As filed with the Securities and Exchange Commission on December 31, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM S-1 REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------------------
EQUIVEST FINANCE, INC.
(Exact name of registrant as specified in charter)
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Delaware 6153 59-2346270
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
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----------------------------
2 Clinton Square, Syracuse, New York 13202
(888) 373-7678
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive
offices)
----------------------------
Richard C. Breeden
Chief Executive Officer
Equivest Finance, Inc.
100 Northfield Street, Greenwich, Connecticut 06830
(203) 618-0065
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
Copies to:
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LINDA C. QUINN ERIC C. COTTON THOMAS W. DOBSON
Shearman & Sterling Equivest Finance, Inc. Latham & Watkins
599 Lexington Avenue 2 Clinton Square 633 West Fifth Street
New York, New York 10022 Syracuse, New York 13202 Los Angeles, California 90071
(212) 848-4000 (888) 373-7678 (213) 485-1234
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-----------------------------------
Approximate date of commencement
of proposed sale to public: As soon as
practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [__].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [__].
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [__].
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Be Offering Price Aggregate Offering Amount of
Securities to Be Registered Registered(1) Per Share Price(2) Registration Fee
- ----------------------------------------- -------------- ---------------- ------------------ ----------------
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Common Stock, par value $.01 per share $ $100,000,000 $27,800
========================================= ============== ================ ================== ================
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(1) Includes shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 31, 1998
Shares
[LOGO]
Equivest Finance, Inc.
Common Stock
---------------
Of the shares of Common Stock offered hereby, shares are being
sold by the Company and shares are being sold by the Selling
Stockholders named herein under "Principal and Selling Stockholders". The
Company will not receive any of the proceeds from the shares of Common
Stock sold by the Selling Stockholders. It is anticipated that the
public offering price will be between $ and $ per share.
For information relating to the factors in determining the
public price, see "Underwriting". Our Common Stock is listed on
The Nasdaq Stock Market's SmallCap Market under the symbol
"EQUI", and application will be made to list the Common
Stock on The Nasdaq Stock Market's National Market
under the symbol "EQUI".
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS,
SEE "RISK FACTORS" ON PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
--------- ------------- ----------- ------------
Per Share..... $ $ $ $
Total(1)...... $ $ $ $
(1) The Company has granted the Underwriter an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of additional
shares to cover over-allotments of shares.
Delivery of the shares of Common Stock will made on or about ,
against payment in immediately available funds.
Credit Suisse First Boston
Prospectus dated ,
<PAGE>
[ARTWORK TO COME]
[Picture of Newport Harbor]
[Picture of Winter Vacationers]
[Picture of Ski Slope]
[Picture of Long Wharf Resort]
[Picture of resort in New Hampshire]
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 10
Bankruptcy of Related Entities............................................ 10
Indebtedness of the Company............................................... 11
Additional Financing Requirements......................................... 12
Customer Borrowings....................................................... 12
Development, Construction and Property Acquisition Activities............. 14
Real Estate Risks......................................................... 14
Vulnerability to Regional Conditions...................................... 15
Resort Management Contracts............................................... 15
Impact of Timeshare Interval Exchange Networks............................ 15
Potential Future Development of Resale Market for Timeshare Intervals..... 15
Dependence on Outside Vendors............................................. 15
Concentration in Timeshare Industry....................................... 16
Impact of Recession or Economic Slowdown.................................. 16
Seasonality and Variability of Quarterly Results.......................... 16
Integration of Eastern Resorts............................................ 16
Competition............................................................... 17
Dependence on Senior Management and Directors............................. 17
Regulation................................................................ 18
Possible Environmental Liabilities........................................ 19
Dependence on Computer System of Related Party............................ 19
Year 2000 Compliance...................................................... 20
Potential for Adverse Effects on Price of Common Stock.................... 21
Shares Eligible for Future Sale........................................... 21
Limited Public Market..................................................... 22
Withdrawal of Audited Reports............................................. 22
Use of Proceeds............................................................. 23
Dividend Policy............................................................. 23
Capitalization.............................................................. 24
Price Range of Common Stock................................................. 25
Pro Forma Condensed Consolidated Financial Data............................. 26
Selected Consolidated Historical Financial Data............................. 29
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 32
The Timeshare Industry...................................................... 48
Business.................................................................... 51
Regulation.................................................................. 72
Management.................................................................. 75
Information Regarding Executive Compensation................................ 78
Bankruptcy of Affiliates and Related-Party Transactions..................... 83
Resignation of Accountants.................................................. 87
Description of Certain Indebtedness......................................... 88
Principal and Selling Stockholders.......................................... 91
Shares Eligible for Future Sale............................................. 92
Description of Capital Stock................................................ 94
Underwriting................................................................ 99
Notice to Canadian Residents................................................102
Legal Matters...............................................................104
i
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Page
Experts.....................................................................104
Available Information.......................................................104
Index to Financial Statements...............................................F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR
TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in
this Prospectus. This summary is not complete and may not contain all of the
information that may be important to you. You should read the entire Prospectus
carefully, including the financial data and the related notes. Except as
otherwise noted, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. Unless otherwise indicated, all timeshare
industry data contained in this Prospectus is based on information from the
American Resort Development Association ("ARDA"). Unless the context otherwise
requires, "Equivest," "the Company," "our" and "we" means Equivest Finance,
Inc., its predecessors and its subsidiaries, even if we did not own the
subsidiary referred to during the period under discussion. We are a Delaware
corporation. Our two primary operating subsidiaries are Resort Funding, Inc.
("Resort Funding") and Eastern Resorts Company LLC ("Eastern Resorts"). The
consolidated bankruptcy estate (the "Estate") of the Bennett Funding Group, Inc.
("BFG") and Bennett Management and Development Corp. ("BMDC"), and R. Perry
Harris are the Selling Stockholders in the Offering.
THE COMPANY
Overview
We finance timeshare projects throughout the United States and in
selected foreign markets, and are a leading developer and operator of timeshare
resorts which are located in New England. Since 1991, we have provided financing
for the acquisition and development of timeshare resorts, as well as for
consumer receivables resulting from the sale of one-week timeshare ownership
intervals ("timeshare intervals"). As of September 30, 1998, our loan portfolio
had an outstanding balance of approximately $156.6 million. In August 1998, we
acquired Eastern Resorts, which operates six timeshare resorts in and around
Newport, Rhode Island and one resort in the Berkshire mountains of western
Massachusetts.
We are focused on increasing shareholder value by growing our existing
timeshare finance business and further diversifying our timeshare resort
development business. We believe that combining our nationwide timeshare finance
operations with Eastern Resorts, a major regional timeshare resort developer,
provides us with significant growth capabilities. The financing business should
continue to lead to attractive resort acquisition opportunities, as it did with
Eastern Resorts, which was our customer prior to its acquisition. Likewise,
acquisitions of successful developers will contribute significantly to the
growth of our loan portfolio.
We believe we have positioned ourselves well to take advantage of the
favorable growth trends in the U.S. timeshare market, as well as the broader
leisure market. In 1997, the U.S. timeshare industry recorded total timeshare
interval sales of approximately $2.7 billion, which represents a growth of
nearly 25% over 1996 and a compound annual growth rate of approximately 16% over
the past six years. Overall, worldwide timeshare interval sales in 1997 were
approximately $6.2 billion, which represents a compound annual growth rate of
approximately 16% since 1980.
Operations
Financing
Historically, we have concentrated on funding small to midsize
timeshare projects (involving loans ranging from $1 million to $10 million).
Since 1991, we have provided approximately $350 million in financing to
approximately 70 projects in the United States and the Caribbean, one project in
Canada and two in Ireland. We intend to use our extensive experience in the
timeshare industry to expand into the financing of larger development projects.
<PAGE>
We provide loans to timeshare resort developers to acquire land and
construct a resort, or to acquire a hotel, club or other previously developed
property for conversion into a timeshare resort ("A&D Loans"). A&D Loans are
generally collateralized by a first mortgage on the property with full recourse
to the developer. In addition to A&D Loans, we provide financing both indirectly
and directly to the consumers who purchase timeshare intervals. Consumers
typically purchase such intervals with a 10% down payment, and the developer
holds a receivable from the consumer for the remaining 90% of the purchase price
("Consumer Loans"). Through our timeshare development operations, we directly
generate Consumer Loans. Our financing operations indirectly fund consumer
purchases of timeshare intervals by purchasing developers' Consumer Loans
("Purchased Receivables") or making loans to developers secured by their
Consumer Loans ("Hypothecation Loans"). The cost and tax benefits of
Hypothecation Loans are generally more advantageous to developers, although
Purchased Receivables result in greater upfront cash to the developer. In the
case of Hypothecation Loans and Purchased Receivables, we have direct recourse
against the developer and the consumers whose obligations underly these loans.
o Acquisition and Development Loans. We generally obtain the
exclusive right to finance consumer receivables resulting
from the sale of timeshare intervals for any resort for which
we make an A&D Loan. As a developer sells timeshare
intervals, a portion of the proceeds from each sale is paid
to the Company and applied to the A&D Loan ("release
payment"). As of September 30, 1998, our A&D Loan portfolio
had a weighted average interest rate of 12.0%.
o Consumer Financing. Our Consumer Financing portfolio consists
of our Consumer Loans, together with Hypothecation Loans and
Purchased Receivables. We consider our Consumer Financing
portfolio the most significant aspect of our financing
business. After adjustment for the risks of default, the
yield on our Consumer Financing portfolio is substantially
higher than on our A&D Loan portfolio. As of September 30,
1998, our Consumer Financing portfolio had a weighted average
interest rate of 13.6%.
As of September 30, 1998, our total loan portfolio had an outstanding
balance of $156.6 million, which included $37.3 million (24%) of A&D Loans,
$116.3 million (74%) of Consumer Financing and $3.0 million (2%) of other loans.
Resort Development
We entered the resort development business in August 1998, when, as
part of our strategy for diversification and growth, we acquired Eastern
Resorts. Eastern Resorts, either on its own or through its predecessor, has been
in the resort development business since 1981. It operates six resorts in and
around Newport, Rhode Island and the Bentley Brook Mountain Club resort in the
Berkshire mountains of western Massachusetts. As of September 30, 1998, Eastern
Resorts operated resorts containing 325 units, representing 16,838 timeshare
intervals, of which 4,363 remained unsold. We currently have under development
174 additional units, representing 9,048 intervals. In the first nine months of
1998, we sold approximately 1,000 timeshare intervals at an average price of
$9,619.
Our resort operations include:
o Marketing and selling timeshare intervals in our resorts;
o Providing financing to consumers who purchase our timeshare
intervals;
o Managing our resorts on behalf of homeowner associations;
o Owning and managing two restaurants at our resorts;
o Renting unoccupied timeshare intervals on an overnight basis;
and
2
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o Acquiring property and constructing or converting timeshare
resorts.
Newport is one of the principal destination resorts in the
northeastern United States. Newport is noteworthy for its jazz and folk music
festivals, sailing, the historic summer mansions of leading American families
and many other attractions. The Bentley Brook Mountain Club is a major new
project at the Jiminy Peak ski resort in the Berkshire mountains of western
Massachusetts. The Bentley Brook Mountain Club, which has direct access to ski
slopes and is a short drive from the summer music festival at Tanglewood, offers
a broad range of year-round outdoor activities. According to local visitors
bureaus, Newport hosts approximately 3.75 million visitors, and Berkshire County
hosts approximately 2.25 million visitors each year.
All of our resorts are associated with Resort Condominiums
International ("RCI"). This allows our customers to exchange their timeshare
interval for one in over 3,200 other resorts around the world at any time of
year. According to ARDA, the ability to exchange timeshare intervals worldwide
is an important factor to customers deciding to purchase a timeshare interval.
Each year, a substantial percentage of our owners takes advantage of the
exchange opportunity.
All of our resorts are designed to furnish customers with a
high-quality vacation experience and offer many leisure amenities. Our resorts
are situated in desirable locations that are accessible by car from Boston, the
greater New York City area and other parts of the Northeast region. We estimate
that more than 11 million households are within driving distance (200 miles) of
our properties. The percentage of these households having an annual income in
excess of $50,000 exceeds the national average.
Growth Strategy
Our goal is to increase shareholder value through growth and
diversification in the timeshare industry and potentially the broader leisure
and finance markets. As part of that objective, we seek to become a full-service
lender and developer in the timeshare industry. Key elements of our current
growth strategy include the following:
o Increase Consumer Financing portfolio. We intend to increase
our Consumer Financing business by increasing our
originations of Consumer Loans and A&D Loans. We generally
expect that each $1,000 invested in our own resorts or in A&D
Loans to third-party developers will generate $3,000 to
$4,000 in Consumer Financing. We believe we can increase our
volume of A&D Loans, without lowering the interest rate we
charge, by continuing to target high-quality, small to
midsize development projects, and by expanding our financing
activities to somewhat larger development projects that
satisfy our underwriting criteria. To support this growth, we
intend to expand our capital base through increased
borrowings from financial institutions and the issuance of
debt, equity or asset-backed securities in the capital
markets.
o Develop and acquire additional resorts. We intend to
construct or acquire additional resorts in New England and in
other locations as opportunities arise. We seek project sites
in desirable locations that are within driving distance of
areas with favorable demographic characteristics. We believe
that our experience in resort development, knowledge of the
timeshare industry, and market presence will help us to
accomplish this strategy. We are seeking to obtain additional
capital to finance this growth.
o Reduce borrowing costs. By improving arrangements with our
lenders and increasing our internally generated cash flow, as
well as a result of general market conditions, we have
reduced the weighted average interest rate we pay on our debt
to 7.1% at September 30, 1998 from 9.6% at September 30,
1996. As we grow, we will continue to enhance our capital
structure. This will
3
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allow us to compete even more effectively for new
development projects and against larger lenders.
o Increase sales and marketing efforts. We use extensive
marketing programs to inform potential timeshare interval
buyers about our resorts. By adding staff to reinforce our
marketing efforts in the markets in which we currently
operate, and expanding our efforts into new markets, we
believe we can sell more timeshare intervals per year than we
have in the past. In addition, we will continue to expand our
internal marketing staff, which concentrates on selling
additional timeshare intervals to our existing membership
base.
o Explore potential opportunities in broader leisure and
finance markets. We are continually reviewing potential
opportunities to expand into the broader leisure and finance
markets, particularly those for which our existing businesses
provide relevant experience and expertise. There is no
assurance that such opportunities will be identified or, if
we find them, that they will be successfully undertaken.
Competitive Strengths
We believe that the following qualities provide us with certain
competitive strengths and operating efficiencies.
o Exceptional customer service to developers. We provide
exceptional customer service to existing and potential
borrowers, including:
o quick credit decisions;
o flexible transaction structuring;
o comprehensive loan servicing; and
o direct access to senior management.
o Proven underwriting criteria. We believe we can maintain low
loan loss ratios as our loan portfolio grows by continuing to
fund projects in attractive locations with favorable economic
and demographic characteristics, as well as by broadening our
analytical capabilities. Our ability to assess new
development projects has been enhanced by our acquisition of
Eastern Resorts.
o Low marketing costs. We have been able to stabilize marketing
costs through various means. By developing resorts in
desirable tourist destinations, typically within driving
distance of our customers, we can invite potential buyers to
tour our resorts without relying on costly gift programs,
such as subsidized airline tickets and lodging. Also, we
expect our marketing costs, as a percentage of timeshare
interval sales, to decrease as a result of the expansion of
our internal marketing efforts.
o In-house capabilities. We have developed significant in-house
operational capabilities. This enables us to maintain greater
control over all phases of our financing and development
operations, and to improve our customer service while
reducing overall costs. For example, we use internal
personnel to supervise advances on and servicing of both A&D
Loans and Consumer Financing. In addition, we have in-house
marketing, sales, legal, accounting, financing, development,
and property management capabilities.
