Item 3. Legal Proceedings
The Company is currently subject to litigation and claims respecting employment, tort, contract, negligence and construction, among others, arising in the ordinary course of its business. Management expects none 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 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.
For additional 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, the Company's 10-Q filed August 15, 2000, for the quarterly period ending June 30, 2000, and the Company's 10-Q filed November 14, 2000, for the quarterly period ending September 30, 2000, which are incorporated herein by reference.
John Cavanaugh and William Reighley, individually or through their company, Castle Holdings, Inc. (collectively, "Castle"), have instituted a total of four actions against the Company and/or KGI. The first of these actions is for the Company's alleged procurement of and involvement in the alleged wrongful termination by KGI of Messrs. Cavanaugh and Reighley following the Company's acquisition of three resort properties in St. Thomas, U.S. Virgin Islands from KGI. Messrs. Cavanaugh and Reighley are seeking money damages in a second suit in excess of $830,000, plus interest, for Bluebeard Castle Inc.'s ("BCI") failure to pay promissory notes allegedly owed to Messrs. Cavanaugh and Reighley that were also executed by them during their employment with BCI. In the third suit, in which the Company participates as an intervening party, Messrs. Cavanaugh and Reighley seek damages in excess of $1.1 million dollars, plus punitive damages, attorney's fees and costs for the effect upon them of the Company's acquisition of the KGI St. Thomas resorts and related events. In the fourth suit, Messrs. Cavanaugh and Reighley seek payment by KGI of promissory notes executed before the KGI Acquisition. The Company is not a named party to the fourth suit, but is monitoring the case to the extent that it relates to similar issues presented in the three other suits and any potential indemnification for which Company may be responsible in connection with an indemnification agreement between the Company and KGI. Throughout 2000, the Company was involved in ongoing discovery requests as required under an order consolidating all the cases for discovery purposes. No other substantive developments occurred in these suits. The Company believes that the various suits by Messrs. Cavanaugh and Reighley are without merit, and the Company is pursuing discovery of its own in connection with possible fraudulent acts, conversion and self-dealing that may have damaged the Company.
The Company has filed a complaint in the Supreme Court of New York, in and for the County of Onondaga, 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 is a result of the breach, by Kinser and the additional defendants, of the November 1999 Agreement and Plan of Reorganization 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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's equity holders during 2000, except for the election of officers and ratification of independent auditors voted upon at the annual meeting held May 15, 2000. The Company intends to hold the 2001 annual meeting of the stockholders and to file its detailed 2001 Definitive Proxy Statement, and reference is expressly made thereto for specific information incorporated herein by reference.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock is listed on the NASDAQ Stock Market as a small-capitalization issue. The following table sets forth the high and low sale prices for the common stock for each quarter during the fiscal years ended December 31, 1999 and December 31, 2000, as reported on the NASDAQ Stock Market:
COMMON STOCK HIGH LOW ---- ---
Year-ended December 31, 2000
Fourth quarter $3.25 $1.63 Third quarter $3.50 $2.13 Second quarter $4.00 $2.00 First quarter $6.00 $3.38
Year-ended December 31, 1999
Fourth quarter $6.25 $5.25 Third quarter $6.75 $4.50 Second quarter $7.07 $2.75 First quarter $7.50 $2.00
Such quotations reflected inter-dealer price, without retail mark-up, markdown or commission, and did not necessarily represent an actual transaction. The high and low bids shown above relate only to periods in which any actual trading occurred.
On March 16, 2001, there were approximately 86 holders of record of the Company's common stock and the Company estimates that there were over 200 total beneficial owners of the Company's common stock. The Company has never declared or paid any cash dividends on its common stock and does not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of future dividends for preferred or common stock will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions in respect of the payment of dividends and other factors that the board of directors
deems relevant. No dividends on the Company's common stock can be paid until such Preferred Stock dividends are paid in full.
On December 31, 1998, the Company filed a Form S-1 Registration Statement covering a proposed sale of all of the shares of common stock held by the Bennett Estate, as well as certain primary shares to be issued by the Company to raise additional equity capital (the "Proposed Offering"). The Bennett Estate received approval from the Bankruptcy Court to sell all of its common stock in the Company in the Proposed Offering. Due to market conditions, the Proposed Offering was not accomplished, though the Bennett Estate continues to pursue the sale or other disposition of its stock. The Trustee of the Bennett Estate recently filed a proposed Chapter 11 plan with the Bankruptcy Court (the "Plan"). Under the terms of the Plan, upon confirmation the Trustee would be authorized to spin off the shares of the Company to the creditors of the Bennett Estate, unless previously sold, upon a brief notice filing with the Bankruptcy Court. Any such distribution would involve dissemination of more than 20 million shares now held by the Bennett Estate to its creditors, who would potentially be free to sell such shares. The Company does not know whether the Plan will be approved by creditors and confirmed by the Bankruptcy Court, and if so, whether the Company's shares will be sold by the Bennett Estate or distributed to creditors. Upon the completion of an offering or similar transaction, or the distribution of Bennett Estate stock to its creditors, the Bennett Estate's ownership interest in the Company will be reduced or eliminated in its entirety. The Proposed Offering that was the subject of the 1998 Registration Statement cannot be completed under current market conditions, and the Company does not know when, if ever, it will be able to complete any other public or private offering. The Company has not abandoned its efforts to complete the Proposed Offering of common stock contemplated in the 1998 Registration Statement. However, in view of the uncertain ability to conduct the Proposed Offering, the Company has determined that the costs of the Proposed Offering of approximately $1.6 million now accrued on the Company's balance sheet should be written off as a loss (the "IPO Write-Off"). The Company has already paid all such costs and the IPO Write-Off is a non-cash event.
Although the Trustee intends to sell or distribute all of the common stock and all of the Bennett Estate's Preferred Stock in the Company, it is possible that less than all of such capital stock may be sold or distributed, in which case the Bennett Estate would continue to be a stockholder and would likely seek other means to liquidate its holdings in the Company. Bankruptcy Court approval would be required for a full or partial sale or distribution. The sale of a large block of common stock, or the expectation that such a sale might occur, could materially adversely affect the share price of the common stock. The amount of common stock available for trading, as well as trading volume, is currently small, while spreads between high and low closing prices are large.
Item 6.
Item 6. Selected Financial Data
The following table sets forth summarized consolidated financial data of the Company for each of the five fiscal years ended December 31
(Amounts in Thousands of Dollars Except Per Share Data)
(a) Included $23.8 million of Notes payable - related party that was converted into equity in 1997.
(b) In August 1998, acquired Eastern Resorts.
(c) In March 1999, completed the KGI Acquisition. In November 1999, completed the Peppertree Acquisition.
(d) Includes a one-time write off of $1.6 million in IPO Costs. Without the costs written off relating to the Proposed Offering (as defined herein), none of which were incurred in 2000, the Company's net income would have been $11.4 million or $0.38 per share.
(e) The Company redeemed this preferred stock effective February 13, 1998 and all cumulative and unpaid dividends were paid.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information and our financial statements and the notes thereto appearing elsewhere in this filing.
The Company's business requires continuous access to short and long-term sources of debt financing. The Company's principal cash requirements arise from its timeshare operations (including sales and marketing costs), both internal and third party lending activities, the funding of timeshare construction, debt service payments and operating expenses. The Company's primary sources of liquidity are borrowings under secured lines of credit and cash flow from operations. In the future, the Company expects that it will seek to raise additional capital through increasing its borrowing from financial institutions and issuing debt, equity or asset-backed securities in the capital markets.
The Company's main sources of liquidity are derived from the following credit obligations: 1) the $150 million DG Credit Facility; 2) the $30 million CSFB A&D Line, although this loan is currently in an amortization period where no additional draws can be made; 3) the $30 million Internal Finova Loan under which no new loan commitments have been made or are anticipated to be made, with the exception of a $9.2 million construction loan on the Company's Berkshire Mountain Resort which is almost completely funded; 4) the $20 million Finova Third Party Line; and 5) the $20.7 million B of A Bridge Loan. See "RISK FACTORS, RISK OF INCREASING LEVERAGE; LIQUIDITY" for a description of and balances on the obligations.
RESULTS OF OPERATIONS DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999
During the year-ended December 31, 2000, the Company's results included Eastern Resorts, acquired in August 1998; the KGI properties, acquired in March 1999; Peppertree, acquired in November 1999; and Riverside Suites, acquired in May 2000. Therefore, the twelve months ended December 31, 1999 include Eastern Resorts for the entire period, but the former KGI and Peppertree properties for a partial year. The year ended December 31, 2000 contains Eastern Resorts, Peppertree and the KGI properties for the full period. Riverside Suites operating results are included only for the third and fourth quarter of 2000.
Net Income
Income before provision for income taxes increased 21% to $18.3 million for the year-ended December 31, 2000, as compared to $15.2 million for the same period in 1999. Net income increased 20% to $10.4 million for the year-ended December 31, 2000 from $8.7 million for the same period in 1999. Diluted earnings per share rose 13% to $0.35 in 2000 from $0.31 in 1999. However without the effect of the IPO Write-Off net earnings would have increased 31% to $11.4 million compared with $8.7 million in 1999. Diluted earnings per share for 2000 without the IPO Write-Off would have been $0.38 in 2000, compared with $0.31 in 1999. The increase in net income is primarily attributable to the addition of the timeshare operating results for acquisition-related properties, and the resulting growth in total revenue.
Total revenue rose 78% to $158.3 million for the year-ended December 31, 2000 as compared to $89.1 million for the same time period in 1999. Revenue growth is largely, but not entirely, due to the addition of revenue associated with acquisition-related properties.
While earnings per share increased substantially, the Company's pretax income as a percent of revenues fell from 17.1% to 11.6%. If the Company had not written off the 1998 Registration Statement costs in 2000, pre-tax income as a percentage of revenues would have been 12.6%. This decrease in gross pretax margins is due to several factors. The principal reason for the decline in pretax profit margin in 2000 compared to 1999 relates to poor performance of the Company's Peppertree subsidiary, and to a lesser degree, to poor performance of the Company's St. Thomas properties. Peppertree was substantially overstaffed when acquired and its sales and marketing costs as a percentage of VOI revenue for the entire 2000 year were 14.8% greater than sales and marketing costs as a percent of VOI revenues at the Company's non-Peppertree properties. Many factors contribute to Peppertree's poor operating results, including, poor management, excessive compensation costs, low average prices per customer and an inadequate supply of prospect tours. The Company has significantly restructured Peppertree's sales and marketing operations and has made significant cost cutting changes, which have reduced Peppertree's overall sales and marketing expenses. The Company is continuing to monitor Peppertree costs and anticipates cutting costs further if sales, marketing and overhead costs do not fall to levels comparable to its non-Peppertree locations.
