint is a result of the
breach, by Kinser and the additional defendants, of the November 1999 Agreement
and Plan of Reorganization (the "Agreement") pursuant to which the Company
purchased various Peppertree entities. The complaint sets forth multiple causes
of action, including a default under a promissory note held by a wholly owned
subsidiary of the Company, and guaranteed by Kinser. The complaint further
alleges that Kinser defaulted upon his obligation to make payment of taxes due
and owing by various Peppertree entities and incurred prior to their acquisition
by the Company, and that Kinser breached his fiduciary duty to the Company, as a
result of his improper inducement of the Company to make a tax payment at a time
when he served as a Director of the Company. The Company's action seeks recovery
of more than $3 million from Mr. Kinser. This complaint includes an additional
count, asserting that defendant Kinser has further breached his fiduciary duty
to the Company by refusing to honor in good faith long standing business
relationships, thereby tortuously interfering with the business of the Company
and its subsidiaries.
On October 8, 2001 the defendants filed their response to the
complaint, entitled "Motion to Dismiss, Answer and Counterclaims." Defendants'
35
answer generally denied facts alleged in the complaint. Defendants' counterclaim
contains four (4) separate counts or claims alleging: i) that the Company
breached the Agreement by refusing to purchase the Holiday Inn SunSpree Resort
("Sunspree"); ii) that the Company owes Kinser an additional $350,000.00,
representing a portion of the purchase price allegedly improperly applied to
Peppertree's tax liabilities; iii) that the Company breached an agreement to
manage the SunSpree resort; and iv) that the Company's attachment of the
Sunspree in order to protect its anticipated recovery was wrongful.
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 Second Master Loan Modification Agreement entered into as of the 7th day of
September, 2001, by and among Equivest FINANCE, INC., ("EFI"), EQUIVEST
CAPITAL, INC. (f/k/a Resort Funding, Inc.), ("RFI"), Eastern Resorts
Company, LLC, ("Company"), Eastern Resorts Corporation, ("ERC"), Ocean City
Coconut Malorie Resort, Inc., ("Coconut Malorie"), Bluebeard's Castle,
Inc., ("Bluebeard"), Castle Acquisition, Inc., ("Castle"), Avenue Plaza
LLC, ("Avenue Plaza"), EQUIVEST WASHINGTON, INC., (f/k/a EFI D.C.
Acquisition, Inc., successor to the interests of Capital City Suites, Inc.)
("EFI DC"), and EQUIVEST TEXAS, INC., ("Equivest Texas"), (EFI, RFI, the
Company, ERC, Coconut Malorie, Bluebeard, Castle, Avenue Plaza, EFI DC and
Equivest Texas shall be individually referred to as the "Borrower" and
collectively referred to as the "Borrowers"), jointly and severally, and
EFI, Equivest Maryland, Inc. (f/k/a EFI Maryland Acquisition, Inc.)
("Equivest Maryland"), Equivest Louisiana, Inc. (f/k/a EFI Louisiana
Acquisition, Inc.) ("Equivest Louisiana"), and Equivest St. Thomas, Inc.
(f/k/a EFI St. Thomas Acquisition, Inc.) ("Equivest St. Thomas"), (EFI,
Equivest Maryland, Equivest Louisiana and Equivest St. Thomas shall be
individually referred to as the "Guarantor" and collectively referred to as
the "Guarantors"), jointly and severally, and CAPITALSOURCE FINANCE LLC, a
Delaware limited liability company ("CapitalSource") and CAPITALSOURCE
36
HOLDINGS LLC, a Delaware limited liability company ("CapitalSource
Holdings").
10.2 Trust Agreement dated as of September 6, 2001, by and among CAPITALSOURCE
FINANCE LLC ("CapitalSource"), EQUIVEST CAPITAL, INC. ("ECI" and in its
capacity as a certificate holder hereunder, together with CapitalSource,
the "Initial Certificate holders"), CS RESORTS, INC., as Owner Trustee, and
THE CAPITAL TRUST COMPANY OF DELAWARE, OR DELAWARE TRUSTEE.
(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 9, 2001 Form 8-K announcing record income for second
quarter and first six months; Diluted EPS Rises 25% for Second
Quarter; Second Quarter Profit Margin Rises 49%;
(ii) September 25, 2001 Form 8-K announcing completion of $37
Million Construction Loan Financing to Eliminate Debt Held by
CS First Boston;
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, 2001
37