4
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o Experienced management team. We have experienced management
and personnel in both our financing and development
businesses. Our Chairman, Chief Executive Officer and
President, Richard C. Breeden, has overseen the restructuring
of Equivest since 1996 and was responsible for our
combination with Eastern Resorts. In addition, he is a former
senior economic advisor to President Bush, former Chairman of
the United States Securities and Exchange Commission (the
"SEC") and former chairman of the worldwide financial
services practice of Coopers & Lybrand LLP. Thomas J. Hamel,
who leads our resort financing business, has 12 years of
experience in financing timeshare resort projects and is
well-known in the timeshare sector nationally. R. Perry
Harris, who leads our timeshare development efforts, has been
in the timeshare industry since 1981 and has earned
recognition in the course of developing and marketing seven
resorts in New England. Moreover, the top five executives of
Eastern Resorts have an average of over 14 years experience
in the timeshare industry and have been with Eastern Resorts
for an average of 12 years.
Our History
Equivest was founded in 1983 as an insurance premium finance company.
In January 1989, we made the initial public offering of our Common Stock, which
was listed on The Nasdaq Stock Market's SmallCap Market.
In 1993, BMDC and certain other investors acquired control of us. In
1994, BMDC acquired additional shares from the other large investors. In May
1995, we stopped generating new business as an insurance premium finance
company. In February 1996, we acquired Resort Funding, which was then a
wholly-owned subsidiary of BFG, known as Bennett Funding International, Ltd.,
from BFG in exchange for our preferred stock. Following this exchange, BFG and
BMDC had beneficial ownership of approximately 88.9% of our voting stock. In
August 1998, we complemented our resort-oriented specialty finance business with
our acquisition of Eastern Resorts, a resort developer.
In March 1996, BFG, BMDC and certain affiliates filed petitions for
bankruptcy in the United States Bankruptcy Court for the Northern District of
New York (the "Bankruptcy Court"). Prior to becoming an officer and director of
the Company, Richard C. Breeden was appointed and remains the trustee in
bankruptcy for the Estate (the "Trustee"). The Trustee decided not to challenge
our acquisition of Resort Funding, after concluding that the business of Resort
Funding had not been tainted by the allegedly fraudulent transactions which were
the basis for a civil complaint filed by the SEC and a criminal complaint filed
by the U.S. Attorney for the Southern District of New York against BFG, BMDC and
related parties. See "Certain Relationships and Related-Party Transactions."
The Estate has already received approval from the Bankruptcy Court to
sell all of its stock in Equivest in the Offering. If market conditions prevent
the Estate from selling all of its stock in the Offering, Bankruptcy Court
approval would be required for a partial sale. It is the Estate's intention to
sell its entire interest.
Our principal executive offices are located at Two Clinton Square,
Syracuse, New York 13202 and our telephone number is (888) 373-7678. We also own
office space in Newport, Rhode Island.
5
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THE OFFERING
Common Stock offered by:
the Company..................... shares(1)
the Selling Stockholders........ shares(2)
Total..................... shares(1)
Common Stock to be outstanding
following the Offering.......... shares(3)
Use of proceeds....................We intend to use the net proceeds to
repurchase our Series 2 Class A Redeemable
Preferred Stock, to repay existing
indebtedness, including all remaining
amounts outstanding under the modified
Bridge Loan and Long Wharf Resort Loan, and
for general corporate purposes. We will not
receive any proceeds from the sale of the
shares of Common Stock by the Selling
Stockholders. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol..................."EQUI"
- --------------------
(1) Does not include shares of Common Stock that we may sell pursuant
to the Underwriters' over-allotment option. See "Underwriting."
(2) Includes shares to be sold by the Estate and shares to be sold by R. Perry
Harris. See "Principal and Selling Stockholders."
(3) Excludes (i) 3,500,000 shares of Common Stock reserved for issuance under
the 1997 Long-Term Incentive Plan, (ii) an aggregate of 430,000
shares of Common Stock reserved for issuance upon the exercise of
outstanding warrants, with exercise prices ranging from $3.50 to $8.00 per
share, (iii) 67,113 shares of Common Stock issued to the Estate in October
1998, in satisfaction of certain indebtedness and (iv) 25,532 shares
issued to the Estate in payment of dividends on the Series 2 Class A
Preferred Stock in October 1998. See Note L to the Consolidated Financial
Statements of Equivest, "Bankruptcy of Affiliates and Related-Party
Transactions" and "Certain Indebtedness".
6
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SUMMARY CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL AND OPERATING DATA
The summary consolidated historical and pro forma financial and
operating data set forth below have been derived from the consolidated financial
statements of the Company and the consolidated financial statements of Eastern
Resorts, included in this Prospectus beginning with the "Index to Financial
Statements" on Page F-l. The summary historical consolidated financial and
operating data for the years ended December 31, 1995, 1996 and 1997 and for the
nine month periods ended September 30, 1997 and 1998 have been derived from, and
should be read in conjunction with, the consolidated financial statements of the
Company and notes thereto. The unaudited historical financial statements of the
Company for the nine month periods ended September 30, 1997 and 1998 include, in
the opinion of management, all adjustments necessary for a fair presentation.
Interim results are not necessarily indicative of results in future periods.
The summary pro forma condensed consolidated statements of income have
been derived from the historical financial statements of the Company and of
Eastern Resorts, LLC. The pro forma condensed consolidated statements of income
give effect to the acquisition of Eastern Resorts, using the purchase method of
accounting as if such transactions had been consummated as of January 1, 1997
for the year ended December 31, 1997 and as of January 1, 1998 for the nine
months ended September 30, 1998. The pro forma condensed consolidated statements
of income should not be considered indicative of actual results that would have
been achieved had the acquisition of Eastern Resorts been consummated for the
periods indicated and do not purport to indicate results of operations for any
future period.
The summary consolidated historical and pro forma financial and
operating data should be read in conjunction with the consolidated financial
statements of the Company and Eastern Resorts and related notes, the
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Pro Forma Condensed Consolidated Financial Data and the Selected
Consolidated Historical Financial Data included elsewhere in this Prospectus.
7
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<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
September 30,
---------------------------------------------- --------------------------------------
Pro Pro
Forma Forma
1995 1996 1997 1997 1997 1998 1998
------ ------ ------ ------ ------ ------ -----
(Dollars in thousands except for per share data)
Statement of Income Data:
Revenue
- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................... $ 11,022 $ 12,998 $ 15,109 $ 17,135 $ 11,329 $ 15,011 $ 16,032
Timeshare interval sales........... -- -- -- 8,635 -- 1,103 9,830
Resort operations.................. -- -- -- 8,056 -- 1,214 8,294
Other income....................... 2,173 1,265 856 859 206 868 868
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.................. 13,195 14,263 15,965 34,685 11,535 18,196 35,024
Costs and expenses
- ------------------
Provision for doubtful receivables. 794 179 925 1,278 225 650 1,116
Interest expense................... 5,982 8,271 8,077 10,227 6,302 5,318 6,696
Cost of timeshare intervals sold... -- -- -- 1,928 -- 273 2,368
Goodwill and other amortization.... 848 903 1,064 1,996 769 1,403 2,008
Sales and marketing................ -- -- -- 3,868 -- 567 4,273
Resort management.................. -- -- -- 7,348 -- 990 7,050
General and administrative......... 3,450 3,221 2,475 4,177 1,826 2,786 4,099
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses....... 11,074 12,574 12,541 30,822 9,122 11,987 27,610
Income before provision for income
taxes (1)...................... 2,121 1,689 3,424 3,863 2,413 6,209 7,414
Provision for income taxes......... 595 29 193 673 180 2,300 2,970
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (1)..................... 1,526 1,660 3,231 3,190 2,233 3,909 4,444
----------- ----------- ----------- ----------- ----------- ----------- -----------
Preferred stock dividends.......... 604 527 731 731 561 450 450
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income available to common
stockholders (1)............... $ 922 $ 1,133 $ 2,500 $ 2,459 $ 1,672 $ 3,459 $ 3,994
=========== =========== =========== =========== =========== =========== ===========
Net income per common share
(diluted) (1).................. $ 0.05 $ 0.07 $ 0.15 $ 0.12 0.10 0.15 0.16
=========== =========== =========== =========== =========== =========== ===========
Weighted average number of common
shares outstanding (diluted)... 16,984,847 17,012,708 17,913,902 21,113,902 17,082,112 22,748,919 25,562,106
</TABLE>
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<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......... $ 1,303 $ 4,037 $ 4,620 $ 2,453 $ 2,505
Notes receivable (2)............... 80,387 95,866 120,791 99,538 137,154
Total assets....................... 88,601 113,204 133,484 115,763 188,732
Notes payable...................... 78,538 106,745 99,961 107,316 128,365
Preferred stock.................... 39 39 30 39 30
Stockholders' equity............... 2,377 4,037 32,528 6,270 51,661
Other Data:
A&D Loan portfolio................. $ 32,838 $ 31,475 $ 39,390 $ 30,563 $ 37,258
Consumer Financing portfolio (3)... 51,820 67,771 96,377 73,192 116,340
</TABLE>
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(1) For the year ended December 31, 1995, income before provision for income
taxes, net income and net income per share amounts exclude a loss from
operations of discontinued segment of approximately $2.2 million.
(2) Net of allowance for doubtful receivables and developer hold backs.
(3) Consumer Financing portfolio includes the Purchased Receivables and
Hypothecation Loans of Resort Funding. It includes $17.1 million in
Consumer Loans held by Eastern Resorts as of September 30, 1998.
8
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FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements, including
statements related to strategies, business plans and goals, integrated
operations of Resort Funding and Eastern Resorts, potential benefits of the
acquisition of Eastern Resorts, resorts under development, financing plans, the
outcome of various bankruptcy and other litigation involving us and the Estate,
and other statements of expectations. These forward-looking statements are based
on our current expectations and projections about future events. These
statements may be identified by such forward-looking words or phrases as
"believe," "expect," "should," "planned," "estimated," and "potential." These
forward-looking statements are subject to risks, uncertainties and assumptions
concerning us, including those discussed in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this Prospectus.
Because actual results or outcomes could be materially different from
those expressed in any forward-looking statements, investors should not place
undue reliance on any such forward-looking statements. We undertake no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for us to predict all of these factors. Further, we
cannot assess the impact of each such factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to be
materially different from those contained in any forward-looking statements.
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RISK FACTORS
You should carefully consider the following Risk Factors and other
information in this Prospectus before deciding to purchase any Common Stock.
Bankruptcy of Related Entities
In 1993, BMDC acquired control of Equivest, a small public company in
the process of exiting its sole business, insurance premium finance. In February
1996, BFG transferred ownership of Resort Funding to us in exchange for more of
our stock. While under the control of BMDC, Resort Funding participated in
transactions with BFG and its affiliates, and Resort Funding was included in
BFG's consolidated federal income tax returns.
In March 1996, BFG and BMDC and several of their affiliates sought
reorganization under Chapter 11 of the United States Bankruptcy Code. The
bankruptcy filings were precipitated when the SEC filed a civil complaint
against BFG, BMDC and certain affiliates, and criminal complaints were filed and
indictments issued against certain members of prior management. After his
appointment in April 1996, the Trustee filed numerous lawsuits against
participants in the alleged frauds as well as certain lawyers, accountants,
insurance companies and others who allegedly aided or assisted BFG's management
in such fraudulent conduct. Creditors also commenced class actions and other
lawsuits seeking private damages and other relief. These legal proceedings
claimed that from 1990 until 1996, BFG, BMDC and certain affiliates engaged in a
pyramid-style fraudulent scheme in which they sold substantial volumes of
securities supposedly collateralized by leases of office equipment, which leases
either were fictitious or had previously been pledged or sold to others.
The Trustee's investigations have never implicated us or any of our
subsidiaries in the alleged fraudulent schemes. Similarly, the Trustee has not
filed any legal actions against us. Nonetheless, certain creditors' lawsuits
claimed that we and Resort Funding participated in the alleged fraud and we and
Resort Funding were named as defendants in several federal and state class
actions. The federal class actions were subsequently consolidated (the
"Consolidated Class Actions") in the United States District Court for the
Southern District of New York (the "District Court"). In October 1998, the
Trustee and counsel for the plaintiffs in the Consolidated Class Actions signed
a Memorandum of Understanding (the "MOU") to settle certain major litigation
between the Estate and an insurance carrier for its leases. The MOU requires
approval of both the District Court and the Bankruptcy Court, as well as
satisfaction of certain other conditions. We have not participated in
negotiations concerning the MOU, and are not a party to the MOU. The parties to
the MOU have signed a settlement agreement which is to be submitted for the
approval of the Bankruptcy Court and of the District Court as part of a proposed
notice to the plaintiff class. Among other things, the settlement agreement is
contingent on our releasing one of the parties to the settlement agreement. If
approved, the settlement agreement would provide for our final dismissal from
the Consolidated Class Actions. While the resolution of the Consolidated Class
Actions may ultimately bar the related state actions, these state actions remain
pending. We know of no other material litigation involving the alleged fraud
described above that names Resort Funding or Equivest as a defendant.
In November 1997, the Company repaid approximately $25 million of debt
to the Estate through the issuance of 4,645,596 shares of Common Stock to the
Estate. In September 1998, the Bankruptcy Court authorized the Trustee to
exchange its remaining indebtedness of $361,000 to the Estate for 67,113
additional shares of Common Stock. No party in interest in the bankruptcy has
sought to set aside the sale of Resort Funding to us or to consolidate any of
our assets in the proceeding, and we do not believe that any such action, if
raised, would be successful. We therefore believe that our future should not be
influenced by BFG's affairs, although the bankruptcy proceedings are continuing
and there can be no assurance that claims will not be made in the future
involving us. See "Certain Relationships and Related-Party
Transactions--Bankruptcy Proceedings of Affiliated Companies and Related
Litigation."
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Indebtedness of the Company
Short-Term Indebtedness
In August 1998, we entered into two loans with Credit Suisse First
Boston Mortgage Capital LLC ("CSFBMC") in connection with the acquisition of
Eastern Resorts. These loans included a $12.1 million bridge loan (the "Bridge
Loan"), of which $8.7 million was outstanding at September 30, 1998 and $3.5
million at December 11, 1998, the initial maturity date. The second loan was a
$9.7 million loan (the "Long Wharf Resort Loan"), of which $9.2 million was
outstanding at September 30, 1998 and $8.8 million was outstanding at December
11, 1998, the initial maturity date. CSFBMC is an affiliate of Credit Suisse
First Boston Corporation, the lead managing underwriter for the Offering. The
loans are secured by certain assets of the Company and the maturity dates were
extended to June 11, 1999. We are planning to replace the Long Wharf Resort
Loan. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Commitments" and "Description of
Indebtedness--Bridge Loan" and "--Long Wharf Resort Loan."
1997 Credit Facility
In November 1997, we entered into a credit facility (the "1997 Credit
Facility") with CSFBMC, which provided up to $75.0 million to finance Purchase
Receivables and to make Hypothecation Loans (the "Consumer Receivables Line")
and $30.0 million to fund A&D Loans (the "A&D Line"). The 1997 Credit Facility
is secured by certain of our assets. At September 30, 1998, $45.3 million was
outstanding under the Consumer Receivables Line and $15.3 million under the A&D
Line. We may borrow under both lines, subject to continuing compliance with loan
terms, until November 1999. All unpaid amounts under both lines are due and
payable in November 2000. We are planning to replace this credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of
Indebtedness--1997 Credit Facility."
Other Indebtedness
We also had $50.1 million of other indebtedness at September 30, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Commitments" and "Description of Certain
Indebtedness" and Note F of Notes to Consolidated Financial Statements of
Equivest. At such date, approximately $22.8 million of such indebtedness
consisted of non-callable loans with low interest rates ranging from 0.5% to
4.0%. The average weighted rate of interest under such loans at September 30,
1998 was 2.1%.
Leverage
At September 30, 1998, our debt to equity ratio was 2.5:1. Our
management seeks to maintain levels of leverage that are generally lower than
many specialty finance companies, thereby reducing earnings per share compared
with companies that operate at higher leverage rates. Although we intend to
operate on lower average leverage than may be typical among specialty finance
companies, we nonetheless have high overall levels of debt and substantially all
of our assets have been pledged as collateral on our loans. We are seeking to
replace the 1997 Credit Facility and to obtain additional financing to support
our current operations and planned growth. Our level of indebtedness could have
important consequences to our investors including:
o increasing our vulnerability to general adverse economic or
industry conditions;
o limiting our ability to obtain additional financing to fund future
lending, resort acquisition and development and general corporate
requirements; and
o requiring us to dedicate a substantial portion of our cash flow
from operations to the payment of indebtedness, thereby reducing
operating flexibility and opportunities for growth.