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 47% to $38.1 million for the year-ended December 31, 2000 from $25.9 million for the year-ended December 31, 1999, primarily due to higher average outstanding balances on the loan portfolio of approximately $80 million for the entire year. In addition, the weighted average interest rate on the loan portfolio increased approximately 40 basis points. The increase in the portfolio was due entirely to notes acquired or originated relating to purchases of VOIs in its own resorts.
Interest income related to the consumer loan portfolio increased to 93% of total interest income for the year-ended December 31, 2000, compared to 82% 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 A&D Loans decreased 64% to $2.7 million for the year-ended December 31, 2000 from $4.4 million for the same period in 1999, mainly due to lower average outstanding balances due to the elimination in consolidation of loans to businesses acquired after March 25, 1999. Third party A&D Loan originations declined 51% from $16.8 million for the year-ended December 31, 1999 to $8.2 million for the year-ended December 31, 2000, while third party consumer loan receivables originations declined approximately 23% from $74.6 million for the year-ended December 31, 1999 to $57.6 million for the year-ended December 31, 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 on captive originations from the sale of VOIs in the Company's own resorts. All of the Company's portfolio growth in the aggregate now comes from internally-generated receivables.
VOI Sales
VOI revenues increased 138% to $97.4 million for the year-ended December 31, 2000, from $40.9 million for the prior year. While precise estimates are not possible due to the variables in the sales process, the Company believes that 1999 VOI sales would have been no more than $90 million had the 1999 acquisitions all taken place on January 1, 1999. Vacation ownership revenue increased to 61.4% of total revenue for year-ended 2000 as compared to 45.9% for the year-ended 1999 due to the inclusion of operating results for the acquired properties, increases in the number of VOIs sold and increases in the average price per sale.
For the year-ended December 31, 2000, the Company sold 4,597 fixed-week VOIs and 3,663 points packages, at a combined average sales price of approximately $10,831. VOI sales revenues for the year-ended December 31, 2000, reflected a 110% increase in the number of VOIs sold, and a 4% increase in the average sales price of a VOI compared to the same period in 1999. The Company now owns or manages 29 timeshare resort locations with a completed inventory of approximately 27,710 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:
For the Year-ended December 31, December 31, 2000 1999 ---------- --------------- Timeshare intervals sold 8,260 3,920 Average Sales Price 10,831 $10,400 Number of VOIs in inventory at period end 27,710 27,687
As a result of the Peppertree Acquisition, five 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 points packages than prices for fixed or floating week VOIs. Therefore, statistics concerning "average sales price" no longer correlate directly to prior measures of average sale price. Similarly, 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.
Resort Operations
Resort operations revenue totaled $20.7 million for the year-ended 2000, as compared to $20.5 million for 1999. The increase in resort operations is largely due to the impact of the Peppertree Acquisition. Resort management expenses as a percentage of resort operation revenue dropped to 61.5% in 2000 compared with 80.0% for 1999. The decline in resort management expense as a percentage of resort operation revenue is the result of the addition of resort properties with greater resort operation profit margins from overnight rentals, as well as cost reduction measures.
Other Income
Other income increased 22% to $2.0 million for the year-ended December 31, 2000 as compared to $1.6 million for the year-ended December 31, 1999. The increase in other income is primarily due to the addition of other income associated with acquisition properties and to a lesser degree increased service income. Other income associated with acquisition properties represented 109% of the increase in other income.
Provision For Doubtful Receivables
The provision for doubtful receivables increased 314% to $9.1 million for the year-ended December 31, 2000 from $2.2 million for the year ending December 31, 1999. The increase in the provision for doubtful receivables is primarily due to an increase in consumer receivables generated from VOI sales at one of the Company's sales centers. However, the increase also reflects increases in the Company's rate of provisioning for doubtful receivables from 5.0% of VOI sales during the year-ended December 31, 1999 to 9.3% of VOI sales during the year-ended December 31, 2000. Increases in the rate of provisioning for doubtful receivables are driven by the Company's TRM methodology, which requires additional provisions to reflect both portfolio growth and increases in receivable aging. The increased percentage rate of reserving for doubtful receivables in effect during 2000 increased the dollar amount of provisions by approximately $1.6 million compared with what it would have been under the rate of provisioning in effect during the comparable period in 1999. 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 Target Reserve Methodology, or TRM, 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.
At December 31, 2000, the Company had total reserves (including collateralization on the Hypothecation Loans) for its loan portfolio equal to $35.1 million or 4.3% of total loans. Included in this amount were total reserves and over collateralization of $23.4 million on third party consumer receivables
or approximately 20.0% of the outstanding consumer receivables portfolio attributable to third party resorts. This represented a reserve coverage ratio of 12.8 times the $1.8 million of such receivables that were 60 or more days past due at December 31, 2000. At December 31, 2000 the Company also, maintained an aggregate allowance for doubtful receivables of $11.7 million, or 8.0% of the outstanding consumer receivable portfolio from owned resorts. This represented a reserve coverage ratio of 2.1 times the approximate $5.7 million in consumer receivables from owned resorts that were 60 days or more past due as of that date. The $11.7 aggregate allowance for doubtful receivables represented an increase of 16.8% compared with $10.1 million at December 31, 1999. This largely reflects the significant increases in reserves required by the Company's TRM compared with reserving policies previously in effect at Eastern Resorts, KGI, Peppertree and Riverside Suites.
On July 1, 1999, Peppertree entered into an Agreement for the Collection of Unpaid Accounts with Meridian Financial Services, Inc. ("Meridian"), a wholly owned subsidiary of II (the "Agreement"). Under the terms of the Agreement, initially for a period of ten (10) years, Meridian was to be the exclusive agent for the collection of delinquent and unpaid loan, maintenance fee and club fee accounts on behalf of Peppertree ("Accounts"). In return, Meridian was to receive a percentage of the amount collected and a fee for each VOI re-conveyance in the case of a loan default. The Agreement did not contain any explicit performance criteria by which Peppertree could evaluate the effectiveness of Meridian's collection activities. Subsequent to the Peppertree Acquisition, the Company determined that Meridian's collection efforts did not comply with reasonable industry standards for collections and that Meridian was in breach of the Agreement. The Company subsequently terminated the Agreement and transferred all collection activities for accounts from Peppertree to its Resort Funding subsidiary. The Company believes that Meridian's performance resulted in millions of dollars in Peppertree loan write-offs, though Meridian and II dispute that Meridian violated the Agreement or failed to make reasonable efforts. The Company and II are discussing the situation for the purpose of resolving disputes attributable to the termination of the Agreement without litigation. There is no assurance that any such negotiations will be successful or that the ultimate resolution of this matter will not have a negative financial impact on the Company.
The following tables provide detailed loan portfolio information relating to Third Party Loans and Subsidiary Consumer Loans. As this data shows, the Company's Third Party Loan portfolio more than 60 days past due was $1.8 million at December 31, 2000, while total reserves and overcollateralization were $23.4 million. Thus, considering its receivables portfolio as a whole, the Company had total reserves equal to approximately 4.7 times total 60 day past due loans. As of December 31, 2000, additional write offs in the amount of $1.7 million were taken primarily as a result of the poor performance of the Peppertree loan portfolio. The Company believes that it follows a conservative approach in establishing strong provisions for potential problem loans, and providing detailed information to investors regarding performance of its receivables portfolio.
The following table sets forth the performance of the consumer receivable portfolio at December 31, 2000:
(1) Includes the consumer receivables that collateralize the Hypothecation Loans.
At December 31, 2000, 94.3% of the aggregate consumer receivable portfolio was current, and there were 750 notes with a principal balance of $4.6 million that were over 90 days past due. Of this amount, $3.8 million relates to the consumer receivables in the Company's resorts. During 2000, the company wrote off 1,798 consumer notes with an outstanding principal balance of $13.0 million, leading to a charge after inventory recovery of $7.9 million. This total level of charges to the allowance for doubtful receivables represents an increase of 204% over 1999. Notwithstanding this increase, the Company's total allowance for doubtful receivables increased 16.8% to $11.8 million at year-end 2000 as a result of increases in provisioning. Past due loans at December 31, 2000 fell 23.8% to $5 million compared with $6.5 million at December 31, 1999. With the exception of loans relating to Peppertree sales serviced by Meridian, the Company serviced most other loans in its portfolio internally, using its own personnel and facilities. Total reserves and overcollateralization of approximately $35.1 million at December 31, 2000, compared with $7.4 million in total consumer receivables that were 60 days or more past due represented an overall reserve coverage ratio of 4.7 times the volume of 60 day past due notes.
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:
(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.
The following two tables show current and historic levels of 90 day past due loans and changes in the Company's allowance for doubtful accounts:
(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.
(2) Does not include the Company's allowance for doubtful accounts, which had a beginning balance in 1995 of $290,000, provision of loan losses of $0 for 1996, and loan losses of $50,000 for 1996. These amounts pertain to the insurance premium finance business discontinued in 1995.
Interest Expense
Interest expense, net of capitalized amounts, increased 76% to $23.6 million for the year-ended December 31, 2000 as compared to $13.4 million for the year-ended 1999. The increase in interest expense is a result of the increased borrowings associated with the increased loan portfolio, increased borrowings associated with the 1999 Acquisitions and the foreclosure of the
San Antonio project, and an increase in the weighted average outstanding interest rate. The average outstanding balance increased approximately $105 million, while the weighted average interest rate on outstanding debt increased from 7.1% for the year-ended December 31, 1999 to 8.7% for the year-ended December 31, 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. 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 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.
Cost Of Timeshare Intervals Sold
The cost of timeshare intervals sold for the year-ended December 31, 2000 totaled $23.2 million or 23.9% of VOI revenue, compared to $9.7 million for the year-ended 1999, or 23.6% of VOI revenue. The increase in dollar volume is a result the inclusion of operating results for the Peppertree Acquisition and to a lesser degree the Riverside Acquisition.
Depreciation And Amortization
Depreciation and amortization increased 47% to $5.1 million for the year-ended December 31, 2000 from $3.5 million for the same period in 1999. The increase is primarily due to $1.0 million associated with depreciation expense and $0.7 million associated with goodwill amortization.
Goodwill amortization increased 108% to $1.4 million for the year-ended December 31, 2000 from $0.7 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 $19 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 $1.7 million and accounts for 60% 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.
Write Off of IPO Costs
In view of its inability to determine when, if at all, it will be able to complete the efforts of the Company and the Bennett Estate to sell shares of common stock in a public offering, the Company wrote off the $1.6 million in offering costs accrued on the Company's balance sheet relating to the 1998 Registration Statement as of December 31, 2000. All such costs have been previously paid, and no such costs were actually incurred in 2000.
Sales And Marketing
Sales and marketing expense increased to $45.9 million for the year-ended December 31, 2000 from $19.5 million for the year-end December 31, 1999. The increase in total sales and marketing dollar expense is due to the inclusion of operating results from acquired properties. Results in 2000 were affected by a decrease in sales and marketing expense to 47.2% of timeshare sales, compared with 47.6% for the year-ended December 31, 1999. The Company believes that aggregate sales and marketing expenses for the Company's non-Peppertree sales centers was approximately 44.0%, but the aggregate percentage for the Company was increased by marketing and commissions programs at its Peppertree sales centers during the first half of the year. Sales and marketing expenses at Peppertree were significantly reduced during the remaining months of 2000.
Since the Peppertree Acquisition, the Peppertree sales centers have operated at a cost level significantly greater than the Company's other sales centers. The Company anticipates that the Peppertree sales and marketing expenses as a percent of VOI revenue will decline during 2001 due to reductions implemented during the second half of 2000, as well as further cuts to be made as necessary in 2001. The Company continues to believe that sales and marketing costs at former Peppertree resorts can be reduced to achieve total sales and marketing expense on a par with such cost levels elsewhere within the Company. There is no assurance that the Company will succeed in reducing such cost levels or of the timing of any resulting increase in Peppertree gross profit margins.
Resort Management
Resort management expense for the year-ended December 31, 2000 totaled $12.7 million or 61.5% of resort operation revenue as compared $16.5 million or 80.0% of resort operation revenue for the comparable period in 1999. The decline in resort management expenses as a percentage of resort operation revenue is primarily due to the addition of a number of 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 to $18.6 million for the year-ended December 31, 2000 from $9.2 million for the same period in 1999. The increased costs are attributable to the inclusion of general and administrative costs associated with the acquisition-related properties, which represented 86% of the total increase in general and administrative costs. The following items also contributed to the increase in general and administrative expense: payroll costs, travel costs, office related costs, outside service costs, and servicing fees due to growth of the Company.
General and administrative expense increased in nominal dollars, as a percentage of total revenue increased to 11.7% of total revenue for 2000, compared with 10.3% of total revenue in 1999. The increase in general and administrative expense as a percentage of total revenue reflects increases in accounting, auditing and sales verification / administration expense as the Company continues to invest in its management and organization infrastructure. In 1999 and 2000, the Company's expense for compensation was reduced from what it would otherwise have been because the Company did not incur any cost whatsoever to compensate its Chief Executive, who was compensated entirely by the Bennett Estate. While Mr. Breeden continues to receive his entire compensation directly from the Bennett Estate, and does not receive any remuneration directly from the Company, beginning January 1, 2000 the Company began to reimburse the Bennett Estate for a portion of the compensation paid to Mr. Breeden.
Provision For Income Taxes
The provision for income taxes for the year-ended December 31, 2000 increased 21% to $7.9 million from $6.5 million for the same period in 1999. The increase is attributable to the increase in pretax income during 2000 as compared to the same period in 1999. The provision for income taxes represents approximately 43% of pretax income for 2000 and 1999. During the first quarter of 1999, the Company's federal income tax liability was reduced by the availability of net operating losses carried forward, which were fully utilized at that time. No such benefit was available in 2000.
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).
DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
Net Income
Income before provision for income taxes increased 78% to $15.2 million for the year-ended December 31, 1999, as compared to $8.5 million for the same period in 1998. Net income increased 66% to $8.7 million for the year-ended December 31, 1999 from $5.2 million for the same period in 1998. Diluted earnings per share rose 55% to $0.31 in 1999 from $0.20 in 1998. The increase in net income is primarily attributable to the addition of the timeshare operating results for acquisition-related properties, and the resulting growth in total revenue.
Total revenue rose 201% to $89.1 million for the year-ended December 31, 1999 as compared to $29.6 million for the same time period in 1998. Revenue growth is largely due to the addition of revenue associated with acquisition-related properties. Revenue and income relating to Eastern Resorts includes the entire year, while the comparable figures from the former KGI Properties and the Peppertree Properties relate only to the period after March 26, 1999 and November 17, 1999, respectively.
While earnings per share increased substantially, the Company's pretax income as a percent of revenues fell from 28.7% to 17.1%. This decrease is due to several factors. First, the development business in general has much higher revenues than the Company's finance business, but also substantially lower gross profit margins. Thus, as development revenues in 1999 were more than twice as large as finance revenues, the aggregate profit margin was reduced to a blend of traditional finance company and developer profit margins. Second, the KGI Acquisition involved a purchase of assets that at the time of purchase were losing money at a substantial rate due to very significant uncontrolled costs. During 1999 the Company cut costs significantly at the former KGI properties, and the aggregate profit margin of the former KGI resorts has correspondingly increased from a loss to a positive margin now approaching that of the Company's Eastern Resorts operation. The Peppertree Acquisition also involved absorption of a group of properties which, at the time of closing had sales and marketing costs very significantly in excess of such costs within the Company, and consequently a very low pretax profit margin.
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 27% to $26.0 million for the year-ended December 31, 1999 from $20.4 million for the year-ended December 31, 1998, primarily due to higher average outstanding balances on the loan portfolio of approximately $32 million for the entire year. In addition, the weighted average interest rate on the loan portfolio increased approximately 50 basis points. The increase in the portfolio was due principally to the addition of acquired resorts' existing portfolios and continued growth of the owned consumer loan portfolio. Third party Hypothecation Loans also increased in size and the weighted average interest rate increased.
Interest income related to the owned consumer loan portfolio increased to 28% of total interest income, compared to 5% of interest income for 1998. Interest income earned from the Company's third party loans decreased from $19.4 million for the year-ended 1998 to $18.6 million for the year-ended 1999, mainly due to the elimination of interest during consolidation totaling $2.0 million. The Company previously extended loans to certain of the acquisition properties, which are now eliminated during consolidation. However, some growth in the third party consumer loan portfolio contributed to the increase in interest income, which was partially offset by a decline in interest rates. Interest income on third party consumer receivables increased to $14.0 million for the year-ended 1999 from $13.5 million for the year-ended 1998, and is attributable to growth in the third party consumer loan portfolio, specifically hypothecation loans. Interest on A&D Loans decreased 18.6% to $4.4 million for the twelve months ended December 31, 1999 from $5.4 million for the same time period in 1998, mainly due to a lower average outstanding balance due to the elimination of loans in consolidation. A&D Loan originations declined 30.8% from $24.3 million in 1998 to $16.8 million in 1999, while third party consumer loan receivables originations remained relatively constant at $70 million. The decline in A&D loan originations is attributable to a shift in the Company's growth strategy from third party A&D loans to the owned timeshare and consumer financing segments, which the Company believes involve less risk than third party A&D loans. The company expects its third party A&D loan portfolio to continue to decline both as a percentage of the total portfolio and also in absolute dollars due to more stringent risk underwriting standards and prioritization of available funds.
VOI Sales
VOI revenues increased to $40.9 million for the year-ended December 31, 1999, from $4.6 million for the prior year. The increase was due to the full year impact of the Eastern Resorts Acquisition that the Company completed in August of 1998 and due to the 1999 Acquisitions. During 1999, the Company sold approximately 3,920 vacation ownership intervals at an average price of approximately $10,400. Although it is not possible to estimate with any precision due to unavailable information from prior companies and the uncertainty of the sales process, the Company believes that VOI revenues for the full year would have been approximately $90 million, had the 1999 Acquisitions had taken place at the beginning of 1999. Vacation ownership revenue increased to 46% of total revenue for year-ended 1999 as compared to 15% for the year-ended 1998 due to the inclusion of operating results for the acquired properties.
Resort Operations
Resort operation revenue totaled $20.6 million for the year-ended 1999, as compared to $3.6 million for 1998. The increase in resort operations was due to the full year impact of the Eastern Resorts acquisition that the Company completed in August of 1998 and due to the 1999 Acquisitions. Resort management expenses as a percentage of resort operation revenue dropped to 80.0% in 1999 compared with 89.2% for 1998. The decline in resort management expense as a percentage of resort operation revenue is the result of the addition of resort properties with greater resort operation profit margins from overnight rentals, the inclusion of high summer season in 1999 at Newport properties compared with 1998, when most of this time period occurred prior to the date of the Eastern Resorts acquisition, and efforts to enhance Eastern Resorts' resort operations gross margins.
Other Income
Other income increased 59% to $1.6 million for the year-ended December 31, 1999 as compared to $1.0 million for the year-ended December 31, 1998. The increase in other income is primarily due to an increase in service income associated with consumer receivables, increased fee income, and other income associated with acquisition properties. Other income associated with acquisition properties represented 9% of the increase in other income.
Provision For Doubtful Receivables
The provision for doubtful receivables increased 177% to $2.2 million for the year-ended December 31, 1999 from $0.8 million for the prior year ending December 31, 1998. The increase in the provision for doubtful receivables is primarily due to an increase in consumer receivables generated from the acquisition-related properties, together with application of the Company's TRM or target reserve methodology to the entire portfolio, including newly acquired receivables.
At December 31, 1999, the Company had total reserves (including collateralization on the Hypothecation Loans) for its loan portfolio equal to $32.9 million or 12.6% of total loans. Included in this amount were total reserves and over collateralization of $22.8 million on third party consumer receivables or approximately 21.1% of the outstanding consumer receivables portfolio attributable to third party resorts. This represented a reserve coverage ratio of 6.7 times
the $3.4 million of such receivables that were 60 or more days past due at December 31, 1999. At December 31, 1999 the Company also, maintained an aggregate allowance for doubtful receivables of $10.1 million, or 8.3% of the outstanding consumer receivable portfolio from owned resorts. This represented a reserve coverage ratio of 3.5 times the approximate $2.9 million in consumer receivables from owned resorts that were 60 days past due as of that date. The $10.1 aggregate allowance for doubtful receivables represented an increase of 163% compared with $3.8 million at December 31, 1998. This largely reflects the significant increases in reserves required by the Company's TRM compared with reserving policies previously in effect at Eastern Resorts, KGI or Peppertree.