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Additional Financing Requirements
We require continuous financing to conduct our finance and resort
acquisition and development businesses. Resort Funding needs sources of
liquidity to make new loans to Eastern Resorts and other borrowers, and to
purchase additional Consumer Loans. To meet our capital needs, we plan to expand
our equity base through the Offering and earnings and increase our borrowing
availability under warehouse lines like the 1997 Credit Facility. Currently,
substantially all of our assets are pledged as collateral for existing loans. In
addition, we are exploring the possibility of entering into securitization
transactions in which we either sell or borrow against the collateral in our
loan portfolio, and issuing other debt securities in the capital markets as our
operations and market conditions permit.
In recent periods, some specialty lenders have been unable to obtain
additional financing from their customary or other sources, including from
warehouse lenders and through securitization transactions. Some lenders have
found it necessary to file for protection under bankruptcy laws. In times of
credit constriction, we find it harder to borrow money and have to pay more for
any loans than do larger borrowers.
Since Resort Funding is a major lender to Eastern Resorts, limitations
on the availability of financing to Resort Funding could limit the ability of
Eastern Resorts to expand in the future if reasonable alternative sources of
financing are unavailable. In the future, we may not be able to obtain financing
or raise capital on terms satisfactory to us or at all. To the extent we cannot
raise additional funds, lack of liquidity could materially and adversely affect
our financial condition and results of operations.
Customer Borrowings
Credit and Concentration Risks
Our borrowers may repay late or not pay back their loans. The risk of
delinquency and default, and of consequent loss to us, increases during economic
downturns. Certain A&D Loans are much larger than individual Consumer Loans that
make up our Consumer Financing portfolio and are made to considerably fewer
borrowers. Further, these loans normally are riskier than Consumer Loans because
the resorts which serve as collateral may not be completed on time, within
budget, or at all, and the projected sales of timeshare intervals from which the
A&D Loan is repaid may not occur as projected or at all. Even if we are able to
obtain ownership of a resort from a defaulting developer, in most circumstances
the property can only be sold as a timeshare resort due to developer sales of
the resort prior to default. Thus, the number of potential buyers for the
project may be limited to companies capable of completing timeshare sales at the
resort, and in some cases that is not feasible. Since January 1, 1996 two A&D
Loans have become the subject of legal proceedings by us to seek to foreclose on
outstanding mortgages. One such loan of approximately $6.7 million was repaid in
full from the proceeds of a sale to a new purchaser. The second loan, involving
approximately $3.5 million, is the subject of pending litigation.
We believe that our Consumer Financing portfolio is less risky than
our A&D Loan portfolio. In addition to the obligation of the consumer purchasers
of the timeshare interval, Purchased Receivables and Hypothecation Loans are
backed by an obligation of the developer to replace any non-performing loan with
a new performing loan. In addition, for Purchased Receivables we hold back from
each developer a reserve against which non-performing loans can be applied, and
for Hypothecation Loans we maintain a mandatory overcollateralization for the
same purpose. Thus, while the Consumer Financing portfolio experiences more
frequent defaults than the A&D Loan portfolio, our aggregate exposure after
reserves is lower, and we have the credit of the developer to supplement that of
the consumer and the reserve.
We adhere to underwriting criteria in evaluating a developer and the
particular project's viability, and we perform credit checks on consumers.
Consumer defaults occur regularly, particularly in the early months of a note.
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Though historically this happened only rarely, developers are sometimes unable
to repay or repurchase non-performing Consumer Loans. While the borrowers
promise to make payments under their notes regardless of any defect in, damage
to, or change in condition of the resort property, the existence of problems in
these areas is likely to adversely affect our time, cost and amount of
collections.
At September 30, 1998, we had total reserves, including over
collateralization on the Hypothecation Loans, for our loan portfolio equal to
15.9% of total loans. This included developer hold-backs and other loan specific
reserves of 13.4% of total loans, and a general allowance for doubtful
receivables equal to 2.5% of total loans. We evaluate the adequacy of the
allowance on a quarterly basis and add to the allowance by charging the amount
of the projected loss as an expense. When we believe that collectibility of a
receivable is unlikely, that amount is charged against our allowance for
doubtful receivables. As with other lenders, there is a risk that our reserves
may not be sufficient to absorb our credit losses, which may be substantial
during a recession or economic slowdown, with attendant adverse effects on our
financial condition, results of operation and liquidity.
Interest Rate and Duration Risks
We derive our finance operations' revenues from interest and fees on
loans and consumer receivables. We principally borrow from the sources described
above to fund additional loans and purchase additional Consumer Loans.
At September 30, 1998, we owned A&D Loans in the principal amount of
$37.3 million, with a weighted average variable interest rate of 12.0%. At that
date, we owned Purchased Receivables in a carrying amount of $90.2 million, with
a weighted average interest rate of 13.3% and a weighted average life to
maturity of 5.1 years, Hypothecation Loans of $9.0 million, with a weighted
average variable rate of 10.9% and a weighted average life to maturity of
approximately 3.3 years and Consumer Loans of $17.1 million, with a weighted
average interest rate of 16.5% and a weighted average life to maturity of 4.9
years. At September 30, 1998, these loans were financed principally with
borrowings under the 1997 Credit Facility. The A&D Line has a variable rate of
LIBOR plus 2.9%, and the Consumer Receivables Line has a variable rate of LIBOR
plus 1.9%. At September 30, 1998, the rate under the A&D Line was 8.28%, and the
rate under the Consumer Receivables Line was 7.28%.
Historically, we have derived net interest income from our financing
activities because the interest rates that we charge to borrowers have exceeded
the interest rates we pay to our lenders. We typically borrow at variable
interest rates. Accordingly, if we lend at fixed rates or at variable rates that
do not increase as rapidly as the rates on our own borrowings, an increase in
interest rates could reduce or eliminate the spread which we earn on our A&D
Loan portfolio and our Consumer Financing portfolio. Moreover, an increase in
interest rates generally would decrease the value of assets with interest rates
that do not rise commensurately. We do not currently hedge our interest rate
risks.
If interest rates were to decrease generally on loans available to our
customers or the purchasers of timeshare intervals, borrowers could prepay their
loans and reduce our interest revenues. We generally seek protection from
prepayment risk on loans (other than Consumer Loans) by making loans that are
not prepayable in some circumstances and requiring prepayment fees in certain
other circumstances.
We typically make loans and acquire Purchased Receivables with
borrowings whose maturities do not match those of the related Consumer Loans,
and which generally mature earlier than the related Consumer Loans. As a result,
we must ordinarily refinance our borrowings. As noted above, all amounts under
the 1997 Credit Facility are due in November 2000. The average maturity of our
portfolio holdings extends well beyond those dates and the rate of repayment on
A&D Loans by developers is variable based on the volume of sales in such
projects. Although we have historically been able to secure financing sufficient
to fund our operations, we do not presently have agreements with our lenders to
extend the term of our existing funding commitments upon their expiration. While
we have been successful in obtaining financing to date, we may not be able to do
so in the future.
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<PAGE>
Development, Construction and Property Acquisition Activities
Risks of Expansion Strategy
We intend to continue the expansion of our existing resorts and to
acquire selectively, convert and develop other resorts. Acquiring, converting
and developing resorts places substantial demands on our liquidity and capital
resources, as well as on our personnel and administrative capabilities.
Construction costs or delays at a property may exceed original estimates,
possibly making the expansion or development uneconomical or unprofitable.
Further, sales of timeshare intervals at a newly completed property may not be
sufficient to make the property profitable. In addition, we may expand into new
geographic areas in which we have no operating history. We may not be successful
in such locations or, if we are successful, it may require more time or a
greater investment in research, marketing and personnel before we become
successful in such locations. We do not presently have the financing available
to complete all of our planned expansion as set forth in "Business--Resorts
Summary" and "--Growth Strategy," and we may not have such financing upon
consummation of the Offering.
Regulatory and Environmental Risks
In addition, our development and construction activities, as well as
our ownership and management of real estate, are subject to comprehensive
federal, state and local laws regulating such matters as environmental and
health concerns, protection of endangered species, water supplies, zoning, and
land development, land use, building design and construction, marketing and
sales, and other matters. Such laws, as well as any difficulties in obtaining
the requisite licenses, permits, allocations, authorizations and other
entitlements pursuant to such laws, could impact the development, completion,
and sale of our projects.
Third-Party Contractors
While our construction activities typically are performed by
third-party contractors whose performance we cannot assure, construction claims
may be asserted against us for construction defects. These claims may give rise
to liabilities. Certain state and local laws may impose liability on property
developers with respect to construction defects or repairs made by future owners
of such property.
Real Estate Risks
Our business depends in part on the value and operating
characteristics of real property investments. Real estate values are often
uncertain and tend to fluctuate. Desirability of real estate is affected by
numerous and mostly variable factors, including government policies, general
economic conditions, property condition, location, neighborhood quality, and
alternative properties available to consumers. If our resorts or those of the
developers we finance are not attractive to consumers, our timeshare interval
sales will decline. There will also not be as many receivables to finance and we
may not be able to collect on the loans we have made.
Real estate investments are relatively illiquid. Such illiquidity will
tend to limit our ability to vary our portfolio promptly in response to changes
in economic conditions. If developers default on their loans and we acquire the
collateral properties, we may not be able to sell the properties at prices
acceptable to us or at all.
We carry comprehensive liability, fire, windstorm and business
interruption insurance with respect to our properties and interests in our
resorts (i.e., our inventory of unsold timeshare intervals), with policy
specifications, insured limits and deductibles customarily carried for similar
properties which we believe are adequate. There are certain types of losses
(such as losses arising from flooding) that are either uninsurable or not
economically insurable or for which our borrowers have limited insurance
coverage. Should an uninsured loss or a loss in excess of insured limits occur,
we could be required to repair damages at our expense, or lose our capital
invested in an owned resort or face loan default in the case of a financed
resort to the extent that the relevant homeowners'
14
<PAGE>
association does not and cannot cover such losses. Any such loss could
materially adversely affect our financial condition, results of operations, or
liquidity.
Vulnerability to Regional Conditions
As of September 30, 1998, all of our resorts were located in
Massachusetts and Rhode Island. Our performance and the value of our properties
will be affected by regional factors, including local economic conditions (which
may be adversely impacted by business layoffs or downsizing, industry slowdowns,
changing demographics and other factors) and the local regulatory climate. Our
current geographic concentration could make us more susceptible to adverse
events or conditions which affect this region in particular.
Resort Management Contracts
We receive a fee of 6% to 10% of a resort's budgeted operating
expenses to manage such resort. The fee is paid by a homeowners' association to
which all timeshare interval owners must contribute annual dues. We expect that
1998 management fees will generate revenues of approximately $5.1 million,
although the effect on net income will be considerably smaller. The management
contracts for five of our existing resorts run through December 31, 2001 and
have automatic one-year extensions unless terminated upon six months notice of
the contract expiration date. The contracts for the other two resorts expire in
2001 and 2002, but are expected to be extended beyond those dates as long as we
continue to control the association board for each resort. While we believe we
will be able to extend the terms of existing management contracts, we do not
presently have agreements with any of these associations to do so. If these
associations do not renew their agreements with us, we would lose a valuable
source of revenue upon expiration of the existing agreements.
Impact of Timeshare Interval Exchange Networks
Timeshare interval exchange networks greatly enhance the
attractiveness of timeshare intervals by allowing owners to exchange in a
particular year the occupancy right in their timeshare interval for an occupancy
right in another participating network resort. If such exchange networks cease
to function effectively, or if our resorts do not continue to qualify for
affiliation with exchange networks, our sales of timeshare intervals may be
reduced, and that could materially adversely affect our financial position,
results of operations or liquidity. See "Business--Exchange Networks."
Potential Future Development of Resale Market for Timeshare Intervals
Based on our experience at our existing resorts, we believe that the
market for resale of timeshare intervals by the owners of such intervals is very
limited and that resale prices are substantially below their original purchase
price. Attempts by buyers to resell their timeshare intervals may compete with
our sales of timeshare intervals. While timeshare interval resale clearing
houses or brokers do not currently have a material impact on our business, if
the secondary market for timeshare intervals were to become better organized and
more liquid, the availability of resale intervals at lower prices could
adversely affect our prices and number of sales of new timeshare intervals.
Dependence on Outside Vendors
Our sale of timeshare intervals is dependent upon our ability to
generate prospects to tour our resort projects. Presently, approximately 85% of
the sales prospects touring our resorts are purchased through outside
vendors and, of those, substantially all were purchased from Data King
Corporation. Although we are expanding
15
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our own in-house tour generation capabilities, there are no guarantees that our
efforts will be successful. There are also no guarantees that outside vendors
will continue to meet our marketing demands.
Concentration in Timeshare Industry
Because our operations currently are conducted solely within the
timeshare industry, any adverse changes affecting the timeshare industry, such
as an oversupply of timeshare units, a reduction in demand for timeshare units,
changes in travel and vacation patterns, a decrease in popularity with consumers
of any of the resorts owned or financed by us, changes in governmental
regulations or taxation of the timeshare industry, as well as negative publicity
about the timeshare industry, could adversely affect our financial condition,
results of operations, or liquidity.
Impact of Recession or Economic Slowdown
Periods of recession or economic slowdown increase the risks
associated with our business. During such periods, the demand for vacation real
estate and real estate values typically decline, timeshare development slows or
ceases, loan demand lessens, and loan delinquencies and defaults rise. Our
timeshare development operations could suffer losses if we experience a decrease
in sales of timeshare intervals or if we are forced to sell our timeshare
intervals at lower prices. While we believe that our reserve for loan losses is
currently adequate, it may not be sufficient during an economic downturn. See
"--Customer Borrowings--Credit and Concentration Risks."
Seasonality and Variability of Quarterly Results
Eastern Resorts experiences significant fluctuations in its quarterly
results due to seasonal variations in rental income. During the spring and
summer months of the second and third quarters, our revenues from renting
unoccupied timeshare units on a transient basis increase significantly. Seasonal
variation is also influenced by the concentration of our resorts in Newport,
Rhode Island, which is a popular destination primarily during the summer months.
We expect the seasonality of results of operations to lessen following the
expansion of the Bentley Brook Mountain Club resort, which will attract
visitors, and thus increase transient rental income, throughout the ski season.
In addition, sales of timeshare intervals have generally been lower in the
months of December and January. Our cash flow and earnings may be impacted by
the timing of development and the completion of future resorts, as well as the
potential effect of severe weather or other seasonal conditions in the regions
where we operate, all of which may cause significant variations in quarterly
results.
Integration of Eastern Resorts
As of the date of this Prospectus, the operations of Eastern Resorts
have been comparable to our expectations and there have been no significant
integration issues. Nonetheless, as our operations develop and expand, we will
require additional management and employees and will need to implement enhanced
operational and financial systems. We may not be able to successfully hire,
retain, integrate and use management and employees and implement and maintain
such operational and financial systems. Failure to do so could materially
adversely affect our financial condition, results of operations or liquidity.
Our entrance into the timeshare development business through our
acquisition of Eastern Resorts occurred recently and we may not realize the
benefits we expected to achieve from the consolidation of Resort Funding and
Eastern Resorts at the expected levels or within the anticipated time periods.
Moreover, such acquisition may cause some of our third-party developer clients
to be reluctant to deal with an enterprise they view as a competitor, though no
loss of such clients has occurred to date.
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Competition
Financing Operations
Our finance business is highly competitive. Most of our competitors
are much larger than us and have significantly more money to lend, including
Finova Capital Corp., Textron Financial Corporation, Heller Financial,
Litchfield Financial Corporation, various banks and others. We view our target
market as developers of midsize and smaller resorts. Recently, some of our
larger competitors have also targeted this segment, thereby increasing pressures
on price and terms.
The availability of financing for new timeshare projects through
capital markets transactions, as well as generous terms offered by other
lenders, could result in overbuilding and an oversupply of intervals in the
timeshare market. This could lead to declining values or over-saturation for
timeshare assets similar to other real estate over-expansions. In addition, the
availability of financing at rates and on terms more favorable than those we
offer may negatively affect our ability to provide additional financing to
certain of our existing customers, as well as our ability to attract new
customers. Further, lenders who traditionally did not provide financing to our
target customers may be forced to do so as other loans made by such lenders are
repaid as a result of financings in the capital markets. These alternative
sources of financing expose us to more intense competition for new A&D Loans
which, among other things, tends to reduce yield and enhance risk.
Resort Development Operations
The timeshare resort industry is highly fragmented and includes a
large number of local and regional resort developers and operators. However,
some of the world's most recognized lodging, hospitality and entertainment
companies, such as Marriott International, The Walt Disney Company, Hilton
Hotels, Hyatt Corporation, and Four Seasons Resorts, have entered the industry.
Other companies in the timeshare industry, including Sunterra Corporation,
Fairfield Communities, Vistana, Ramada Vacation Suites, Silverleaf Resorts and
TrendWest Resorts, are, or are subsidiaries of, public companies with enhanced
access to capital and other resources. In particular, Marriott International and
Silverleaf Resorts develop resorts in the same geographic region as us. In the
future, competitors may seek to develop, or may increase their development of,
resorts in New England.
While the principal competitors of our resort development business are
other developers of timeshare resorts, we are also subject to competition from
(i) service providers in the commercial lodging business, including
condominiums, hotels and motels, (ii) service providers in the leisure business
and (iii) to a lesser extent, from campgrounds, recreational vehicles, tour
packages and second home sales. A reduction in the product costs associated with
any of these competitors, or an increase in our costs relative to such
competitors' costs, could materially adversely affect our financial condition,
results of operations, or liquidity.
Numerous businesses, individuals and other entities compete with us in
seeking properties for development and acquisition of resorts. Many of these
competitors are larger and have greater financial and other resources than we
have. Such competition may result in a higher cost for properties we wish to
acquire or may cause us to be unable to acquire suitable properties for the
development of new resorts.
Dependence on Senior Management and Directors
Senior Management and Directors
Our success depends upon the continued contributions of our board of
directors and the respective management teams of Resort Funding and Eastern
Resorts. Our operations are directed by a small senior management team and the
Trustee, Richard C. Breeden.
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Mr. Breeden, in his capacity as our Chairman of the Board, Chief
Executive Officer and President, currently has no employment contract and
receives no compensation. As Trustee, Mr. Breeden serves solely as a
representative of the Estate and his principal duty is to the creditors of the
Estate. All of the shares of stock owned by the Estate are expected to be sold
in the Offering, after which time Mr. Breeden expects to continue serving in
his current capacity pursuant to a proposed three-year employment agreement.
Mr. Breeden expects that he will serve concurrently as Trustee of the Estate
pending the consummation of the Estate's plan of reorganization. Resort
Funding's President, Thomas J. Hamel, has directed Resort Funding's timeshare
operations since 1991, developing an extensive network of clients. Mr. Hamel has
a three-year employment contract with Resort Funding, with successive one-year
renewal terms. R. Perry Harris is the President of Eastern Resorts. He has been
with Eastern Resorts and its predecessors for 17 years, and the other four key
officers have been with Eastern Resorts and its predecessors for an average of
11 years. Mr. Harris has entered into a five-year employment agreement with
Eastern Resorts. Mr. Harris' expertise and experience in the development of
timeshare resorts are extremely important to us. The loss of the services of any
one of these individuals, or of any of our officers, could materially and
adversely affect our business.
Dual Role of Trustee as Chairman and CEO of Equivest
The Trustee agreed that, for so long as the Estate continued to own
any of our stock, the Trustee would not vote such shares or exercise any other
rights with regard to such shares without consultation with the Creditors'
Committee and obtaining approval of the Bankruptcy Court. The Estate currently
intends to sell all of its Common Stock in the Company in the Offering, and if
it is successful in doing so, the Estate would own no shares in the Company and
thus should have no right to influence our management directly. If less than all
of the Estate's shares are sold in the Offering, the Estate would continue to
hold an interest in our Company. In that event, the Trustee would continue to
have to consult with the Creditors' Committee and obtain approval of the
Bankruptcy Court prior to voting the shares of the Estate. In such cases, Mr.
Breeden, as Director, would recuse himself from matters, if any, in which the
interest of the Estate and the Company diverge, as he has done in the past.
The bankruptcy proceedings involving the Estate will continue through
1999 and to a lesser extent in future years. Mr. Breeden does not expect that
his responsibilities as Trustee will interfere with his duties at the Company.
He will, however, be called upon from time to time to devote attention and
energies to the ongoing bankruptcy proceedings, which could distract him from
important activities of our Company for temporary periods.
Regulation
Our finance operations are subject to regulation by federal, state and
local government authorities and are subject to various laws and judicial and
administrative decisions imposing various requirements and restrictions
including, among other things, regulating credit granting activities,
establishing maximum interest rates and finance charges, requiring disclosure to
customers, setting collection, repossession and claims-handling procedures,
sales and marketing practices regarding timeshare intervals and other trade
practices. Our timeshare resort development operations are subject to extensive
regulation by the states and jurisdictions in which our resorts are located and
in which timeshare intervals are marketed and sold. Federal laws also govern
various aspects of credit, disclosure, telemarketing, advertising, environmental
matters, civil rights, and the rights of the disabled, among others. State laws
may also govern such matters and provide additional consumer protections, such
as fire and life safety requirements and regulations governing service of food
and alcohol, as well as mandatory filings, disclosures, and contract terms.
Although we believe that we are in compliance in all material respects with
applicable federal, state and local laws, rules and regulations, more
restrictive laws, rules and regulations could be adopted in the future which
could make compliance much more difficult or expensive, restrict our ability to
conduct our business as it is currently conducted or otherwise adversely affect
our financial condition, results of operations, or liquidity. See "Regulation."
18
<PAGE>
Possible Environmental Liabilities
Various federal, state or local environmental laws may make a current
or previous owner or operator of real property liable for the costs of removal
or remediation of hazardous or toxic substances, including asbestos, located on
or emanating from such property. Those laws often impose liability whether or
not the owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances. In some states, contamination of a property may
give rise to a lien on the property to assure the costs of cleanup. In some
states, this lien has priority over the lien of an existing mortgage.
Additionally, third parties may seek recovery from owners or operators of real
properties for personal injury, property damage, or other claims associated with
exposure to or impact from hazardous substances. The presence of hazardous or
toxic substances also may adversely affect any owner's ability to refinance
property or to sell the property to a third party.
All of our properties have been subject to recent non-invasive
environmental site assessments in general conformance with American Society for
Testing and Materials standards. These assessments were intended to evaluate the
environmental conditions of these properties and included a site visit, a review
of certain records and public information concerning the properties, and the
preparation of a written report.
Certain of the environmental site assessments identified recognized
environmental conditions at some of our properties. These conditions include
historic uses of the property such as manufacturing or automotive related
facilities. Certain of our resorts in the Long Wharf area of Newport, Rhode
Island have been constructed on sites which have been placed on the
Comprehensive Environmental Response Computation and Liability Information
System ("CERCLIS") and listed as a "State Site" due to the presence of lead in
this area. The source of the lead contaminated soil is not known but is
suspected to be fill dating back many years or possibly other prior uses. As
part of its development of the Long Wharf Resort, Eastern Resorts entered into
an agreement with the Department of Environmental Management of Rhode Island
("DEM") to remediate voluntarily lead contamination in exchange for a release of
liability for the cleanup. After Eastern Resorts successfully completed a
remediation project, DEM issued a letter on March 26, 1998 declaring the site in
compliance with respect to this agreement. We believe that applicable
remediation requirements have been or are being fulfilled. See
"Regulation--Environmental Regulation."
The environmental site assessments have not revealed any recognized
ongoing environmental liability that we believe would have a materially adverse
effect on our financial condition, results of operations, or liquidity. There
can be no assurance, however, that all environmental conditions and risks have
been identified in these environmental assessments and that we are aware of all
existing material environmental liabilities. Moreover, it is possible that (i)
future laws, ordinances or regulations could impose material environmental
liabilities; or (ii) the current environmental condition of our resort
properties could be adversely affected by third parties, or by the condition of
land or operations in the vicinity of the resort properties.
Real property pledged as security may be subject to unforeseen
environmental liabilities. Such environmental liabilities may give rise to (i) a
diminution in value of the property, (ii) the borrower's inability to repay its
obligations, (iii) limitations on the ability to foreclose against such
property, or (iv) liability for cleanup costs or other remedial actions which
could be material.
Dependence on Computer System of Related Party
The computer software and hardware platform for our loan servicing
program is owned by the Estate. We expect to have the opportunity to purchase
all necessary equipment and software from the Estate when the Estate no longer
has use for it. However, there is no assurance that the Estate will continue to
make the servicing platform available to us, or that we will be able to acquire
the servicing platform from the Estate. We have previously used unaffiliated
third parties on occasion to perform our loan servicing and believe that we will
be able, if necessary, to make arrangements with a third party to perform such
services in the future. Use of third-party arrangements are
19
<PAGE>
likely to involve increased costs. In any event, we expect to incur increased
costs to build a new data processing system to replace the existing system.
Year 2000 Compliance
We are heavily dependent on computer systems for our loan servicing
activities, among other things. The software and embedded microchips in certain
computer systems identify dates only by the last two digits of a year. For
example, 1999 would be coded as "99," 1998 as "98" and so on. The Year 2000
problem arises from the inability of certain software programs and microchips to
distinguish between dates in the year 2000 and dates in the year 1900. As a
result, a date entered "00" may be read as 1900 instead of 2000. If uncorrected,
functions using these systems would not work properly in the year 2000. Problems
which may occur as a result of uncorrected software programs or microchips
include system failures, miscalculations or errors causing disruptions of
operations.
Beginning in 1997, we undertook to assess our Year 2000 readiness by
identifying those computer systems we use that are not Year 2000 compliant. We
have also begun to assess the Year 2000 readiness of other entities with whom we
have a material relationship.
Resort Funding
Resort Funding relies more on information systems for servicing its
loans than for any other individual function. The computer software and hardware
platform for Resort Funding's loan servicing program is owned by The Processing
Center, Inc. ("TPC"), a bankrupt affiliate of the BFG. The platform is not yet
Year 2000 compliant. We have been working closely with TPC's programmers and
management information systems personnel to monitor TPC's progress in modifying
its systems. As of September 30, 1998, we understood that TPC's remediation
efforts were 25% complete, and that approximately 20% of the platform had been
satisfactorily tested. We have been advised that TPC anticipates completing its
remediation program and testing all systems by June 1999. However, there can be
no assurance that TPC's software and hardware platform will be Year 2000
compliant by December 31, 1999. There also can be no assurance that TPC will
continue to make the servicing platform available to Resort Funding, or that
Resort Funding will be able to acquire the servicing platform from TPC. Resort
Funding has previously used unaffiliated third parties on occasion to perform
its loan servicing. Consequently, we believe we will be able to make
arrangements with a third party to perform such services if necessary, but such
arrangements are currently not in place. As a contingency, we expect to identify
potential parties to perform our loan servicing by the end of the first quarter
of 1999 in the event that, in our view, TPC's remediation efforts have not
progressed sufficiently to ensure timely Year 2000 compliance.
Eastern Resorts
Eastern Resorts uses a third-party database server as its primary
software system for resort reservations, timeshare sales, and homeowners'
association receivables. The version of the software used by Eastern Resorts is
not Year 2000 compliant. However, an updated version of the system is currently
available at no cost. The updated version is Year 2000 compliant. Eastern
Resorts expects to have the upgraded version installed and tested
by the end of March 1999. The minimum system requirements for the upgraded
software are such that Eastern Resorts also anticipates replacing much of its
existing hardware and software in the ordinary course of business.
Any such replacements will be Year 2000 compliant.
The computer system used by Eastern Resorts for word processing is not
Year 2000 compliant. Eastern Resorts expects to have all systems corrected,
tested and functional, or otherwise replaced in the ordinary course of business,
by September 1999. We do not anticipate that the cost of any corrections or
replacements will be material. However, there can be no assurance that the
actual cost to make such corrections or acquire replacements will not exceed our
expectations, which may have an adverse effect on our financial performance.
20
<PAGE>
Third Parties
Our Year 2000 compliance program also includes assessing the readiness
of our lenders, borrowers, major vendors, suppliers and any other third parties
with whom we have significant dealings, who may be impacted by the Year 2000
problem. We have just commenced assessing these third parties' Year 2000
readiness, and do not know whether they are Year 2000 compliant. The extent to
which such parties have not modified their systems to address the Year 2000
issues may have a significant, adverse impact on our operations or financial
performance.
Cost
Since Resort Funding uses the computer software and hardware platform
of a third-party, our cost for addressing and correcting Year 2000 issues has
not been material. As of September 30, 1998, we estimate that we had spent
$25,000 on Year 2000 remediation. We do not anticipate that we will incur any
significant additional expense in correcting our systems. However, there can be
no assurance that our expenditures will not exceed our estimates. In the event
that we are forced to identify and contract with parties to replace existing
suppliers and vendors, such as TPC, the cost of such replacement may have a
material adverse effect on our financial condition and results of operations.
Further, if we are unable to perform our contractual obligations to our lenders
and borrowers as a result of our own or an important third party's failure to
achieve Year 2000 compliance, the potential cost and liability for such failure
may have a material adverse effect on our financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Impact of Year 2000 on Computer Systems."
Potential for Adverse Effects on Price of Common Stock
Our Common Stock was delisted from The Nasdaq Stock Market's SmallCap
Market in February 1996 as a result of our failure to comply with Nasdaq rules.
Our Common Stock was relisted with The Nasdaq Stock Market's SmallCap Market in
February 1998. We intend to list the Common Stock on The Nasdaq Stock Market's
National Market or the New York Stock Exchange at the time of the Offering.
As of September 30, 1998, the Estate beneficially owned approximately
80.1% of our Common Stock and 10,000 shares of Series 2 Class A Redeemable
Preferred Stock, which represents approximately 84.1% of the voting rights. The
Trustee intends to sell all of the Common Stock in the Offering, and to sell all
the Preferred Stock to us at the conclusion of the Offering. However, it is
possible that less than all of such capital stock will be sold, in which case
the Estate would continue to be a stockholder and would likely seek other means
to liquidate its holdings in us. 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. We do not believe that the high and low closing prices set forth
under "Price Range of Common Stock" are likely to be indicative of the price at
which the Offering can be completed, and have accordingly agreed with the
managing underwriters to fix a public offering price by negotiation based on the
factors set forth under "Underwriting." Moreover, we intend to effect a reverse
stock split of at least 1/3, 1/4, or 1/5 for one share prior to the Offering. It
is foreseeable that the trading prices of the Common Stock following the reverse
split may be less than the split ratio would arithmetically indicate.
Shares Eligible for Future Sale
Upon completion of the Offering, we will have shares of Common
Stock issued and outstanding ( if the Underwriters' over-allotment option
is exercised in full). Of these shares, the shares of Common Stock to be sold in
the Offering will be freely tradable without restriction under the Securities
Act, except for any
21
<PAGE>
shares owned by our "affiliates" as that term is defined in Rule 144 under
the Securities Act. R. Perry Harris, a director and officer of the Company, will
own shares of Common Stock following the Offering. In addition, as of the
date of this Prospectus, (i) 3,500,000 shares of Common Stock were reserved for
issuance upon exercise of outstanding stock options pursuant to the 1997
Long-Term Incentive Plan and (ii) 430,000 shares of Common Stock were reserved
for issuance upon exercise of outstanding warrants. With respect to these
warrants and the shares held by Mr. Harris, the Company has agreed to register
the resale of shares under certain conditions. The sale of any substantial
amount of Common Stock on the open market, or the perception that such a sale
might occur could have a materially adverse effect on the market price of the
Common Stock. In connection with the Offering, we, our directors and officers
(including Mr. Harris) have agreed not to sell any shares of Common Stock or
securities convertible or exchangeable into or exercisable for any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the consent of Credit Suisse First Boston Corporation, subject to certain
exceptions. See "Shares Eligible for Future Sale."