The following table sets forth the portfolio performance of the consumer receivable portfolio at December 31, 1999:
1. Includes the consumer receivables that collateralize the hypothecation loans.
2. The remaining principal outstanding owed to the Company is only $108 million. The balance of the $122.3 million represents receivables included in overcollateralization.
At December 31, 1999, 94.6% of the aggregate consumer receivable portfolio was current, and there were 508 notes with a principal balance of $2.7 million that were over 90 days past due. Of this amount, $1.3 million were notes relating to the consumer receivables in the Company's resorts. During 1999, the company wrote off 548 consumer notes with an outstanding principal balance of $2.6 million. With limited exceptions, the Company serviced the loans in its portfolio internally, using its own personnel and facilities. Total reserves and overcollateralization of approximately $32.8 million at December 31, 1999, compared with $6.3 million in total consumer receivables that were 60 days or more past due represented an overall reserve coverage ratio of 5.2 times the volume of 60 day past due notes.
Interest Expense
Interest expense, net of capitalized amounts, increased 80% to $13.4 million for the year-ended December 31, 1999 as compared to $7.5 million for the year-ended 1998. The increase in interest expense is a result of the increased borrowings associated with the increased loan portfolio, increased borrowings associated with the 1999 Acquisitions, and an increase in the weighted average outstanding interest rate. The average outstanding balance increased approximately $75 million, while the weighted average interest rate on outstanding debt increased from 6.7% for the year-ended December 31, 1998 to 7.1% for the year-ended December 31, 1999.
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 approximately 600 basis points. This is currently the largest financing facility that the Company maintains.
Cost Of Timeshare Intervals Sold
The cost of timeshare intervals sold for the year-ended December 31, 1999 totaled $9.7 million or 23.6% of VOI revenue, compared to $1.1 million for the year-ended 1998, or 25.1% of VOI revenue. The decrease in the cost of timeshare intervals sold as a percentage of VOI revenue is primarily due to lower product costs at certain acquisition sites, while the increase in dollar volume is a result the inclusion of operating results for acquisition properties.
Depreciation And Amortization
Depreciation and amortization increased 60% to $3.5 million for the year-ended 1999 from $2.2 million for the same period in 1998. The increase is primarily due to $0.6 million associated with depreciation expense, $0.5 million associated with goodwill amortization and $0.2 million associated with financing costs. These increases are a result of the full year impact of the Eastern Resorts acquisition and the two acquisitions the Company completed in 1999.
Goodwill amortization increased 229% to $0.8 million in 1999 from $0.2 million for the same period in 1998 and represented 41% of the increase. Goodwill associated with the Peppertree Acquisition is approximately $15 million and is being amortized over 20 years. Depreciation and amortization of the properties totaled $0.6 million and accounts for 44% of the increase.
Sales And Marketing
Sales and marketing expense increased to $19.5 million for the year-ended December 31, 1999 from $2.2 million for the year-end December 31, 1998. However, sales and marketing expense decreased slightly to 47.6% as a percentage of VOI revenue for 1999, compared to 47.7% for 1998. The increase in total sales and marketing dollar expense is due to the inclusion of operating results from acquired properties, and the decrease in such costs as a percent of VOI revenue was principally due to the acquisition of certain resorts with lower sales and marketing costs than the Company's Newport properties that were included in the 1998 totals.
Results in the fourth quarter of 1999 were adversely affected by an increase in sales and marketing expense to 57.5% of timeshare sales, compared with 46.6% in the fourth quarter of 1998, and 43.1% through the nine months ending September 30, 1999. The Company believes that the fourth quarter increase was attributable in significant part to reduced occupancy and reduced number of travelers in the majority of the Company's markets due to unusually severe weather conditions, especially Hurricanes Floyd and Lenny, as well as travel safety concerns relating to potential Year 2000 computer issues. The resulting lower levels of tours at the Company's resort properties led to a corresponding increase in the sales and marketing expense as a percentage of VOI sales.
Management anticipates that the sales and marketing expense experienced in the fourth quarter of 1999 was largely a one-time event. However, since the Peppertree Acquisition the
Peppertree sales centers have operated at a cost level significantly greater than the Company's other sales centers. The Company believes that this reflects a higher cost structure and cost per tour than is allowed to exist at the Company's other sales centers. There is no assurance that the Company will succeed in reducing such cost levels or of the timing of any resulting increase in Peppertree gross profit margins.
Resort Management
Resort management expense for the year-ended December 31, 1999 totaled $16.5 million or 80.0% of resort operation revenue as compared $3.3 million or 89.2% of resort operation revenue for the comparable period in 1998. The decline in resort management expenses as a percentage of resort operation revenue is primarily due to the addition of a number of resort properties that derive significant room revenue from unsold timeshare inventory.
General And Administrative
General and administrative expense increased 124% to $9.2 million for the year-ended December 31, 1999 from $4.1 million for the same period in 1998. The increased costs are attributable to the inclusion of general and administrative costs associated with the 1999 Acquisitions, which represented 78% of the total increase in general and administrative costs. The following items also contributed to the increase in general and administrative expense: payroll costs, travel costs, office related costs, outside service costs, and servicing fees due to growth of the Company.
Although general and administrative expense increased in nominal dollars, general and administrative expense as a percentage of total revenue declined to 10.3% of total revenue for 1999, compared with 13.9% of total revenue in 1998. The decrease in general and administrative expense as a percentage of total revenue is generally the result of spreading costs across increased revenue, as well as control of expenditures. In both 1998 and 1999, the Company's expense for compensation was reduced from what it would otherwise have been because the Company did not incur any cost whatsoever to compensate its Chief Executive, who was compensated entirely by the Bennett Estate. While Mr. Breeden continues to receive his entire compensation directly from the Estate, and does not receive any remuneration directly from the Company, beginning January 1, 2000 the Company began to reimburse the Estate for a portion of the compensation paid to Mr. Breeden.
Provision For Income Taxes
The provision for income taxes for the year-ended December 31, 1999 increased 99% to $6.5 million from $3.3 million for the same period in 1998. The increase is attributable to the increase in pretax income during 1999 as compared to the same period in 1998. The provision for income taxes represents approximately 43% and 38% of pretax income for 1999 and 1998, respectively. During the first quarter of 1998, the Company's federal income tax liability was reduced by the availability of net operating loss carryforwards, which were fully utilized at that time. No such benefit was available in 1999.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's notes receivable average interest rate as of December 31, 2000 was 14.2%. See note B to the Company's consolidated financial statements contained herein.
The Company is exposed to interest rate changes primarily as a result of its financing of timeshare purchases and borrowing under credit lines. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs.
As of and for the year ended December 31, 2000, the Company had no derivative financial instruments or foreign operations.
The table below provides weighted average interest rate and expected maturity date information as of December 31 (the actual amounts may differ due to prepayments):
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 appears in Annex A to this report, which follows the signature page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item will be set forth under "Directors and Executive Officers" and "Proxy Statement -- Compliance with Section 16(a) Under the Securities Exchange Act of 1934" in the Company's Definitive Proxy Statement for the 2001 annual meeting of the stockholders. Such information is incorporated in this Item by reference.
Item 11.
Item 11. Executive Compensation
The information required by this Item will be set forth under "Executive Compensation" in the Company's Definitive Proxy Statement for the 2001 annual meeting of the stockholders. Such information is incorporated in this Item by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item will be set forth under "Proxy Statement -- Stock Ownership of Directors, Certain Executive Officers and Principal Stockholders" in the Company's Definitive Proxy Statement for the 2001 annual meeting of the stockholders. Such information is incorporated in this Item by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item will be set forth under "Certain Relationships and Related Transactions" in the Company's Definitive Proxy Statement for the 2001 annual meeting of the stockholders. Such information is incorporated in this Item by reference.
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements
We have provided the following consolidated financial statements immediately following the Index to Financial Statements on as Annex A of this report.
Annex Page
Independent Auditor's Report on Consolidated Financial Statements (1)
Consolidated Balance Sheets as of December 31, 1999 and 2000 (2)
Consolidated Statements of Income for the years ended December 31, 1998, December 31, 1999, and December 31, 2000 (3) Consolidated Statements of Stockholder's Equity for the years ended December 31, 1998, December 31, 1999, and December 31, 2000 (4 - 5)
Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1999, and December 31, 2000 (6)
Notes to Consolidated Financial Statements (7 - 36)
2. Financial Statement Schedules
All schedules to the consolidated financial statements have been omitted because they are not required under the related instructions or are inapplicable, or because the Company has included the required information in our consolidated financial statements or related notes.
3. Exhibits
The following exhibits either (a) are filed with this report or (b) have previously been filed with the SEC and are incorporated in this Item by reference to those prior filings.
INDEX TO EXHIBITS
Exhibit No.: Exhibit ------------ -------
2.1 Agreement and Plan of Reorganization by and among Equivest Finance, Inc., Peppertree Acquisition Corp., Peppertree Acquisition II Corp., Peppertree Resorts, LTD., Pioneer Hotel Corporation, C. Wayne Kinser and the Stockholders Named Herein, dated as of November 17, 1999 (incorporated by reference to the Company's Form 8-KA filed December 1, 1999).
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to the Company's 1998 Form 10KSB).
3.2 By-laws (incorporated by reference to the Company's 1998 Form 10KSB).
4.1 Registration Rights Agreement by and among Equivest Finance, Inc. and C. Wayne Kinser, the Sharon Kay Williamson Charitable Remainder Unitrust, the David Wayne Kinser Charitable Remainder Unitrust, Donald Clayton, John McFarland and Herbert J. Patrick, Jr., dated as of November 16, 1999 (incorporated by reference to the Company's Form 8-KA filed December 1, 1999).
10.1 Resort Funding, Inc Profit Sharing & 401k Plan (incorporated by reference to the Company's 1997 Form 10KSB).
10.2 Nonstandarized Adoption Agreement Prototype Cash or Deferred Profit-Sharing Plan and Trust/Custodial Account sponsored by Manufacturers & Traders Trust Company for Resort Funding, Inc. dated December 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.3 Eastern Resorts Company LLC Profit Sharing & 401k Plan (incorporated by reference to the Company's 1998 Form 10KSB).
10.4 Flexible Nonstandardized Safe Harbor 401(k) Profit Sharing Plan Adoption Agreement for Eastern Resorts Company, LLC., dated January 4, 2000. (incorporated by reference to the Company's 1999 Form 10KSB).
10.5 Receivables Financing Facility extended by Holland Limited Securitization, Inc. and Internationale Nederlanden (U.S.) Capital Markets, Inc. to Bennett Funding International, Ltd. and BFICP Corporation (incorporated by reference to the Company's 1997 Form 10-KSB).