Limited Public Market
We can give no assurance that a liquid public market for the Common
Stock will develop or be sustained after the Offering or that purchasers of the
Common Stock will be able to resell their Common Stock at prices equal to or
greater than the initial public offering price. Numerous factors, including
announcements of fluctuations in our or our competitors' operating results and
market conditions for finance and timeshare industry stocks in general, could
have a significant impact on the future price of the Common Stock. In addition,
the stock market has recently experienced significant price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of companies. These broad fluctuations may adversely affect the
market price of the Common Stock. See "Underwriting."
Withdrawal of Audited Reports
On March 29, 1996, Mahoney Cohen Rashba & Pokart, PC ("Mahoney Cohen")
resigned as BFG's independent accountants and withdrew its reports on all
financial statements of BFG and its related entities, including Resort Funding.
Mahoney Cohen stated that such financial statements were based on, among other
things, information supplied by Patrick Bennett and, in light of the allegations
that Mr. Bennett had provided Mahoney Cohen with false and misleading
information relating to BFG, Mahoney Cohen had no choice but to withdraw its
reports. Mahoney Cohen is among the defendants of the Trustee's adversary
proceeding as a result of its audits of BFG. On April 5, 1996, Puritz &
Weintraub citing our departure from the insurance premium finance business,
resigned as our independent accountants. See "Resignation of Accountants."
We subsequently hired Firley, Moran, Freer & Eassa, P.C. ("FMFE") to
serve as our independent accountants, and FMFE has issued an unqualified report
on our consolidated financial statements for the years ended December 31, 1995,
1996 and 1997. Data for the periods prior to 1995 are not reported upon by
independent accountants and are therefore not included in this Prospectus. The
Trustee, who is also our Chairman and CEO, has challenged the audits of Mahoney
Cohen for these periods in pending legal proceedings against Mahoney Cohen and
others.
22
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the Offering, net of the estimated
underwriting discounts and commissions and expenses of the Offering, are
estimated to be approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full) based on a public offering price of
$ per share. The Company will not receive any proceeds from the sale of the
shares of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds to repurchase its Series 2
Class A Redeemable Preferred Stock and to repay existing indebtedness, including
all remaining amounts outstanding under the modified Bridge Loan and Long Wharf
Resort Loan. The Bridge Loan and the Long Wharf Resort Loan, both of which were
entered into in connection with the Company's acquisition of Eastern Resorts in
August 1998, bear interest at a rate of LIBOR plus 3% (8.375% at September 30,
1998) and had an initial maturity of December 11, 1998. As a result of
negotiations with the Company, CSFBMC extended the maturity on both loans to
June 11, 1999. In the event that the Company has remaining net proceeds
following repayment of all outstanding indebtedness to CSFBMC under the Bridge
Loan and Long Wharf Resort Loan and other indebtedness, the Company intends to
use such remaining net proceeds for working capital and other general corporate
purposes, including financing additional timeshare resorts or the acquisition of
other businesses. No definite plans for such acquisitions exist at this time.
Pending such uses, the remaining net proceeds, if any, will be invested in bank
deposits or short-term, interest-bearing, investment grade securities. See
"Description of Certain Indebtedness" and "Underwriting."
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock. The Company
intends to retain any future earnings to finance the development and expansion
of its business and, therefore, does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. Provisions of the Company's existing
credit facilities also currently preclude the Company's payment of dividends on
its Common Stock. See "Description of Capital Stock" and "Description of Certain
Indebtedness."
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<PAGE>
CAPITALIZATION
The following table sets forth information regarding the consolidated
cash and cash equivalents and capitalization of the Company as of September 30,
1998, and as adjusted for the pro forma effects of (i) the sale of shares
of Common Stock in the Offering at a public offering price of $ per share and
(ii) the application of the estimated net proceeds from the Offering to
repurchase the Company's outstanding Series 2 Class A Preferred Stock
and to repay $ in debt. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements of the Company
included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------
Historical As Adjusted
---------------- --------------
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents...................................................... $ 2,505
==============
Notes payable.................................................................. $ 128,365
Stockholders' equity:
Preferred Stock: Series 2 Class A, $3 par value, 15,000 shares
authorized; 10,000 shares issued and outstanding (none as adjusted for
the Offering)............................................................... 30
Common Stock: $.05 par value, 50,000,000 shares authorized;
25,105,706 shares issued and outstanding ( shares, as
adjusted for the Offering(1)).......................................... 1,255
Additional paid in capital..................................................... 47,601
Retained earnings.............................................................. 2,775
--------------
Total stockholders' equity.................................................... 51,661
--------------
Total capitalization.......................................................... $ 180,026
==============
</TABLE>
- --------
(1) The share count does not include (i) 3,500,000 shares of Common Stock
reserved for issuance under the 1997 Long-Term Incentive Plan, (ii) an
aggregate of 430,000 shares of Common Stock reserved for issuance upon
the exercise of outstanding warrants, with exercise prices ranging from
$3.50 to $8.00 per share, (iii) 67,113 shares of Common Stock issued to
the Estate in October 1998, in satisfaction of certain indebtedness and
(iv) 25,532 shares issued to the Estate in payment of dividends on the
Series 2 Class A Preferred Stock in October 1998. See Note L to the
Consolidated Financial Statements of Equivest, "Bankruptcy of
Affiliates and Related-Party Transactions" and "Certain Indebtedness."
24
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's initial public offering was consummated in January 1989.
Its Common Stock was listed on The Nasdaq Stock Market's SmallCap Market under
the symbol "EQUI." The Common Stock was delisted from The Nasdaq Stock Market's
SmallCap Market in February 1996 and traded thereafter over-the-counter until
February 1998 when the Company's application for relisting was approved and the
Common Stock resumed trading on The Nasdaq Stock Market's SmallCap Market under
the symbol "EQUI."
The following table sets forth, for the periods indicated, the high
and low sale prices for the Common Stock, as reported on the NASD Automated
Confirmation Transaction Service.
Common Stock
-----------------------
High Low
---- ---
1996
- ----
First Quarter $5 5/8 $ 3/4
Second Quarter 2 1/2 9/16
Third Quarter 1 7/32 11/16
Fourth Quarter 3/4 9/32
1997
- ----
First Quarter 3 1/4 1/2
Second Quarter 3 1 1/4
Third Quarter 4 3/8 1 5/8
Fourth Quarter 6 1/16 4
1998
- ----
First Quarter 6 5/8 4 7/8
Second Quarter 6 1/2 4 5/8
Third Quarter 8 5/8 4 3/4
Fourth Quarter (through December 28, 1998) 6 7/8 3 1/2
The Company's stock price at the close of trading on December 28, 1998
was $4 9/16. On December 28, 1998, there were approximately 40 holders of record
and an estimated 345 beneficial owners of the Company's Common Stock.
25
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
income (the "Pro Forma Financial Data") have been derived from the historical
financial statements of the Company and Eastern Resorts included elsewhere in
this Prospectus. The pro forma condensed consolidated statements of income give
effect to the acquisition of Eastern Resorts using the purchase method of
accounting, as if such transaction had been consummated as of January 1, 1997
for the year ended December 31, 1997 and as of January 1, 1998 for the nine
months ended September 30, 1998. The adjustments relating to the acquisition of
Eastern Resorts are described in the accompanying notes. Assuming the
consummation of the Offering, the pro forma condensed consolidated statements of
income, as adjusted, include the proceeds to the Company from the Offering. The
Pro Forma Financial Data should not be considered indicative of actual results
that would have been achieved had the acquisition of Eastern Resorts been
consummated for the periods indicated and do not purport to indicate results of
operations for any future period. The Pro Forma Financial Data should be read in
conjunction with the Company's and Eastern Resorts' historical financial
statements and the notes thereto included elsewhere in this Prospectus.
26
<PAGE>
<TABLE>
<CAPTION>
EQUIVEST FINANCE, INC.
Unaudited Pro Forma Condensed Statements of Combined Income
For the Nine Months Ended September 30, 1998
(Dollars in thousands except for per share data)
Adjustments
for
Historical Acquisition Adjustments
Historical Eastern of Eastern for Public Pro Forma
Equivest Resorts(1) Resorts Pro Forma Offering as Adjusted
-------- ---------- ------- --------- -------- -----------
Revenue
- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income........................ $ 15,011 $ 1,831 $ (810)(2) $ 16,032 $ $
Timeshare interval sales............... 1,103 8,727 -- 9,830
Resort operations...................... 1,214 7,080 -- 8,294
Other income........................... 868 -- -- 868
------------ ------------ --------- ----------- ----------- -----------
Total revenue....................... 18,196 17,638 (810) 35,024
Costs and expenses
- ------------------
Provision for doubtful receivables..... 650 466 -- 1,116
Interest expense....................... 5,318 1,313 65(3) 6,696 (5)
Cost of timeshare intervals sold....... 273 2,095 -- 2,368
Goodwill and other amortization........ 1,403 -- 605(4) 2,008
Sales and marketing.................... 567 3,706 -- 4,273
Resort management...................... 990 6,060 -- 7,050
General and administrative............. 2,786 1,313 -- 4,099
------------ ------------ --------- ----------- ----------- -----------
Total costs and expenses............ 11,987 14,953 670 27,610
Income before provision for taxes...... 6,209 2,685 (1,480) 7,414
Provision for income taxes............. 2,300 1,070(6) (400)(6) 2,970 (6)
------------ ------------ --------- ---------- ----------- -----------
Net income............................. $ 3,909 $ 1,615 $ (1,080) $ 4,444 $ $
============ ============ ========= ========== =========== ===========
Preferred stock dividends.............. 450 450
------------ ---------
Net income available to common
stockholders........................ $ 3,459 $ 3,994
============ ==========
Income per common share:
Basic............................... $ 0.16 $ 0.16 $
============ ========== ===========
Diluted............................. $ 0.15 $ 0.16 $
============ ========== ===========
Weighted average number of
common shares outstanding:
Basic............................... 22,272,673 2,813,187 25,085,860
Diluted............................. 22,748,919 2,813,187 25,562,106
</TABLE>
- ----------------------
(1) The historical income statement of Eastern Resorts represents activity for
the 240-day period ended August 28, 1998 (the date of the acquisition).
Eastern Resorts' activity for the 33-day period ended September 30, 1998
is included in Historical Equivest.
(2) Reflects the elimination of intercompany interest income.
(3) Reflects interest expense on the Bridge Loan ($875,000) and the
elimination of intercompany interest expense.
(4) Reflects the amortization of the financing costs associated with the
Bridge Loan and the amortization of goodwill.
(5) Reflects the reduction of interest expense from the retirement of
approximately $ of debt.
(6) Reflects the effect on income taxes of (i) the 1998 historical income of
Eastern Resorts, (ii) the tax deductible pro forma acquisition
adjustments, and (iii) adjustments for the Offering.
27
<PAGE>
<TABLE>
<CAPTION>
EQUIVEST FINANCE, INC.
Unaudited Pro Forma Condensed Statements of Combined Income
For the Year ended December 31, 1997
(Dollars in thousands except for per share data)
Adjustments
for
Historical Acquisition of Adjustments
Historical Eastern Eastern for Public Pro Forma
Equivest Resorts Resorts Pro Forma Offering as Adjusted
Revenue
- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income........................$ 15,109 $ 2,602 $ (576)(1) $ 17,135 $ $
Timeshare interval sales............... -- 8,635 -- 8,635
Resort operations...................... -- 8,056 -- 8,056
Other income........................... 856 83 (80)(1) 859
------------ ------------ ----------- ----------- ---------- ------------
Total revenue....................... 15,965 19,376 (656) 34,685
Costs and expenses
Provision for doubtful receivables..... 925 353 -- 1,278
Interest expense....................... 8,077 1,395 755(2) 10,227 (5)
Cost of timeshare intervals sold....... -- 1,928 -- 1,928
Goodwill and other amortization........ 1,064 -- 932(3) 1,996
Sales and marketing.................... -- 3,868 -- 3,868
Resort management...................... -- 7,348 -- 7,348
General and administrative............. 2,475 1,782 (80) 4,177
Total costs and expenses............ 12,541 16,674 1,607 30,822
Income before provision for taxes...... 3,424 2,702 (2,263) 3,863
Provision for income taxes............. 193 1,080(4) (600)(4) 673 (4)
------------ ------------ ----------- -----------
Net income.............................$ 3,231 $ 1,622 $ (1,663) $ 3,190 $ $
============ ============ =========== =========== ============ ============
Preferred stock dividends.............. 731 731
------------ -----------
Net income available to common
stockholders........................$ 2,500 $ 2,459
============= ===========
Income per common share:
Basic...............................$ 0.22 $ 0.17 $
============= =========== ===========
Diluted.............................$ 0.15 $ 0.12 $
============= =========== ===========
Weighted average number of common
shares outstanding:
Basic............................... 11,582,587 3,200,000 14,782,587
Diluted............................. 17,913,902 3,200,000 21,113,902
</TABLE>
- --------------------
(1) Reflects the elimination of intercompany interest income and other income.
(2) Reflects interest expense on the Bridge Loan ($1,331,000) and the
elimination of intercompany interest expense.
(3) Reflects the amortization of the financing costs associated with the Bridge
Loan and the amortization of goodwill.
(4) Reflects the effect on income taxes of (i) the 1997 historical income of
Eastern Resorts, (ii) the tax deductible pro forma acquisition adjustments,
and (iii) adjustments for the Offering, after giving effect to the net
operating loss carryforward of $685,000.
(5) Reflects the reduction of interest expense from retirement of debt of
approximately $ of debt.
28
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The Company acquired Resort Funding on February 16, 1996. See
"Bankruptcy of Affiliates and Related-Party Transactions--Acquisition of Resort
Funding." The audited financial statements of the Company for 1995 and 1996,
from which the data in this table are derived, include Resort Funding's results
of operations with those of the Company on a combined basis.
The following tables set forth certain selected historical
consolidated financial data of the Company and of Eastern Resorts.
The selected historical consolidated financial data of the Company for
the years ended December 31, 1995, 1996 and 1997 have been derived from, and
should be read in conjunction with, the audited consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. The selected historical consolidated financial data of Eastern
Resorts for the years ended December 31, 1996 and 1997 have been derived from
the audited consolidated financial statements of Eastern Resorts and notes
thereto. The audited consolidated financial statements of Eastern Resorts for
the years ended December 31, 1996 and 1997 are included elsewhere in this
Prospectus, and should be read in conjunction with the following selected data.
The historical unaudited consolidated financial data of the Company
for the nine months ended September 30, 1997 and 1998 have been derived from,
and should be read in conjunction with, the unaudited condensed consolidated
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus. The selected historical consolidated financial data of Eastern
Resorts for the 240-day period ended August 28, 1997 and 1998 have been derived
from, and should be read in conjunction with the unaudited financial statements
and related notes for the same periods included elsewhere in this Prospectus. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included in the unaudited condensed consolidated
financial statements of the Company and Eastern Resorts. Interim results are not
necessarily indicative of results for future periods, including fiscal year
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Pro Forma Condensed Consolidated Financial
Statements."
29
<PAGE>
<TABLE>
<CAPTION>
EQUIVEST FINANCE, INC.