10.6 Assignment, Release and Custodial Agreement between Resort Funding, Inc., BFICP Corporation, Credit Suisse First Boston Mortgage Capital LLC, ING (U.S.) Capital Markets Corporation, ING (U.S.) Capital Markets, Inc., Holland Limited Securitization, Inc., First Trust of New York, N.A. and Concord Servicing Corporation (incorporated by reference to the Company's 1997 Form 10-KSB).
10.7 $75,000,000 Receivables Financing Facility extended by Credit Suisse First Boston Mortgage Capital LLC to Resort Funding, Inc., dated February 11, 1998 (incorporated by reference to the Company's 1997 Form 10-KSB).
10.8 $30,000,000 Acquisition and Development Financing Facility extended by Credit Suisse First Boston Mortgage Capital LLC to Resort Funding, Inc., dated November 14, 1997 (incorporated by reference to the Company's 1997 Form 10-KSB).
10.9 Employment Agreement by and between Thomas J. Hamel and Richard C. Breeden, as Trustee, dated May 29, 1997 (incorporated by reference to the Company's 1997 Form 10-KSB).
10.10 Employment Agreement by and between Gerald L. Klaben, Jr. and Richard C. Breeden, as Trustee, dated July 26, 1996 (incorporated by reference to the Company's 1997 Form 10-KSB).
10.11 Employment Agreement by and between Eastern Resorts and R. Perry Harris dated as of August 24, 1998 (incorporated by reference to the Company's Form 8-K filed September 11, 1998).
10.12 Purchase Agreement among Equivest Finance, Inc. and Kosmas Group International, Inc., Avenue Plaza, LLC, Ocean City Coconut Malorie Resort, Inc., Capital City Suites, Inc., Kosmas Caribbean Holding Corporation, Steven Kosmas, Paul Kosmas, Nicholas Kosmas and Chip Gordy, dated as of February 16, 1999 (incorporated by reference to the Company's Form 8-K filed February 23, 1999).
10.13 Indemnification Agreement by and between Kosmas Group International, Inc., the undersigned subsidiaries and shareholders and Equivest Finance, Inc., dated March 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.14 Settlement Agreement and Mutual Releases by and between Christian Kjaer, Kosmas Group International, Inc. and Equivest Finance, Inc., dated March 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.15 Registration Rights Agreement by and among Equivest Finance, Inc. and Christian Kjaer, entered into and effective as of March 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.16 Stock Purchase Warrant granted by Equivest Finance, Inc. to Christian Kjaer, dated March 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.17 Loan and Security Agreement (Receivables Transactions Warehouse Facility) by and between Resort Funding, Inc. and FINOVA Capital Corporation entered into as of September 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.18 Loan and Security Agreement (ADC Loans Warehouse Facility) by and between Resort Funding, Inc. and FINOVA Capital Corporation entered into as of September 30, 1999 - (incorporated by reference to the Company's 1999 Form 10KSB).
10.19 Guaranty and Subordination (Receivables Transactions Warehouse Facility) by Equivest Finance, Inc., in favor of FINOVA Capital Corporation entered into as of September 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.20 Guaranty and Subordination (ADC Loans Warehouse Facility) by Equivest Finance, Inc. in favor of FINOVA Capital Corporation entered into as of September 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.21 Servicing Agreement by and between Resort Funding, Inc. and FINOVA Capital Corporation entered into as of September 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.22 Pledge and Assignment of Put and Reserve Agreement and Interval Mortgages by Resort Funding, Inc., to and in favor of FINOVA Capital Corporation entered into as of September 30, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.23 Credit Agreement by and among Equivest Finance, Inc., Peppertree Acquisition Corp., Peppertree Acquisition II Corp. and Bank of America, N.A., dated as of November 17, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.24 Form of Security Agreement by and among Equivest Finance, Inc., each Subsidiary of the Borrower, the Subsidiary Guarantors and Bank of America, N.A., dated as of November 17, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.25 Form of Pledge Agreement by and among Equivest Finance, Inc., Peppertree Resorts, LTD., Peppertree Acquisition II Corp. and Bank of America, N.A., dated as of November 17, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.26 Sublease Agreement by and between Equivest Finance, Inc. and Richard C. Breeden & Co., dated December 21, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.27 Club Affiliation Agreement between Interval International, Inc. and Peppertree Resorts Vacation Club, Inc. dated September 17, 1997 (incorporated by reference to the Company's 1999 Form 10KSB).
10.28 First Addendum to Club Affiliation Agreement between Interval International Inc. and Peppertree Resorts Vacation Club, Inc. dated July 15, 1999 (incorporated by reference to the Company's 1999 Form 10KSB).
10.29 First Amendment Agreement dated as of January 31, 2000, to the Receivables Loan and Security Agreement, dated as of January 31, 2000, among EFI Funding Company, Inc., Resort Funding, Inc., Autobahn Funding Company, LLC, DG Bank Deutsche Genossenschaftsbank AG; US Bank Trust National Association and Sage Systems, Inc. with Exhibit "A" Receivables Loan and Security Agreement dated as of January 31, 2000, among the above-referenced parties (incorporated by reference to the Company's Form 10-Q filed May 15, 2000).
10.30 First Amendment Agreement dated as of January 31, 2000, to the Purchase Agreement, dated as of January 31, 2000, between Resort Funding, Inc. and EFI Funding Company, Inc. with Exhibit "A" Purchase Agreement dated as of January 31, 2000, between the above-referenced parties (incorporated by reference to the Company's Form 10-Q filed May 15, 2000).
10.31 Sinking Fund Account Agreement dated as of January 31, 2000, among EFI Funding Company, Inc., Resort Funding, Inc., DG Bank Deutsche Genossenschaftbank AG and Manufacturers and Traders Trust Company (incorporated by reference to the Company's Form 10-Q filed May 15, 2000).
10.32 First Amendment Agreement dated as of January 31, 2000, to the Purchase Agreement, dated as of January 31, 2000, between EFI Development Funding, Inc., as seller and EFI Funding Company, Inc., as purchaser with Exhibit "A" Purchase Agreement dated as of January 31, 2000, between the above-referenced parties (incorporated by reference to the Company's Form 10-Q filed May 15, 2000).
10.33 Second Amendment Agreement dated as of August 4, 2000, to the Receivables Loan and Security Agreement, dated as of January 31, 2000, among EFI Funding Company, Inc., Resort Funding, Inc., Autobahn Funding Company, LLC, DG Bank Deutsche Genossenschaftsbank AG; US Bank Trust National Association and Sage Systems, Inc. (incorporated by reference to the Company's Form 10-Q filed September 15, 2000).
10.34 Loan and Security Agreement by and between FINOVA Capital Corporation and Eastern Resorts Company, LLC., dated as of June 15, 2000. (incorporated by reference to the Company's Form 10-Q filed September 15, 2000).
10.35 Registration Rights Agreement entered into as of the 16th day of November, 1999, by and among Equivest Finance, Inc., and C. Wayne Kinser, the Sharon Kay Williamson Charitable Remainder Unitrust, the David Wayne Kinser Charitable Remainder Unitrust, Donald Clayton, John McFarland and Herbert Patrick, Jr. (incorporated by reference to the Company's Form 10-Q filed September 15, 2000).
10.36 * Second Amendment and Waiver to Credit Agreement by and among Equivest Finance, Inc., Peppertree Acquisition II Corp, and Bank of America, dated as of November 17, 2000.
11. Computation of earnings per share. See Notes to Consolidated Financial Statements.
21. * Subsidiaries of the Company.
23.1 * Independent Auditors Consent.
-------------------- ------------------------------------------------ * Filed herewith
(b) Reports of Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended December 31, 2000:
Current Report of Form 8-K dated November 14, 2000 filed with the SEC November 16, 2000, announcing record third quarter revenues; net income increases of 21%; earnings of $0.12 per diluted share.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed above.
(d) Financial Statement Schedules
See the response to Item 14(a)2 above.
SIGNATURES In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date Signature Title
March 30, 2001 /s / Richard C. Breeden Chief Executive Officer, ---------------------------- President and Chairman Richard C. Breeden of the Board of Directors
March 30, 2001 /s / Thomas J. Hamel Executive Vice President, ---------------------------- and Director Thomas J. Hamel
March 30, 2001 /s / R. Perry Harris Executive Vice President, ---------------------------- and Director R. Perry Harris
March 30, 2001 /s / Gerald L. Klaben, Jr. Chief Financial Officer, ---------------------------- Senior Vice President, and Gerald L. Klaben, Jr. Treasurer
March 30, 2001 /s / Richard G. Winkler Senior Vice President, ---------------------------- General Counsel, and Richard G. Winkler Secretary
March 30, 2001 /s / James R. Petrie Controller ---------------------------- James R. Petrie
March 30, 2001 Director ---------------------------- C. Wayne Kinser
March 30, 2001 /s / Olof S. Nelson Director ---------------------------- Olof S. Nelson
Audited Consolidated Financial Statements
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors Equivest Finance, Inc. Greenwich, Connecticut
We have audited the accompanying consolidated balance sheets of Equivest Finance, Inc. and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Equivest Finance, Inc. and subsidiaries as of December 31, 1999 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with generally accepted accounting principles.
/s/ FIRLEY, MORAN, FREER & EASSA, P.C.
Syracuse, New York March 24, 2001
CONSOLIDATED BALANCE SHEETS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
Years ended December 31, 1998, 1999 and 2000
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business: Equivest Finance, Inc. (Equivest) and its subsidiaries (collectively the Company) is a developer, operator and lender in the timeshare industry. The Company owns 29 timeshare resort properties primarily in the Eastern United States and St. Thomas, USVI. It sells fixed and flexible week timeshare intervals, including rights to use at certain locations; sells a vacation club product that operates on a points based system; and manages timeshare homeowners' associations at these properties. The Company provides financing to purchasers of its timeshare products; and to independent domestic and foreign timeshare resort developers (Resorts) which includes consumer lending for timeshare intervals, hypothecation loans to resort developers who pledge timeshare loans as collateral, and resort acquisition and development lending.
The Company entered the timeshare resort development business in 1998 and made substantial additional business acquisitions in 1999 (see Note Q). As a result, there has been a substantial change in the relative operating results of the Company's two business segments (see Note R).
The Company is majority owned by The Bennett Funding Group, Inc. (BFG) and its affiliate, Bennett Management and Development Corporation (BMDC) which, together, own approximately 79% of the Company's voting shares.
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Equivest Finance, Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions were eliminated in consolidation.