Selected Consolidated Historical Financial Data
Nine Months Ended
Year Ended December 31, September 30,
----------------------- -------------
1995 1996 1997 1997 1998 (1)
------ ------ ------ ------ --------
(Dollars in thousands except for per share data)
Statement of Income Data:
Revenue
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 11,022 $ 12,998 $ 15,109 $ 11,329 $ 15,011
Timeshare interval sales.................... -- -- -- -- 1,103
Resort operations........................... -- -- -- -- 1,214
Other income................................ 2,173 1,265 856 206 868
------------ ------------ ------------- ------------- -------------
Total revenue......................... 13,195 14,263 15,965 11,535 18,196
Costs and expenses
Provision for doubtful receivables.......... 794 179 925 225 650
Interest expense............................ 5,982 8,271 8,077 6,302 5,318
Cost of timeshare intervals sold............ -- -- -- -- 273
Goodwill and other amortization............. 848 903 1,064 769 1,403
Sales and marketing........................ -- -- -- -- 567
Resort management........................... -- -- -- -- 990
General and administrative.................. 3,450 3,221 2,475 1,826 2,786
------------ ------------- ------------- ------------- -------------
Total costs and expenses.............. 11,074 12,574 12,541 9,122 11,987
Income before provision for income
taxes (2)............................. 2,121 1,689 3,424 2,413 6,209
Provision for income taxes.................. 595 29 193 180 2,300
------------- -------------- -------------- -------------- ------------
Net income (2).............................. 1,526 1,660 3,231 2,233 3,909
------------ ------------ ------------- ------------- ------------
Preferred stock dividends................... 604 527 731 561 450
-------------- -------------- -------------- -------------- --------------
Net income available to common
stockholders (2)..................... $ 922 $ 1,133 $ 2,500 $ 1,672 $ 3,459
============= ============ ============ ============ ============
Net income per common share
(basic) (2)........................... $ 0.10 $ 0.12 $ 0.22 $ 0.18 $ 0.16
============= ============= ============= ============= =============
Net income per common share
(diluted) (2)......................... $ 0.05 $ 0.07 $ 0.15 $ 0.10 $ 0.15
============= ============= ============= ============= =============
Weighted average number of common
shares outstanding (basic)............ 9,484,847 9,484,847 11,582,587 9,484,847 22,272,673
Weighted average number of common
shares outstanding (diluted).......... 16,984,847 17,012,708 17,913,902 17,082,112 22,748,919
Balance Sheet Data:
Cash and cash equivalents................... $ 1,303 $ 4,037 $ 4,620 $ 2,453 $ 2,505
Notes receivable (3)........................ 80,387 95,866 120,791 99,538 137,154
Total assets................................ 88,601 113,204 133,484 115,763 188,732
Notes payable............................... 78,538 106,745 99,961 107,316 128,365
Preferred stock............................. 39 39 30 39 30
Stockholders' equity........................ 2,377 4,037 32,528 6,270 51,661
Other Data:
A&D Loan portfolio.......................... $ 32,838 $ 31,475 $ 39,390 $ 30,563 $ 37,258
Consumer Financing portfolio (4)............ 51,820 67,771 96,377 73,192 116,340
</TABLE>
- --------------
(1) Includes the results of Eastern Resorts for the 33-day period ended
September 30, 1998.
(2) For the year ended December 31, 1995, net income and net income per share
amounts exclude a loss from operations of discontinued segment of
approximately $2.2 million.
(3) Net of allowance for doubtful receivables and developer hold backs.
(4) Consumer Financing portfolio includes the Purchased Receivables and
Hypothecation Loans of Resort Funding. It includes $17.1 million in
Consumer Loans held by Eastern Resorts as of September 30, 1998.
30
<PAGE>
EASTERN RESORTS CORPORATION
Selected Consolidated Historical Financial Data
(Dollars in thousands)
<TABLE>
<CAPTION>
240 Days Ended
Year Ended December 31, August 28,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues
Timeshare interval sales............. $ 7,062 $ 8,636 $ 8,727
Resort operations.................... 7,512 8,138 7,080
Interest income...................... 2,347 2,602 1,831
------------ ------------ ------
Total revenues....................... 16,921 19,376 17,638
------------ ------------ -------
Costs and expenses
Cost of property sold................ 1,492 1,928 2,095
Sales and marketing.................. 3,507 3,868 3,706
Resort management.................... 6,612 7,348 6,060
General and administrative........... 1,618 1,782 1,313
Provision for doubtful accounts...... 533 353 466
Interest expense..................... 1,275 1,395 1,313
------------ ------------ ------
Total costs and expenses............. 15,037 16,674 14,953
------------ ------------ -------
Operating income......................... 1,884 2,702 2,685
Gain on sale of development rights....... 1,619 -- --
------------ ------------ --
Net income (1)........................... $ 3,503 $ 2,702 $ 2,685
============ =========== ========
</TABLE>
-------------------------
(1) Eastern Resorts' status as a limited liability company, taxed as a
partnership, required that any income tax be paid at the member level.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The discussion of the Company's results of operations which follows
pertains to the business of Resort Funding, with two exceptions. First, in the
year ended December 31, 1995, the Company discontinued its insurance premium
finance business and reported that segment as discontinued operations in that
year. Second, on August 28, 1998, the Company acquired Eastern Resorts on a
purchase accounting basis, and included 33 days of its operations in its
statements of operations for the nine months ended September 30, 1998 (the "33
Days"). Although the Company did not acquire Resort Funding until February
1996, its results for the periods ended December 31, 1995 and 1996 are
included on a consolidated basis as in a pooling of interests because it was
under common control with the Company. See Note C of Notes to Consolidated
Financial Statements of Equivest.
A separate discussion of the results of Eastern Resorts on a
stand-alone basis, including a comparison of the years ended December 31, 1996
and 1997 and the 240-day periods ended August 28, 1997 and 1998 is set forth
below. You should read and refer to the "Selected Consolidated Historical
Financial Data," the "Pro Forma Condensed Consolidated Financial Data," and
the Financial Statements included in this Prospectus, as well as all related
notes, when reading the following discussion.
Financial Performance
From December 31, 1995 to September 30, 1998, total assets increased
113%, to $188.7 million from $88.6 million, while stockholders' equity
increased to $51.7 million from $2.4 million. Stockholders' equity per share
increased to $2.06 from $0.14 per share, while stockholders' equity as a
percent of total assets grew to 27% from 3%.
TOTAL ASSETS
[GRAPHIC OMITTED]
This bar graph shows the total assets of the Company as: $88.6 million as of
12/31/95; $113.2 million as of 12/31/96; $133.5 million as of 12/31/97; and
$188.7 million as of 9/30/ 98 (of which $158.0 million is Resort Funding and
$30.7 million is Eastern Resorts).
32
<PAGE>
STOCKHOLDERS EQUITY
[GRAPHIC OMITTED]
This bar graph shows the stockholders' equity in the Company as: $2.4 million at
12/31/95; $4.0 million at 12/31/96; $32.5 million at 12/31/97; and $51.7 million
at 09/30/98.
The Company's income statement also improved significantly since 1995.
TOTAL REVENUE
[GRAPHIC OMITTED]
This bar graph shows the total revenues of the Company as: $13.2 million as of
12/31/95; $14.3 as of 12/31/96; $16.0 million as of 12/31/97; $18.2 million as
of 09/30/98 (of which $2.6 million represents the revenue of Eastern Resorts for
the 33 days ended 09/30/98); and $35.0 million as of 09/30/98 (which includes on
a pro forma basis revenue of Eastern Resorts in the amount of $19.4 million as
if the Company had acquired Eastern Resorts on January 1, 1998).
33
<PAGE>
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
[GRAPHIC OMITTED]
This bar graph shows the income of the Company from continuing operations,
but before income taxes, as: $2.1 million as of 12/31/95; $1.7 million as of
12/31/96; $3.4 million as of 12/31/97; $6.2 million as of 09/30/98; and $7.4
million as of 09/30/98 (which includes on a pro forma basis pre-tax income
of Eastern Resorts in the amount of $1.2 million as if the Company had
acquired Eastern Resorts on January 1, 1998).
The Company's results of operations in the periods presented were
significantly impacted by the bankruptcy of BFG and BMDC in March 1996. As a
result of the bankruptcy, the Company's lenders restricted the credit available
to it, and hence limited the amount and size of the loans it could make. In
November 1997 the Company secured new credit arrangements.
Results of Operations of Equivest
The Company's primary sources of revenues are its (i) finance
operations and (ii) timeshare operations. Revenues from its finance operations
are principally from interest and fees on loans, and revenues from its timeshare
operations are principally from timeshare interval sales and resort operations.
Finance Operations
In its finance operations, the Company recognizes interest income on
its outstanding loan receivables when earned, using the interest method. The
accrual of interest on a loan is discontinued when unpaid interest, together
with the loan principal outstanding, exceeds the loan's projected cash flow or
the loan's collateral value.
The Company reduces gross receivables by the amount of hold backs from
developers ("specific reserves"). In addition, the Company establishes an
allowance for doubtful receivables ("general reserves"). Management evaluates
the adequacy of the allowance on a quarterly basis by examining past loss
experience, current delinquencies, known and inherent risks in the portfolio,
adverse conditions that may affect the borrower's ability to repay, the
estimated value of the underlying collateral, and current economic conditions.
For the past several years, the Company has maintained general reserves at a
level of approximately 2.2% of the net amount of its notes receivable (excluding
Consumer Loans). The Company's allowance for doubtful accounts is based upon
management's estimate of the amount that will be necessary to cover future
write-offs of accounts receivable in the event (i) a developer defaults on its
obligation to replace or take back a non-performing Consumer Loan and (ii)
specific reserves on such developer's loan are exhausted. A receivable is
charged against the allowance when management believes that collection is
unlikely. If management's estimates differ from actual results, reported
34
<PAGE>
income for the earlier period in which a provision for doubtful receivables was
taken will be too high or too low, and an adjustment will be made.
In the case of Purchased Receivables, the Company generally holds back
from developers 10% to 15% of the purchase price ("hold back") as a specific
reserve against potential default by the developer on its liability for any
defaulted Consumer Loan. The Company does not pay this amount to the developer
until the Consumer Loan has been paid in full. As a result, the special reserve
as a percent of the unpaid principal begins at 10% to 15% and increases as the
principal of the loan is paid down. In the event a consumer defaults on an
obligation, the Company has the right to require the developer to repurchase the
defaulted consumer receivable at an amount equal to the present value of the
unpaid principal and interest on the note, net of the reserve ("chargeback").
Generally, the developer has the option to replace the defaulted consumer
receivable with another of equal or greater value. Specific reserves are charged
only if the developer defaults on its chargeback obligations. General reserves
are charged only if the developer defaults on its obligations and there are no
remaining specific reserves.
In the case of Hypothecation Loans, the Company typically advances to
the developer, at any given time, only 85% to 90% (the "Advance Rate") of the
amount of the receivables pledged as collateral for the loan. As consumers make
payments on their obligations, a portion of the Hypothecation Loan is repaid.
Once the Hypothecation Loan is repaid in full, the remaining collateral is
released to the developer.
Timeshare Operations
The Company's timeshare development operations generate revenue
primarily through selling and financing timeshare intervals and operating
several resort properties. The Company recognizes timeshare interval sales
revenue on the accrual basis. A sale is recognized after a binding sales
contract has been executed, the buyer has made a down payment of at least 10%,
and a statutory recission period has expired. If all other criteria are met, but
construction of the unit to which the timeshare interval relates is not
substantially complete, revenue is recognized according to the percentage of
completion method. The Company recognizes interest income on its outstanding
Consumer Loans when earned, using the interest method. For tax purposes, sales
of timeshare intervals are recognized using the installment sale method of
accounting, which recognizes income as cash is received.
Revenues from resort operations primarily consist of fees earned for
management of timeshare resorts, income from the rental of unoccupied timeshare
units on an overnight basis, and food and beverage sales from the Company's two
restaurants. Revenues are recognized at the time services are rendered.
In its timeshare operations, the Company accounts for uncollectible
notes by recording a provision for doubtful accounts at the time timeshare
interval sales revenue is recognized. Historically, this provision approximated
5% of the outstanding receivables balance. If a customer defaults, any unpaid
balance on the note is charged against the previously established allowance for
doubtful accounts, net of the amount that is restored to inventory. Timeshare
intervals returned to inventory are recorded in inventory at the lower of their
original cost or market value. The Company ceases to recognize interest income
when a note becomes past due.
Costs associated with the acquisition and development of a timeshare
resort include the costs of land, construction, furniture, interest and taxes.
These costs are capitalized and recorded as part of inventory cost, and
inventory is depleted and expensed based on the relative sales method: a fixed
amount is expensed as a depletion of inventory each time a timeshare interval is
sold. If no sales were to be made with respect to a particular development
project, no expense would be recorded unless and until the property is sold or
abandoned, or if management determines the market value of the inventory is less
than its recorded cost.
In contrast to its financing operations, the Company's timeshare
development business experiences significant fluctuations in its quarterly
results primarily owing to higher revenues in the spring and summer months from
renting unoccupied timeshare units on an overnight basis at its resorts in and
around Newport. The Company expects the seasonality of the results of its resort
operations to lessen following the further expansion of the Bentley Brook
Mountain Club, which is expected to attract visitors, and thus increase
overnight rental income throughout the winter ski season.
35
<PAGE>
Selected Financial Data of Equivest
as a Percentage of Total Revenues(1)
<TABLE>
<CAPTION>
Nine
Months
Ended
Year Ended December 31, September 30,
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
-------
Interest from:
A&D Loans.............................. 20.9% 29.8% 25.1% 23.9%
Purchased Receivables.................. 62.3 59.6 61.8 50.7
Hypothecation Loans.................... -- 0.4 1.9 4.7
Consumer Loans ........................ -- -- -- 1.4
Other.................................. 0.3 1.3 5.8 1.8
--------- --------- --------- ------
Total interest on loans................ 83.5% 91.1% 94.6% 82.5%
Timeshare interval sales................. -- -- -- 6.1
Resort operations........................ -- -- -- 6.7
Other income............................. 16.5 8.9 5.4 4.7
---------- ----------- ----------- --------
Total revenue.......................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses
------------------
Provision for doubtful receivables....... 6.0% 1.3% 5.8% 3.6%
Interest................................. 45.4 58.0 50.6 29.2
Goodwill and other amortization.......... 6.4 6.3 6.7 7.7
Cost of property sold.................... -- -- -- 1.5
Sales and marketing...................... -- -- -- 3.1
Resort management........................ -- -- -- 5.5
General and administrative............... 26.1 22.6 15.5 15.3
-------- -------- -------- -----
Total costs and expenses............... 83.9% 88.2% 78.6% 65.9%
Income from continuing operations
before provision for income taxes...... 16.1 11.8 21.4 34.1
Provision for income taxes............... 4.5 0.2 1.2 12.6
-------- -------- -------- ------
Income from continuing operations........ 11.6% 11.6% 20.2% 21.5%
===== ===== ====== =======
</TABLE>
- ---------------------
(1) Results of Eastern Resorts are only included for the 33 day period ending
September 30, 1998.
36
<PAGE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
After adjusting for items eliminated in consolidation, revenue
contributions to the Company by Eastern Resorts for the 33 Days were $2.6
million and expenses were $2.3 million, which does not include $0.3 million in
transaction costs resulting from the acquisition.
The Company's total revenues increased 58% to $18.2 million for the
nine months ended September 30, 1998, from $11.5 million for the same period in
1997. The increase was due primarily to both growth in interest income in the
Company's financing business, as well as the inclusion of 33 days of Eastern
Resorts' revenues. Interest income, excluding a $0.3 million increase due to the
consolidation of Eastern Resorts, accounted for $3.4 million of the increase. If
the acquisition of Eastern Resorts had occurred on January 1, 1998, the Company
would have had total revenues for the nine months ended September 30, 1998 of
$35.0 million. This reflects that fact that Eastern Resorts' annual revenues are
greater than the revenue of Equivest without considering Eastern Resorts.
Interest Income. Interest income increased 32% to $15.0 million for
the nine months ended September 30, 1998, from $11.3 million for the same period
in 1997, primarily due to growth in the Company's loan portfolio, which was
slightly offset by a decline in interest rates. Interest on Hypothecation Loans
and Purchased Receivables increased 31% to $10.1 million for the nine months
ended September 30, 1998 from $7.7 million for the same period in 1997. Interest
received on A&D Loans increased 52% to $4.3 million for the nine months ended
September 30, 1998, from $2.9 million for the same period in 1997. Eastern
Resorts contributed interest income of $0.3 million for the 33 Days.
Gains on Sales of Contracts, Vacation Ownership, Resort Operations.
The Company recorded no gains on sales of contracts in the nine months ended
September 30, 1998 because it did not sell any loans in the period. The Company
had no revenue from vacation ownership or resort operations in the nine months
ended September 30, 1997.
Other Income. Other income increased to $0.9 million for the nine
months ended September 30, 1998, from $0.2 million for the same period in 1997,
which was primarily due to an increase in fee income generated by new
Hypothecation Loans and new A&D Loans.