The financial statements include the results of operations and cash flows of purchased businesses from the date of their respective acquisition.
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.
Cash and Cash Equivalents and Restricted Cash: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted cash, included in other assets, primarily consists of: (1) amounts on deposit at financial institutions as security under lending agreements, and (2) deposits in accounts to be applied to its financing facilities, and (3) down payments on purchases.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Allowance for Doubtful Receivables: Receivables have been reduced by an allowance for doubtful receivables. The allowance is an amount which management believes will be adequate to absorb possible losses on existing receivables. The evaluation considers past loss experience, known and inherent risks in the portfolio, adverse conditions that may affect the borrower's ability to repay, the estimated value of underlying collateral, and current economic conditions. Receivables less the collateral value are charged against the allowance when management believes that collectibility is unlikely.
The Company follows Statement of Financial Accounting Standards No 114 "Accounting by Creditors for Impairment of a Loan" (SFAS 114). Under SFAS 114, the allowance for doubtful receivables for loans identified as impaired is specifically determined using the loan's projected discounted cash flow or its net collateral value.
Because of uncertainties in the estimation process, it is at least reasonably possible that management's estimate of loan losses inherent in the loan portfolio and the related allowance will change in the near term.
Inventory: Inventory is stated at the lower of cost or market and consists of unsold timeshare intervals available for sale, the cost of timeshare resorts under construction, and land for future timeshare construction. Upon the sale of an interval (including right to use and vacation club products), the Company removes the specific cost allocated to the interval from inventory and charges that amount to cost of timeshare intervals sold. Timeshare intervals reacquired through repossession are placed back into inventory at the lower of their original historical cost basis or market value.
Deferred Financing Costs: Deferred financing costs, included in other assets, represent unamortized expenses associated with issuing certain debt. Amortization of these costs are charged to operations on a straight-line basis over the term of the associated debt and does not differ materially from that computed using the effective interest method. The amortization of deferred financing costs amounted to $1,778,183 in 1998, $2,089,706 in 1999 and $1,843,314 in 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Property and Equipment: Property and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which follow:
Buildings and improvements 5-40 years Furniture and equipment 3-7 years
Goodwill: This asset represents the excess of costs over net assets of businesses acquired in 1998 and 1999. The 1998 goodwill of $27,485,408 is being amortized over 40 years and the 1999 goodwill of $19,077,728 is being amortized over 20 years on a straight line basis. Amortization of $237,925, $781,746 and $1,433,983 was charged to operations in 1998, 1999 and 2000, respectively.
Timeshare Interval Revenues: The Company earns these revenues from fully furnished vacation homes sold in either specific fixed week ownership intervals, individual fee simple ownership interests, or the sales of vacation club points which entitle the owners to use properties transferred to an independent membership corporation.
The Company recognizes its sales on the accrual basis when a binding sales contract has been executed, a 10% minimum down payment has been received, the statutory rescission period has expired and construction is substantially complete. If all criteria are met except that construction is not substantially complete, revenue is recognized on the percentage- of-completion basis.
Interest Income: The Company recognizes interest income on its outstanding loans receivable when earned using the interest method. The interest method recognizes income at a constant rate of interest when applied to the principal outstanding.
The accrual of interest on an impaired loan is discontinued when unpaid interest, together with the loan principal outstanding, exceeds the loan's projected cash flow or the loan's net collateral value.
Resort Operations: Revenues from resort operations consist primarily of (1) fees received for management services provided to homeowners' associations, (2) revenues from renting unoccupied units on a transient basis, and (3) revenues from restaurant operations.
Other Income: Other income primarily represents fees which are recognized as income when the Company performs the related service. These services include billing services for developers, and loan commitment, chargeback and collection fees charged to Resorts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Advertising: All costs associated with advertising and promoting the sale of timeshare intervals are expensed in the year incurred. Advertising expense was $124,925, $468,339 and $289,441 for 1998, 1999 and 2000, respectively.
Income Taxes: The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109 is an asset and liability approach to accounting for deferred income taxes. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. A valuation allowance is established as a reduction of deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Earnings Per Share: Earnings per share is based on the weighted average number of common shares outstanding and includes both basic and diluted earnings per share computations. The computation of basic earnings per share excludes any dilutive effects of options and warrants. The computation of diluted earnings per share includes the dilutive effects of the Company's outstanding options and warrants.
Stock-Based Compensation: The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Because the exercise price of employee stock options approximates the market price of the underlying stock on the date of grant, no compensation expense is recorded under APB 25. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123).
Segment Information: Segment information, as disclosed in Note R, is presented in accordance with Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 sets standards for the way that public companies report information about operating segments in annual financial statements and interim financial reports. It also establishes standards for disclosures about products and services, geographic areas, and major customers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE B--CONCENTRATIONS OF RISK
Credit Risk: The Company is exposed to on-balance sheet credit risk related to notes receivable.
The Company offers financing to the buyers of timeshare intervals and vacation club points at the Company's resorts. These buyers make down payments of at least 10 percent of the purchase price and deliver promissory notes to the Company for the balance which generally bear interest at a fixed rate, are payable over a seven year period and are secured by a first mortgage on a timeshare interval or by an assignment of rights under the vacation club member's purchase agreement. The Company generally does not verify the credit history of its customers and will provide financing if the customer is employed and meets certain household income criteria. If a buyer of a timeshare interval defaults, the Company must foreclose on the timeshare interval and reincur the associated marketing, selling, and administrative costs to resell the interval. Although the Company in many cases may have recourse against a timeshare interval buyer for the unpaid price, certain states have laws which limit the Company's ability to recover personal judgments against customers who have defaulted on their loans. Accordingly, the Company has generally not pursued this remedy.
The Company has concentrations of credit risk in its timeshare resort receivables, and timeshare consumer receivables either purchased from independent resort developers or which collateralized hypothecation loans to those developers. At December 31, 2000 the Company had agreements for resort development financing with 8 developers covering 10 timeshare resort complexes. These concentrations are believed to be mitigated by credit and evaluation procedures including credit evaluation of individual consumers before the purchase of their notes. The Company requires collateral, including an overcollateralization requirement and holdbacks on certain receivables. In addition to outstanding loans from these developers, at December 31, 2000 the Company was committed to lend approximately $3.4 million for resort construction or renovation. The Company has also agreed to make hypothecation loans to, or purchase timeshare interval contracts from 63 resorts subject to satisfactory underwriting approval of each consumer.
Interest Rate Risk: The Company's financing activities produces net interest income which is the spread between the interest rates it charges its customers and the interest rates it pays to its lenders. Because the Company's indebtedness bears interest at variable rates and a substantial amount of the Company's receivables portfolio bears interest at fixed rates, increases in interest rates erode the net rates that the Company has obtained. The Company has not engaged in interest rate hedging transactions. Therefore, a significant increase in interest rates, particularly if sustained, would negatively affect the Company's results of operations, cash flows, and financial position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE B--CONCENTRATIONS OF RISK--Continued
Availability of Funding Sources: The Company funds a substantial portion of its notes receivable and timeshare inventory with borrowings under its financing facilities. These borrowings are in turn repaid with the proceeds received by the Company from repayments of such notes receivable and timeshare sales. To the extent that the Company is not successful in maintaining or replacing existing financing, it would have to curtail its operations or sell assets, thereby having a material adverse effect on the Company's results of operations, cash flows, and financial condition.
Cash: The Company maintains cash balances at various financial institutions in several states with balances in excess of $100,000. Accounts at these institutions are insured by the Federal Deposit Insurance Corporation up to $100,000 per institution.
NOTE C--RECEIVABLES
Receivables consist of the following:
Accounts receivable consist primarily of: (1) amounts due from timeshare interval owners for maintenance and service charges including amounts which the Company remits to the Resorts upon receipt, (2) the principal amount of delinquent timeshare interval contracts which are receivable from Resorts under the recourse provisions of applicable financing agreements, (3) amounts due from homeowners' associations for management services rendered and (4) amounts due from renting unoccupied units on a transient basis. Receivables are stated at their unpaid principal balances. Amounts due Resorts for maintenance and service charges are included in accrued expenses and other liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE C--RECEIVABLES--Continued
Notes receivable includes: (1) amounts receivable from timeshare interval owners for their purchase of timeshares at Company resorts, (2) amounts receivable from timeshare interval owners resulting from the purchase of timeshare consumer receivables from third parties, less holdbacks of funds under those contracts, (3) loans to Resorts for acquisition and development of resort properties, and (4) hypothecation loans to Resorts secured by the Resorts' loans from timeshare interval owners. Interest rates on these receivables generally range from 9% to 18% per annum.
Based on their maturity dates as of December 31, 2000, the notes receivable are due during the years ending December 31 as follows: 2001--$58,582,602; 2002--$56,328,121; 2003--$39,371,607; 2004--$ 31,698,092; 2005--$26,247,269 and thereafter--$45,448,155.
The promissory note receivable is due as a result of a rescission and termination of an agreement with a corporation. Interest is paid monthly at a rate equal to the lesser of LIBOR plus 1.5% or prime rate. Principal is to be paid in two remaining equal annual installments of $150,000 and the note matures in February 2002.
Notes receivable--related party arose in connection with the purchase of Peppertree Resorts, Ltd. The notes are due at various dates through March 2001 and bear interest at rates ranging from 0% to LIBOR plus 4%. Payment on these notes has not been received in accordance with the underlying agreements and the Company has filed a complaint to enforce payment, among other matters. The Company believes it has adequate collateral and offsets with respect to these loans.
The following are the components of notes receivable as of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE C--RECEIVABLES--Continued
Substantially all timeshare consumer receivables and hypothecation loans are collateralized by security interests in timeshare intervals. Those consumer receivables purchased by the Company are also with full recourse to the Resort developers and it is the Company's practice to hold back approximately fifteen percent of the purchase price of each timeshare contract until the loan has been fully collected. The acquisition and development loans to Resorts are collateralized by security interests in the Resort properties and generally have the personal and/or corporate guarantees of the Resort owners.
The Company classified certain Resort loans as impaired under SFAS 114 at December 31, 1999 and 2000. This determination was made because the debtors had not made principal payments in accordance with their contractual agreements. The outstanding balance of impaired loans amounted to $3,821,251 and $4,820,550 at December 31, 1999 and 2000, respectively. The average outstanding amounts on these loans during 1999 and 2000 were $3,823,201 and $6,543,251, respectively, which includes the note receivable -- related party discussed previously. The Company has no allowance for losses specifically related to these loans because it believes the market value of the collateral exceeds its loan investment.
During 1998, 1999 and 2000, the Company recorded interest income on impaired loans of $452,753, $380,314, and $616,805, respectively.
The activity in the allowance for doubtful receivables for the years ended December 31, 1998, 1999 and 2000 follows:
NOTE D--LOAN ACCOUNTED FOR AS INVESTMENT IN REAL ESTATE JOINT VENTURE
The Company had advanced funds under a loan agreement which it accounted for as a real estate joint venture. The Company classified this asset as impaired at December 31, 1999 and foreclosed on the development in 2000. As a result of the foreclosure the Company transferred its investment in the project of $4,746,446 to its timeshare inventory, is completing construction, and is actively selling timeshare intervals.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE E--RELATED PARTY TRANSACTIONS
Interest Income: Interest income earned on the notes receivable from the bankruptcy Trustee amounted to $219,276 in 1998, $29,251 in 1999, and $-0- in 2000.
Other: The Company's Chief Executive Officer is the bankruptcy Trustee for BFG and BMDC (see Note J). During 1998 and 1999, the Company paid no compensation for his services. Beginning in January 2000, the Company is paying for the estate a monthly fee which totaled $335,000 for the year.
The Company received administrative services from BFG relating to billing consumer amounts due under timeshare interval contracts. This expense amounted to $184,686 in 1998, and $275,997 in 1999. In December 1999, the Company purchased the computer processing equipment and software from BFG for $41,413 and has performed this processing hereafter.
NOTE F--PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999 and 2000:
1999 2000 -------------------- ------------------- Land $ 398,489 $ 459,719 Buildings and improvements 14,173,602 18,226,132 Furniture and equipment 4,246,271 4,956,692 -------------------- ------------------- -------------------- ------------------- 18,818,362 23,642,543 Less accumulated depreciation 695,519 2,062,386 -------------------- ------------------- -------------------- -------------------
Property and equipment, net $ 18,122,843 $ 21,580,157 ==================== ===================
The buildings and improvements consist primarily of facilities at timeshare properties including common areas, retail rental space, and restaurants.
Depreciation expense amounted to $69,664 in 1998, $623,950 in 1999 and $1,680,707 in 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE G--OTHER ASSETS
Other assets consist of the following at December 31, 1999 and 2000:
1999 2000 ------------------- -------------------- Deferred financing costs, net $ 2,526,854 $ 2,148,086 Cash--restricted 1,615,411 4,885,050 Accrued interest receivable 1,762,975 2,512,117 Stock registration costs 1,649,513 -- Other assets 2,500,480 2,406,238 ------------------- -------------------- ------------------- --------------------
$ 10,055,233 $ 11,951,491 =================== ====================
NOTE H--NOTES PAYABLE
Notes payable consist of the following:
1/2% to 4% Collateralized Notes Payable: The Company obtained financing at favorable interest rates from banks and others who were creditors of affiliates which had filed for bankruptcy protection (see Note J). The loans are collateralized with timeshare receivables. The bankruptcy Trustee arranged this financing and borrowed part of the proceeds from the Company in order to settle the bankrupts' obligations with those creditors. As consideration for the financing, the Company pays the bankrupt estate a fee based on an annual rate of approximately 3% of the unpaid principal balance of the loans. The Company recognizes this fee as expense over the various loan terms. At December 31, 1999 and 2000 the unpaid fee amounted to $3,441,267 and $1,631,196, respectively, which is included in amounts due related parties above. The fee is payable over the loan terms beginning after loans receivable from the estate have been paid.
Covenants: Several of the facilities and other loans contain both specific and general covenants including maintenance of collateralization and default rates with respect to pledged receivables, tangible and overall net worth requirements and debt to capital and interest coverage rates.
Subsequent maturities of notes payable for the years ending December 31, are: 2001--$58,162,506; 2002--$21,937,849; 2003--$20,640,947; 2004--$14,309,760; 2005-- $144,474,329 and thereafter $28,849,112.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE I--INCOME TAXES
The consolidated provisions for income taxes included in the accompanying statements of income consist of the following for the years ended December 31, 1998, 1999 and 2000:
The Company had valuation allowances prior to 1998 for net operating loss carryforwards because there was no assurance that the Company would generate sufficient taxable earnings to benefit from using unrestricted loss carryforwards before they expired. The reduction of the valuation allowance in 1998 reflects the use of the loss carryforwards.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE I--INCOME TAXES--Continued
Net deferred tax liabilities included in the accompanying balance sheets result from the following:
The net deferred tax liabilities at December 31, 1999 and 2000 include deferred tax liabilities of $3,474,485 and $2,760,795 relating to the U.S. Virgin Islands, respectively.
As further described in Note Q, Equivest purchased several businesses in 1998 and 1999. In connection with those purchases the Company acquired certain deferred tax assets and assumed certain deferred tax liabilities. The net deferred tax liabilities assumed amounted to $2,800,000 in 1998 and $14,244,000 in 1999.
The Company has tax net operating loss carryforwards at December 31, 2000 of approximately $21,309,000 (federal) and $31,269,000 (various state jurisdictions). The Company acquired a portion of these carryforwards in connection with the 1999 business purchases. They are available to reduce future taxable income in those amounts for the respective tax jurisdictions. The carryforwards expire in various years through the year 2020. The tax operating losses and credits primarily arose because gross profits on timeshare interval sales were deferred for tax reporting purposes at the election of the taxpayer. The Company also has alternative minimum tax credit carryforwards of $5,000,000 available to reduce future federal income tax in the amount of the credit which have no expiration date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE I--INCOME TAXES--Continued
As described in Note Q, Equivest acquired Eastern Resorts as of August 28, 1998. Prior to that time Eastern Resorts was a Subchapter S corporation which classification ended as a result of the merger. As part of the purchase accounting Equivest recorded a $2,800,000 deferred tax liability to reflect the difference between the tax basis and book basis of acquired installment receivables.
NOTE J--CONTINGENCIES AND COMMITMENTS
Since March 1996, the Company's majority owners (BFG and BMDC) and several other affiliates have been in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Those companies are currently being managed for the benefit of their creditors by the Court appointed bankruptcy Trustee. As a result of the bankruptcies and investor fraud at those companies various legal suits have been ongoing. The Company remains named as an defendant in one state class action suit which has had no activity to date. The Company intends to move for dismissal at an appropriate time. The ultimate impact of these events on the Company's business and operations is not presently determinable.
The Company had been named in a legal action filed by a former Company officer and director against the Company and other parties. The suit contains numerous allegations and claims including compensatory damages in excess of $1,000,000, interest and costs. The Company has been dismissed as defendant; however, another defendant has filed a cross-claim for indemnification by the Company. The Company believes that it has meritorious defenses to the cross-claim and intends to defend against it vigorously.
In its purchase of resort properties in March 1999 the Company recorded certain liabilities which it agreed to assume from the seller in the amount of $5.975 million. The amounts represent part of amounts payable by the seller to former owners of three of the properties acquired. Prior to the purchase or as a result of the purchase, the former owners brought suit against the seller and/or the Company for payment of amounts due them, breach of contract, interference by the Company in contractual relations, and misapplication of funds. Counterclaims have been made by the sellers. The suits are in the discovery stage and no assessment of the potential outcomes can be made at this time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE J--CONTINGENCIES AND COMMITMENTS--Continued
The Company is also involved with several other suits brought by (1) former employees alleging wrongful discharge, discrimination and breach of contract and (2) others who allege discrimination, personal assault, injury, or loss of property while on resort premises or otherwise in connection with timeshare operations. In each case it is too early to assess the likelihood of success by the plaintiff and amount of loss, if any.
The Company has employment agreements with three of its executive officers that provide for lump sum severance payments and accelerated vesting of options upon termination of employment under certain circumstances including change of control, as defined. The Company's minimum payment obligation under the severance provisions of these agreements was approximately $969,000 at December 31, 2000.
The Company has management agreements with homeowners' associations at most of its timeshare resorts. Under these agreements the Company is required to provide administrative, accounting, maintenance, security, utilities and professional services; maintain insurance coverage; and pay real estate and personal property taxes. In exchange for these services the Company is reimbursed for costs incurred and receives a management fee for the services provided. These contracts expire at various dates through December 2002.
At December 31, 2000 the Company had several timeshare units under construction with remaining contracted costs to complete of $4,441,000.
NOTE K--STOCKHOLDERS' EQUITY
Preferred Stock and Cumulative Redeemable Preferred Stock Series 2 Class A: The Company has authorized 1,000,000 shares of Preferred Stock with a $3 par value and has authorized 15,000 shares of this amount as Series 2 Class A Preferred Stock. The 10,000 shares of Series 2 Class A Preferred Stock outstanding is held by BFG. BFG is entitled to the number of votes which equals 20% of the total number of voting shares of the Company's stock. In the event of liquidation, these shares have a liquidation value of $1,000 per share ($10,000,000 in total) plus all accrued and unpaid dividends. The Company may, at its option any time after February 16, 2003, redeem this stock in whole or in part at its liquidation value plus accrued and unpaid dividends. The Trustee also has approval to convert this stock into Common Stock or to sell such shares to the Company for a price equal to an equivalent number of shares of Common Stock at the net price of any offering of the Estate's shares of Common Stock. Dividends on this issue are cumulative and payable quarterly when declared by the Company at the rate of $60 per annum per share. At December 31, 2000, the cumulative undeclared and unpaid dividends amount to $1,500,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE L--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosure about Fair Value of Financial Instruments" (SFAS 107) requires the disclosure of the estimated fair value of on and off balance sheet financial instruments. A financial instrument is defined by SFAS 107 as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or to receive cash or another financial instrument from a second entity on potentially favorable terms.
Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. SFAS 107 specifies that fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible income tax ramifications, estimated transaction costs that may result from bulk sales, or the relationship between various financial instruments.
Fair values for the Company's financial instruments are based on judgments regarding current economic conditions, interest rate characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be sustained by comparison to independent markets and in most cases, would not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the instruments.
Fair value estimates do not include anticipated future business or the values of assets, liabilities and customer relationships that are not considered financial instruments. Other assets and liabilities that are not considered financial instruments include deferred taxes, deferred financing costs and accounts payable and accrued expenses. Accordingly, the estimated fair value amounts of financial instruments do not represent the entire value of the Company.