Provision for Doubtful Receivables. The provision for doubtful
receivables increased to $0.6 million for the nine months ended September 30,
1998, from $0.2 million for the same period in 1997, primarily due to portfolio
growth.
Interest Expense. Interest expense decreased 16% to $5.3 million, or
35% of interest income, for the nine months ended September 30, 1998, from $6.3
million, or 56% of interest income, for the same period in 1997, primarily due
to the satisfaction of approximately $25 million of intercompany debt through
the issuance of Common Stock. A decrease in the weighted average interest rate
the Company paid on its bank debt to 6.8% from 8.3%, partially offset by a
higher average balance of bank debt, also contributed to the decrease. Interest
expense increased approximately $150,000 due to the interest costs associated
with Eastern Resorts' debt and the debt associated with the Bridge Loan for the
33 Days as compared to the same period in 1997.
Amortization of Financing and Other Costs. Amortization of financing
and other costs increased to $1.3 million for the nine months ended September
30, 1998, from $0.8 million for the same period in 1997. The increase is
primarily due to capitalized costs associated with the Company's several recent
financings.
General and Administrative Costs. General and administrative costs
increased to $2.8 million, or 15% of total revenues, for the nine months ended
September 30, 1998, from $1.8 million, or 16% of total revenues, for the same
period in 1997. The increase is primarily due to an increase in payroll,
servicing, legal, insurance, advertising and travel costs, largely associated
with the increase in the Company's loan originations.
Income Before Provision for Income Taxes. Income before provision for
income taxes increased to $6.2 million for the nine months ended September 30,
1998, from $2.4 million for the same period in 1997 as a result of
37
<PAGE>
the above-mentioned operating activities. Had the acquisition of Eastern
Resorts occurred on January 1, 1998, income before provision for income taxes
would have been $7.4 million for the nine months ended September 30, 1998.
Provision for Income Taxes. Provision for income taxes as a percentage
of income before provision for income taxes increased to 37% for the nine months
ended September 30, 1998 from 7% for the same period in 1997 primarily due to
the exhaustion of net operating loss carryforwards and the deferred tax
provision relating to the provision for doubtful receivables.
Net Income. Net income increased to $3.9 million for the nine months
ended September 30, 1998, from $2.2 million for the same period in 1997 as a
result of the above-mentioned operating activities. Had the acquisition of
Eastern Resorts occurred on January 1, 1998, pro forma net income would have
been $4.4 million for the nine months ended September 30, 1998.
1997 Compared to 1996
Total revenues increased 12% to $16.0 million in 1997 from $14.3
million in 1996 primarily due to an increase in interest income as a result of
portfolio growth and interest income from related-party notes receivable. See
"Bankruptcy of Affiliates and Related-Party Transactions."
Interest Income. Interest income increased 16% to $15.1 million in
1997, from $13.0 million in 1996, primarily due to growth in the loan portfolio,
and income from notes receivable from a related party. Interest on the Consumer
Financing portfolio increased 19% to $10.2 million in 1997, from $8.6 million
for 1996. This growth in interest income was augmented by an increase of $0.6
million in interest income on notes receivable from a related party, which arose
from approximately $20.0 million in loans made to the Trustee in connection with
the Settlement Loans. See "Certain Relationships and Related-Party
Transactions--Certain Low Interest Settlement Loans." The increase in interest
on consumer notes and related-party notes more than offset a decrease of $0.2
million in interest on A&D Loans to developers, due to lower average balances
outstanding compared to 1996.
Gains on Sales of Contracts. Gains on sales of contracts decreased to
an insignificant amount in 1997 from $0.4 million in 1996. The gains on sales of
consumer receivables in 1996 resulted from the sale of certain portfolios. The
Company's primary lender imposed a prohibition on sales of loans which remained
in place until 1997, when the 1997 Credit Facility was established.
Other Income. Other income decreased slightly in 1997, primarily due
to a significant origination fee received in the first quarter of 1996, half of
which was discounted in the first quarter of 1997 when the asset was sold.
Provision for Doubtful Receivables. The provision for doubtful
receivables increased to $0.9 million in 1997 from $0.2 million in 1996, owing
to growth in the Company's loan portfolio and management's decision to increase
the allowance for doubtful accounts.
Interest Expense. Interest expense decreased 2% to $8.1 million, or
53% of interest income, in 1997, from $8.3 million, or 64% of interest income,
in 1996. Total interest expense on the Company's warehouse line of credit (which
was refinanced in November 1997 by CSFBMC at a 300 basis point savings)
increased in 1997 due to the lender's increasing of the interest rate, and
higher loan balances which were due to the lender's prohibition of loan sales.
This increase was partially offset by lower interest expense resulting from the
conversion of approximately $25 million of related party debt into equity. See
"Bankruptcy of Affiliates and Related-Party Transactions." In addition, interest
expense on other bank notes decreased 28% to $2.5 million for 1997, from $3.5
million for 1996, due to a decrease in interest rates resulting from the
restructuring of Equivest's debt obligations pursuant to the bankruptcy
settlements in November 1996. See "Bankruptcy of Affiliates and Related-Party
Transactions--Certain Low Interest Loans."
Amortization of Financing and Other Costs. Amortization of financing
costs increased 18% to $1.1 million,
38
<PAGE>
or 7% of interest income, in 1997 from $0.9 million, or 7% of interest income,
in 1996. The increase was primarily attributable to the 3% per annum arrangement
fee charged by the Estate in connection with the Settlement Loans. See
"--Liquidity and Capital Resources" and "Bankruptcy of Affiliates and
Related-Party Transactions--Certain Low Interest Loans."
General and Administrative Costs. General and administrative costs
decreased 23% to $2.5 million, or 16% of total revenues, in 1997, from $3.2
million, or 23% of total revenues, in 1996. The decrease was primarily a result
of the significant reduction of application, recording and processing fees paid
to TPC certain nonrecurring expenses incurred in 1996 in connection with
Equivest's acquisition of Resort Funding, and lower office-related costs in
1997.
Income Before Provision for Income Taxes. Income before provision for
income taxes increased to $3.4 million in 1997, from $1.7 million in 1996, as a
result of the above-mentioned operating activities.
Provision for Income Taxes. The provision for income taxes for 1997
increased to $0.2 million from an insignificant amount in 1996. The increase is
primarily attributable to the provision for state income taxes. The tax
provisions for both 1996 and 1997 include the utilization of net operating loss
carryforwards, which reduce the Company's federal income tax liability.
Net Income. Net income increased to $3.2 million for 1997, from $1.7
million in 1996, as a result of the above-mentioned operating activities.
1996 Compared to 1995
Total revenues increased 8% to $14.3 million in 1996, from $13.2
million in 1995, primarily as a result of an increase in interest income from
A&D Loans, which was partially offset by a decrease in gains on sales of
consumer receivables.
Interest Income. Interest income increased 18% to $13.0 million in
1996 from $11.0 million in 1995. Interest on Purchased Receivables and
Hypothecation Loans increased slightly to $8.3 million in 1996, from $8.2
million in 1995, while interest on A&D Loans increased 54% to $4.3 million in
1996 from $2.8 million in 1995, owing to higher average outstanding balances.
Gains on Sales of Contracts. Gains on sales of contracts decreased to
$0.4 million in 1996 from $1.4 million in 1995. This decrease was the result of
a prohibition on sales of consumer receivables after March 31, 1996 imposed by
the Company's primary lender at the time.
Other Income. Other income increased slightly in 1996, primarily as
the result of an increase in fees charged on consumer receivables and a one-time
special origination fee of $0.2 million.
Provision for Doubtful Receivables. The provision for doubtful
receivables decreased to $0.2 million in 1996 from $0.8 million in 1995,
primarily due to lower growth of the Company's loan portfolio.
Interest Expense. Interest expense increased 38% to $8.3 million, or
64% of interest income, in 1996, from $6.0 million, or 54% of interest income,
in 1995 due to an increase in interest rates, as well as higher average
outstanding debt balances. The increase in interest rates was triggered by the
BFG bankruptcy. Intercompany interest expense decreased by 49% to $2.1 million
in 1996, from $4.0 million in 1995, due primarily to the repayment of
intercompany debt through draw-downs on the Company's then-existing financing
facility in 1995.
Amortization of Financing and Other Costs. Amortization of financing
costs increased to $0.9 million, or 7% of interest income, in 1996 from $0.8
million, or 8% of interest income, in 1995 due to an increase in fees
39
<PAGE>
primarily attributable to a 3% arrangement fee charged by the Estate in
connection with the Settlement Loans.
General and Administrative Costs. General and administrative costs
decreased slightly to $3.2 million, or 23% of total revenue, in 1996, from $3.4
million, or 26% of total revenue, in 1995, primarily as a result of decreased
application, recording and processing fees paid to an affiliate of the Company
of $0.9 million, which was partially offset by an increase in outside services
in 1996.
Income Before Provision for Income Taxes. Income from continuing
operations before provision for income taxes decreased to $1.7 million in 1996
from $2.1 million in 1995 as a result of the above-mentioned operating
activities.
Provision for Income Taxes. The provision for income taxes decreased
to an insignificant amount in 1996 from $0.6 million in 1995. The reduction is
attributable to utilization of the Company's net operating loss carryforwards to
offset taxable income arising after February 16, 1996. The net operating loss
carryforwards arose in connection with the discontinuation of its insurance
premium financing operations.
Net Income from Continuing Operations. Net income from continuing
operations increased to $1.7 million in 1996 from $1.5 million in 1995 as a
result of the above-mentioned operating activities.
The Company acquired Eastern Resorts on August 28, 1998. Eastern
Resorts and its wholly owned subsidiary, Eastern Resorts Company, LLC, was
formed in 1994. In 1995, Eastern Resorts acquired the assets of Inn Group
Associates, a Massachusetts Limited Partnership founded in 1981 by R. Perry
Harris. Eastern Resorts' sole asset is its interest in Eastern Resorts Company,
LLC, which is the legal entity for whom financial statements have been prepared.
In the ensuing discussion, therefore, all references to "Eastern Resorts" shall,
where appropriate, signify Eastern Resorts Company, LLC or Inn Group Associates,
its legal predecessor, for which financial statements were prepared. The
financial statements of Eastern Resorts Company, LLC for the fiscal year ended
December 31, 1997 and for the 240-day period ended August 28, 1998 appear at the
back of this Prospectus. See "Index to Financial Statements" on page F-1.
40
<PAGE>
Selected Financial Data of
Eastern Resorts as a Percentage of Revenues
<TABLE>
<CAPTION>
240 Day
Period Ended
Year Ended December 31, August 28,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
As a percentage of total revenues
Sales of timeshare intervals................... 41.7% 44.6% 49.5%
Resort Operations.............................. 44.4 42.0 40.1
Interest Income................................ 13.9 13.4 10.4
------ ------ ------
Total....................................... 100.0% 100.0% 100.0%
====== ====== ======
As a percentage of timeshare interval sales
Cost of timeshare intervals.................... 21.1% 22.3% 24.0%
Sales and marketing............................ 49.7 44.8 42.5
Provision for doubtful receivables............. 7.5 4.1 5.3
------ ------ ------
Total....................................... 78.3% 71.2% 71.8%
====== ====== ======
As a percentage of interest income
Interest expense............................... 54.3% 53.6% 71.7%
As a percentage of resort operations
Resort expenses................................ 88.0% 90.3% 85.6%
As a percentage of total revenues
General and administrative..................... 9.6% 9.2% 7.4%
</TABLE>
EASTERN RESORTS COMPONENTS OF REVENUE
[GRAPHIC OMITTED]
This bar graph shows the percentage of Eastern Resorts' revenue that was
represented by timeshare sales, resort operations and interest income for
1996, 1997 and 1998. Timeshare sales represented 41.7% of Eastern Resorts'
revenue for 1996, 44.6% for 1997 and 49.5% for 1998. Resort operations
represented 44.4% of Eastern Resorts' revenue for 1996, 42.0% for 1997 and
40.1% for 1998. Interest income represented 13.9% of Eastern Resorts'
revenue for 1996, 13.4% for 1997 and 10.4% for 1998.
41
<PAGE>
240-day Period Ended August 28, 1998 Compared to 240-day Period Ended August 28,
1997
Total revenues for the 240-day period ended August 28, 1998 increased
35% to $17.6 million, from $13.0 million for the same period in 1997. The
increase was primarily due to a $2.8 million increase in timeshare sales, a $1.6
million increase in revenues from resort operations, and a $0.2 million increase
in interest income.
Sales of Timeshare Intervals. Timeshare interval sales increased 47%
to $8.7 million for the 240-day period ended August 28, 1998 from $5.9 million
for the same period in 1997, primarily as a result of increases in both the
number of intervals sold and in the average price per interval at the Company's
resorts in and around Newport. The number of timeshare intervals sold through
the Newport sales office increased to 643 in the 240-day period ended August 28,
1998 from 595 in the same period in 1997. As a result of the opening of the
Bentley Brook sales office on April 1, 1998, the Company sold 234 timeshare
intervals in the 240-day period ended August 28, 1998. At the Company's resorts
in Newport, the average price per interval increased 7.1% to $10,341 from $9,654
and the rescission rate (the number of sales rescinded during the statutory
rescission period divided by the total number of sales) decreased to 17.1% from
18.8%. At Bentley Brook, the Company's average price per interval sold was
$7,550 and the rescission rate was 24.5%.
Resort Operations. Revenues from resort operations increased 30% to
$7.1 million in the 240-day period ended August 28, 1998, from $5.4 million in
the same period of 1997. The increase was primarily due to operating 12
additional units at the Bentley Brook Mountain Club and 71 additional units at
Long Wharf Resort.
Interest Income. Interest income increased 10% to $1.8 million in the
240-day period ended August 28, 1998, from $1.7 million in the same period of
1997. This increase resulted from a $2.9 million increase in net Consumer Loans,
due to the increase in timeshare interval sales.
Cost of Sales. Cost of sales, as a percentage of gross timeshare
interval sales, increased to 24% in the 240-day period ended August 28, 1998,
from 23% in the same period of 1997. The increase resulted from the Company's
construction of the Bentley Brook Mountain Club with high quality accommodations
and improved amenities.
Sales and Marketing. Sales and marketing costs, as a percentage of
gross timeshare interval sales, increased to 43% in the 240-day period ended
August 28, 1998 from 42% in the same period of 1997. The increase was due
primarily to the costs associated with opening a new sales office at the Bentley
Brook Mountain Club.
Bad Debt Expense. Eastern Resorts made a provision for doubtful
accounts equal to 5.3% of its timeshare interval sales for the 240-day period
ended August 28, 1998 as compared to 6.0% of timeshare interval sales in the
same period in 1997. The decrease reflects a continued improvement in the
collection process for notes receivable.
General and Administrative. General and administrative expenses for
Eastern Resorts increased to $1.3 million, or 7.4% of total revenues, for the
240-day period ended August 28, 1998, from $1.2 million, or 9.3% of total
revenues, for the same period in 1997. This decrease is attributable to
efficiencies realized from the Company's higher sales volume.
Interest expense. Interest expense rose to 72% of interest income in
the 240-day period ended August 28, 1998, from 57% in the same period in 1997
primarily due to borrowing to fund the completion of the 71-unit Long Wharf
Resort, Phase II, and the purchase of the 12-unit Bentley Brook Mountain Club.
1997 Compared to 1996
Total revenues increased 15% to $19.4 million in 1997 from $16.9
million in 1996, primarily due to a $1.6 million increase in timeshare interval
sales, a $0.6 million increase in revenues from resort operations, and a $0.3
million increase in interest income.
42
<PAGE>
Sales of Timeshare Intervals. The number of timeshare intervals sold
increased to 859 in 1997 from 839 in 1996, and the average sale price per
interval increased 20% to $9,873 from $8,211. The increase was partly a result
of the first full year of sales in the Company's new Long Wharf Resort in
Newport, Rhode Island. In addition, the Company's rescission rate decreased to
18.4% in 1997 from 22.3% in 1996.
Resort Operations. Revenues from resort operations increased 8% to
$8.1 million in 1997 from $7.5 million in 1996. This increase was due primarily
to the increased revenue generated from the opening of 11 units in Long Wharf
Resort, Phase I, in July 1996.