Cash and Restricted Cash: The carrying amounts reported in the balance sheets are their estimated fair values since the amounts are payable on demand.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE L--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
Accounts and Notes Receivable and Investment in Real Estate Joint Venture: The estimated fair value of accounts and notes receivable was developed using estimated cash flows and maturities based upon contractual interest rates and historical experience and discounting those cash flows using current market interest rates. The estimated fair value of the real estate joint venture at December 31, 1999 is based on estimated collateral value which approximates its carrying amount. The Company's carrying amount and fair value of these amounts are summarized as follows:
December 31, 1999 2000 ----------------------- --------------------- Carrying amount $ 244,019,528 $ 254,205,364
Fair value $ 244,476,889 $ 254,456,642
The carrying value of the Company's commitments to lend as disclosed in Note B approximates their fair value. The carrying amount of the promissory note receivable outstanding at December 31, 2000 is its estimated fair value based on current market rates.
It was not practicable to estimate the fair values of the notes receivable--related party because of the nature of the indebtedness and resultant excessive cost to estimate their fair values.
Notes Payable: The fair value of notes payable were estimated using rates available to the Company at December 31, 1999 and 2000 for similar debt and remaining maturities. The carrying amount and fair value of notes payable were summarized as follows:
December 31, 1999 2000 ----------------------- --------------------- Carrying amount $ 289,357,773 $ 288,374,503
Fair value $ 285,959,099 $ 287,074,590
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE M--STOCK OPTIONS, GRANTS, AND WARRANTS
Under 1997 Long-Term Incentive Plan: The Company provides stock-based compensation to employees and directors in the form of nonqualified incentive stock options. The Compensation Committee of the Board of Directors determines the option awards including their exercise price. The Plan's term is ten years; however, the Board of Directors may discontinue the plan at its discretion. Up to 3,500,000 shares of Common Stock may be issued under the Plan.
Summarized option activity and status for 1998, 1999, and 2000 follows:
Exercise prices of outstanding and exercisable stock options as of December 31, 2000 follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE M--STOCK OPTIONS, GRANTS, AND WARRANTS--Continued
Using the criteria of APB Opinion No. 25 and its interpretations, the Company does not recognize compensation cost for the stock options granted under the plan. Had the Company adopted SFAS 123 and recognized compensation cost based on the fair value of the options at their grant dates, the Company's net income and earnings per share would have been the pro forma amounts shown below:
Under Employment Agreements: An employment agreement with an officer provides for annual option grants if the Company reaches certain pretax income as defined in the agreement. The agreement expires in August 2003 but has successive one-year renewals at the election of the parties as set forth in the agreement. It provides for the issuance of options covering (1) 30,000 common shares if the Company reaches at least 100%, but less than 125%, of the pretax income target, and (2) 60,000 common shares if the Company reaches 125% of the target, for any fiscal year under the agreement. Options granted will have an exercise price of the fair market value of the common shares on the date of grant and will expire ten years from the date granted. They will vest at a rate of 20% per year. There have been no options granted under this agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE M--STOCK OPTIONS, GRANTS, AND WARRANTS--Continued
Common Stock Warrants: Warrants to purchase 250,000 shares of Common Stock are outstanding to a bank. The warrants may be exercised at any time prior to November 2002, in whole or in part and in any order, by purchasing 125,000 shares at $3.50 per share and 125,000 shares at $4.00 per share.
A warrant to purchase 180,000 shares of Common Stock is outstanding to a bank. The warrant may be exercised at any time prior to July 18, 2003, in whole or in part, and in any order at an exercise price of $8.00 per share.
A warrant to purchase 250,000 shares of Common Stock is outstanding to an individual. The warrant can be exercised any time prior to March 30, 2002 at an exercise price of $9.00 per share. The warrant contains a mandatory exercise provision once the market value of the Common Stock equals or exceeds $12.00.
NOTE N--EARNINGS PER COMMON SHARE
Pursuant to SFAS 128, a reconciliation of the numerators and the denominators of the basic and diluted per-share computations follows:
The Company has outstanding warrants for the purchase of its Common Stock. These warrants were not included in computing the diluted per share data because to do so would have resulted in increasing earnings per share data as compared to the amounts reported for the basic per share data.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE O--SUPPLEMENTAL CASH FLOWS INFORMATION
The following supplemental cash flows information is provided for interest and income taxes paid and for noncash transactions during the years ended December 31, 1998, 1999 and 2000:
NOTE P--PROPOSED SALE OF COMMON STOCK/NONRECURRING EXPENSE
The Company intended to register shares of Common Stock held by certain stockholders and additional shares of its Common Stock for proposed public sale. Because of unfavorable financial market conditions over the past two years which are continuing, the Company cannot foresee the completion of this undertaking. Other alternatives may be needed for those stockholders to liquidate their holdings. As a result, the Company charged to year 2000 income the previously incurred stock registration costs of $1,649,513 which would have been charged to additional paid in capital had the Company successfully completed its offering of these shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE Q--PURCHASES OF BUSINESSES
During 1998 and 1999 the Company acquired three time share Resort development businesses. The transactions were accounted for as purchases and, accordingly, the operating results and cash flows of the acquired businesses have been included in the Company's consolidated financial statements since the respective acquisition dates. Set forth below are certain unaudited pro forma amounts which assume the acquisitions occurred as of the beginning of the year and the preceding year. These amounts reflect the actual results of operations of the Company and the acquired business(es) after the elimination of revenues and costs and expenses between the Company and the acquired business(es). They also include the effects of the purchase price and acquisition indebtedness on cost of timeshare intervals sales, goodwill amortization, interest and bad debt expense. The pro forma amounts do not represent the results that would have occurred if the acquisitions had actually taken place on the assumed acquisition dates, nor are they indicative of the results of future consolidated operations.
1998 Purchase: On August 28, 1998 Equivest acquired Eastern Resorts Corporation (Eastern) which was a developer and operator of seven timeshare resorts in the New England area. Eastern was the Company's first timeshare resort development business. The purchase price amounted to $57.6 million including cash and acquisition costs of $16.4 million, assumption of liabilities of $25.8 million, and 3.2 million shares of Equivest Common Stock valued at $15.4 million. The purchase price exceeded the fair value of net assets acquired by approximately $27.5 million which was recorded as goodwill.
The following unaudited pro forma consolidated results of operations for the year ended December 31, 1998 assumed the Eastern acquisition occurred as of January 1, 1998 (in thousands):
---------- Net revenue $ 46,466 Net income 5,764 Earnings per share: Basic $ .21 ========== Diluted $ .20 ==========
1999 Purchases: On March 26, 1999, the Company acquired seven timeshare resort properties located in the Eastern United States and St. Thomas, U.S.V.I. The purchase price amounted to $78.9 million including cash and acquisition costs of $2.9 million, and assumption of liabilities of $76.0 million. The purchase price was not in excess of the fair value of net assets acquired.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE Q--PURCHASES OF BUSINESSES--Continued
On November 17, 1999 the Company acquired 15 timeshare resort properties located primarily in the Eastern United States. The purchase price amounted to $124.5 million including cash and acquisition costs of $16.1 million, assumption of liabilities of $94.5 million and 2.9 million shares of Equivest Common Stock valued at $13.2 million. The cash and shares of stock were reduced by certain escrows and holdbacks for contingencies totaling $2.9 million. The purchase price exceeded the fair value of net assets acquired by approximately $19.1 million which was recorded as goodwill. Additionally, the consideration included $940,000 for the sellers' noncompete agreement.
The agreement also provided for the Company to purchase a 275 room Holiday Inn property and adjacent 90 acres of land for $4 million if the parties obtained Holiday Inn's consent. This provision expired in 2000.
The amounts reported at December 31, 1999 for the November 1999 purchase were changed to reflect purchase price changes and the final allocation of the purchase price. These changes resulted in increases to goodwill of $4.2 million, deferred taxes of $1.2 million and accrued liabilities of $.4 million, and decreases to notes receivable of $1.8 million, inventories of $.7 million, and property and equipment of $.1 million.
The following unaudited pro forma consolidated results of operations for the years ended December 31, 1998 and 1999 assumes the 1999 purchases occurred as of January 1, 1998 and 1999, respectively (in thousands):
1998 1999 --------------- -------------- Net revenue $ 124,900 $ 164,242 Net income 3,600 9,006 Earnings per share: Basic $ .11 $ .29 =============== ============== Diluted $ .11 $ .29 =============== ==============
NOTE R--SEGMENT INFORMATION
As a result of its acquisitions, the Company has two reportable segments which are strategic business units that offer different products and services within the timeshare resort industry. Each segment is managed separately because each business requires different business strategies. The resort development segment acquires, develops and operates resort properties and markets and sells timeshare intervals, including vacation club points. Through its financing operations, the Company provides financing to its own resort properties and independent resorts which includes consumer lending for timeshare intervals, hypothecation loans to resort developers and resort acquisition and development loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE R--SEGMENT INFORMATION--Continued The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Interest expense is based on the specific debt incurred by each segment. Intersegment interest is based on interest rates which are similar to those with third parties. Management evaluates the performance of each segment based on profit or loss from operations before income taxes.
Financial information with respect to each reportable segment for 1998, 1999 and 2000 follows (including the Resort Development segment from August 28, 1998) (in thousands):
The following is presented to reconcile amounts in the foregoing segment information to the amounts reported in the Company's consolidated financial statements (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE R--SEGMENT INFORMATION--Continued
Reconciliation of Other Significant Items
The reconciling items represent unallocated corporate expenses and intersegment charges eliminated in consolidation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE R--SEGMENT INFORMATION--Continued
Substantially all of the Company's revenue is derived from operations within the continental United States. However the Company's U.S. Virgin Islands operations accounted for the following in 1999 and 2000 (in thousands):
1999 2000 ------------- ------------- Revenues $ 14,692 $ 13,100 Income before provision for income taxes 1,157 1,786 Investments in long-lived assets 3,786 3,674 Timeshare inventory 19,528 21,819
NOTE S--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Notes: 1) The amounts include the results of acquisitions from their acquisition dates--Kosmas properties acquired in March 1999 and Peppertree Resorts acquired in November 1999.
2) Revenue in the quarters ended June and September 1999 and March, June and September 2000 are approximately two and one-half percent lower than amounts in the quarterly financial information previously reported by the Company. This difference results from fees from certain homeowners' associations which have been reclassified as offsets to expenses. The change does not affect operating or net income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE T--EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution profit sharing and 401(k) plans covering substantially all employees. These plans permit employee contributions up to 15% of compensation subject to statutory limitations. The Company makes matching contributions which are subject to maximum percentages of the employee's contribution and pay. It may also make discretionary contributions. Matching contributions amounted to $41,311 in 1998, $85,081 in 1999, and $128,783 in 2000. There were no discretionary contributions in those years.