Interest Income. Interest income increased 11% to $2.6 million in 1997
from $2.3 million in 1996. This increase resulted from an increase in notes
receivable generated through the increased sales of timeshare intervals.
Cost of Sales. Cost of sales, as a percentage of gross timeshare
interval sales, increased to 22% in 1997 from 21% in 1996 due primarily to the
cost of completing Long Wharf Resort, Phase I.
Sales and Marketing. Sales and marketing costs decreased to 45% of
timeshare interval sales in 1997 from 50% in 1996, primarily due to a higher
average selling price and a higher percent of sales made relative to tours
given.
Bad Debt Expense. The Company made a provision for doubtful accounts
which decreased to 4.1% of timeshare interval sales in 1997 from 7.5% of
timeshare interval sales in 1996 due to the lower percentage of defaults which
the Company achieved through enhanced collections efforts.
General and Administrative. General and administrative expenses
decreased to 9.2% of total revenue in 1997 from 9.6% in 1996, due primarily to
increased efficiencies realized from higher sales volume.
Interest Expense. Interest expense increased to $1.4 million in 1997
from $1.3 million due to higher loan balances partially offset by lower interest
rates in 1996. As a percent of interest income, interest expense was 54% in 1996
and 1997.
Gain on Sale of Development Rights. The gain arose from a one-time
transaction in which the Company sold its rights to develop a timeshare project.
Liquidity and Capital Resources
The Company's business requires continuous access to short- and
long-term sources of debt financing. The Company's principal cash requirements
arise from its lending activities, the funding of timeshare construction, sales
and marketing, debt service payments and operating expenses. The Company's
primary sources of liquidity are borrowings under secured lines of credit and
cash flow from operations. In the future, the Company expects to raise
additional capital through increasing its borrowing from financial institutions
and issuing debt, equity or asset-backed securities in the capital markets.
The amounts of the A&D Line and the Consumer Receivables Line were
adjusted, due to the financing of the Eastern Resorts acquisition. Prior to this
transaction, the Company had made both an A&D Loan and a Hypothecation Loan to
Eastern Resorts, using funds made available to it through the 1997 Credit
Facility. At the closing of the Eastern Resorts acquisition, the Company repaid
all amounts outstanding under the 1997 Credit Facility which pertained to the
loans the Company had made to Eastern Resorts. Simultaneously, CSFBMC made the
Long Wharf Resort Loan to the Company in a total amount of approximately $9.7
million. The amount available to the Company to borrow under the 1997 Credit
Facility was decreased by a corresponding sum, which included a $6.0 million
decrease in the A&D Line, and a $3.6 million decrease in the Consumer
Receivables Line. The Company's obligations under the 1997 Credit Facility are
secured by the collateral assignment to CSFBMC of the security the Company
obtains from its borrowers. Such security consists of mortgages on the resort
properties financed by the Company as well as pledges of consumer receivables.
The 1997 Credit Facility contains covenants
43
<PAGE>
which specify maintenance of minimum collateralization, default rates with
respect to pledged receivables, as well as tangible and overall net worth
requirements.
On August 25, 1998, the Company also borrowed approximately $12.1
million under the Bridge Loan in order to finance the cash portion of the
purchase price for Eastern Resorts. As of September 30, 1998, the unpaid balance
of the Bridge Loan was approximately $8.7 million and was approximately $3.5
million as of December 15, 1998. The Bridge Loan and the Long Wharf Resort Loan
originally due on December 11, 1998 were amended to mature on June 11, 1999. In
connection with the extension, the Company gave up its option to extend the
draw-down period for an additional year under the 1997 Credit Facility. The
Company also agreed to repay at least $500,000 monthly of the aggregate
outstanding loan balances under the Bridge Loan and the Long Wharf Facility.
In September 1996, the Trustee submitted a motion pursuant to Federal
Rule of Bankruptcy Procedure 9019 for approval of the compromise and settlement
of the claims of certain lenders (the "Banks") against the Estate arising out of
certain lease-financing agreements pursuant to which the Banks made loans to the
Estate. The settlements, which were approved by the Bankruptcy Court, required
the Banks to make several new term loans to Resort Funding at favorable 0.5% to
4.0% interest rates (the "Settlement Loans"). The Settlement Loans have a
weighted average interest rate of 2.1% as of September 30, 1998. As of September
30, 1998, Resort Funding's total outstanding balance on the Settlement Loans was
approximately $22.8 million and the weighted average remaining maturity was 52
months. The Settlement Loans are non-callable and are collateralized in part by
notes receivable of the Company. Resort Funding is obligated to pay the Estate
an annual arrangement fee of 3% of the unpaid principal balance of the
Settlement Loans. Approximately $20 million of the proceeds of the Settlement
Loans was loaned to the Trustee to purchase the Banks' original loans to the
Estate. Resort Funding's loan to the Trustee bears interest at 10% per annum and
is nonrecourse to the Estate. The Trustee pledged certain lease payment
collateral to Resort Funding to secure the loan. As of September 30, 1998, the
Trustee had repaid all but $1.2 million on the note.
In December 1996, Resort Funding received approval of a bond exchange
agreement with its public bondholders. The outstanding bond principal balance
and accrued and unpaid interest of approximately $3.4 million were exchanged for
unsecured promissory notes which bear interest at 8% per annum payable monthly.
In accordance with the terms of the unsecured notes, the Company repaid
noteholders representing approximately $1.6 million of the total outstanding
principal amount in accordance with the terms of the notes. The remaining
noteholders extended the maturity of their notes for periods ranging from three
months to 24 months.
In February 1996, the Company issued 10,000 shares of the Series 2
Class A Redeemable Preferred Stock, and 3,000 shares of the Series 2 Cumulative
Convertible Preferred Stock to BFG in exchange for all of the stock of Resort
Funding. As of September 30, 1998, the undeclared and unpaid dividends amounted
to $150,000, and the declared and unpaid dividends amounted to $150,000.
The Series 2 Class A Redeemable Preferred Stock dividends are
cumulative and payable quarterly when declared by the Company at the rate of
$60.00 per annum per share. At the Company's option, such dividends may be paid
in common stock, which has been the Company's practice. No dividends on the
Company's Common Stock can be paid until such Series 2 Class A Preferred Stock
dividends are paid in full. The holder of Series 2 Class A Redeemable Preferred
Stock is entitled to the number of votes which represents 20% of the total
number of votes of the Company. The Company may at its option any time after
February 16, 2003, redeem the Series 2 Class A Redeemable Preferred Stock in
whole or in part at the $10.0 million liquidation value plus accrued and unpaid
dividends. The Trustee has obtained approval to convert the Series A Redeemable
Preferred stock into Common Stock, or to sell these shares for a price equal to
an equivalent number of shares of Common Stock at the net price of this Offering
at the time of the Offering.
In October 1997, the board of directors of the Company approved an
amendment to the Company's Articles of Incorporation, which increased the number
of authorized shares of Common Stock to 50,000,000 shares. On November 24, 1997,
the Trustee received Bankruptcy Court approval for the conversion, effective
October 30, 1997, of approximately $25 million owed to BFG through intercompany
notes into 4,645,596 shares of Common Stock at a price of $5.375 per share. The
October 1997 increase in authorized shares of Common Stock also resulted in the
44
<PAGE>
automatic conversion of the 3,000 shares of Series 2 Cumulative Convertible
Preferred Stock into 7,500,000 shares of Common Stock.
The Company is seeking to replace the 1997 Credit Facility and to
obtain additional financing to support its current operations and planned
growth. Substantially all of its assets are pledged as collateral on existing
loans. Risk factors affecting the Company, including credit quality and
liquidity, are set forth under "Risk Factors," and in the other sections of the
Prospectus referenced therein.
Credit Quality and Allowances for Loan Losses
The Company generally obtains security on all loans in its portfolio.
Purchased Receivables are secured by recourse claims against resort developers,
as well as by the obligation of the consumer and a pledge of the interval.
Nevertheless, a small percentage of the Company's receivables has historically
remained uncollectible.
The Company maintains an allowance for doubtful receivables, or
general reserves, at levels which, in the opinion of management, provide
adequately for current and estimated future losses on existing receivables.
Management evaluates the adequacy of the allowance on a quarterly basis by
examining past loss experience, current delinquencies, known and inherent risks
in the portfolio, adverse conditions that could affect the borrower's ability to
repay, the estimated value of the underlying collateral, and general economic
conditions and trends. Management also evaluates the extent to which specific
developer reserves and guarantees can be expected to absorb loan losses. Each
quarter, a provision for loan losses is recorded in an amount deemed sufficient
by management to maintain the allowance at adequate levels. The allowance for
doubtful receivables increased to $3.9 million as of September 30, 1998 compared
to $3.2 million as of December 31, 1997, as adjusted on a pro forma basis to
include $.8 million recorded by Eastern Resorts as an allowance for loan losses
as of December 31, 1997. The allowance ratio (the allowance for doubtful
receivables divided by the amount of the total portfolio of loans) as of
September 30, 1998 increased slightly to 2.5% from 2.1% at December 31, 1997 (as
adjusted on a pro forma basis). Receivables are charged against the allowance
when management believes that collectibility is unlikely. Because of
uncertainties in the estimation process, management's estimate of loan losses
inherent in the loan portfolio and related allowance may change unexpectedly and
may prove erroneous.
When the Company purchases consumer receivables from resort
developers, it establishes reserves to protect the Company from potential losses
associated with such receivables, in addition to obtaining recourse against
developers. The Company holds back 10% to 15% of the purchase price of Purchased
Receivables as a reserve to cover consumer defaults, in case the developer
should be unable to meet its obligation to repurchase any receivable. The
Company negotiates the amount of these specific reserves with developers based
upon various criteria, two of which are the financial strength of the developer
and the credit risk associated with the receivables being purchased. Specific
reserves amounted to $17.5 million, or 19.4% of the Company's balance of
Purchased Receivables, as of September 30, 1998, compared to $17.3 million, or
19.0% of Purchased Receivables, as of December 31, 1997.
In the event a consumer defaults on its obligations, the Company may
require the developer to repurchase the defaulted consumer receivable at an
amount equal to the present value of the unpaid principal and interest on the
note, net of the reserve held by the Company. Typically, the developer then has
the option to replace the defaulted consumer receivable with another of equal or
greater value or remit payment to the Company.
In the case of Hypothecation Loans, the Company typically advances to
the developer, at any given time, only 85% to 90% of the value of the
receivables pledged as collateral on the loan. Hypothecation Loans are generally
over-collateralized by at least 10% of the loan principal amount. At September
30, 1998, the Company's Hypothecation Loans had total overcollateralization of
approximately $3.6 million.
45
<PAGE>
Impact of Year 2000 on Computer Systems
The software and embedded microchips in certain computer systems
identify dates only by the last two digits of a year. For example, 1999 would be
coded as "99," 1998 as "98" and so on. The Year 2000 problem arises from the
inability of certain software programs and microchips to distinguish between
dates in the year 2000 and dates in the year 1900. As a result, a date entered
"00" may be read as 1900 instead of 2000. If uncorrected, functions using these
systems would not work properly in the year 2000. Problems which may occur as a
result of uncorrected software programs or microchips include system failures,
miscalculations or errors causing disruptions of operations.
Beginning in 1997, the Company undertook to assess its Year 2000
readiness by identifying those computer systems used by the Company which may
not be Year 2000 compliant. The Company has also begun to assess the Year 2000
readiness of other entities with whom it has a material relationship.
Risks
Resort Funding. Resort Funding relies more on information systems for
servicing its loans than for any other individual function.
The computer software and hardware platform for Resort Funding's loan
servicing program is owned by TPC. The platform is not yet Year 2000 compliant.
The Company has been working closely with TPC's programmers and management
information systems personnel to monitor TPC's progress in modifying its
systems. The Company understands that as of September 30, 1998, TPC's
remediation efforts were 25% complete, and that approximately 20% of the
platform had been satisfactorily tested. The Company is advised that TPC
anticipates completing its remediation program and testing all systems by June
1999. However, there can be no assurance that TPC's software and hardware
platform will be Year 2000 compliant by December 31, 1999. There also can be no
assurance that TPC will continue to make the servicing platform available to the
Company though such platform is available for purchase from the Estate. There is
no assurance that the Company will elect to acquire the servicing platform from
TPC, or that if it seeks to do so that it will be successful. The Company has
previously used unaffiliated third parties on occasion to perform its loan
servicing. Consequently, the Company believes it will be able to make
arrangements with a third party to perform such services if necessary, but such
arrangements are currently not in place. As a contingency, the Company expects
to identify potential parties to perform its loan servicing by the end of the
first quarter of 1999 in the event that, in the Company's view, TPC's
remediation efforts have not progressed sufficiently to ensure timely Year 2000
compliance.
Resort Funding's own computer systems consist primarily of networked
personal computers ("PCs") used for accounting and word processing, which Resort
Funding recently acquired in the ordinary course of business. Resort Funding's
PCs and the software they use are substantially Year 2000 compliant.
Eastern Resorts. Eastern Resorts uses a third-party database server as
its primary software system for resort reservations, timeshare sales, and
homeowners' association receivables. The version of the software used by Eastern
Resorts is not Year 2000 compliant. However, an updated version of the system is
currently available at no cost. The updated version is Year 2000 compliant.
Eastern Resorts expects to have the upgraded version installed and tested by the
end of March 1999. The minimum system requirements for the upgraded software are
such that Eastern Resorts also anticipates replacing much of its existing
hardware and software in the ordinary course of business, which is not expected
to involve a material cost. Any such replacements will be Year 2000 compliant.
The computer systems used by Eastern Resorts for word processing are
not Year 2000 compliant. Eastern Resorts expects to have all systems corrected,
tested and functional, or otherwise replaced in the ordinary course of business,
by September 1999. The Company does not anticipate that the cost of any
corrections or replacements will be material. However, there can be no assurance
that the actual cost to make such corrections or acquire replacements will not
exceed the Company's expectations, which may have an adverse effect on the
Company's financial performance.
46
<PAGE>
Third Parties. The Company's Year 2000 compliance program also
includes assessing the readiness of the Company's lenders, borrowers, major
vendors, suppliers and any other third parties with whom the Company has
significant dealings, who may be impacted by the Year 2000 problem. The extent
to which such parties have not modified their systems to address the Year 2000
issues may have a significant, adverse impact on the operations or financial
performance of the Company. The Company has initiated contact with such third
parties in order to determine whether their systems are Year 2000 compliant and,
if not, what steps they have taken to address the problem. The Company has not
yet received sufficient confirmation from all of these parties in order to
assess the likelihood that all such parties will achieve Year 2000 compliance.
If the Company determines that a response to an inquiry is either insufficient
or otherwise indicated that the third-party will not achieve Year 2000
compliance, the Company may follow up with personal contact with the third-party
and, if necessary, an on-site audit or testing of such party's systems. The
Company anticipates finalizing it assessment of third parties' Year 2000
readiness by the first quarter of 1999. At that time, the Company will determine
whether to implement contingency plans to replace or supplement the services
currently provided by third parties. There can be no assurance that such third
parties, including borrowers, will be able to timely correct their Year 2000
problems, and the failure to do so could have a material adverse effect on the
Company's results of operations, financial condition and liquidity.
Cost
Since Resort Funding utilizes the computer software and hardware
platform of a third party, the cost to the Company for addressing and correcting
Year 2000 issues has not been material. As of October 31, 1998, the Company
estimates that it has spent $25,000 on Year 2000 remediation. Management does
not anticipate that the Company will incur any significant additional expense in
correcting its systems. However, there can be no assurance that the Company's
expenditures will not exceed its estimates. In the event that the Company is
forced to identify and contract with parties to replace existing suppliers and
vendors, such as TPC, the cost of such replacement may have a material adverse
effect on the Company's financial condition and results. Further, if the Company
is unable to perform on its contractual obligations to its lenders and borrowers
as a result of its own or an important third-party's failure to achieve Year
2000 compliance, the potential cost and liability for such failure may have a
material adverse effect on the Company's results of operations, financial
condition and liquidity.
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).
47
<PAGE>
THE TIMESHARE INDUSTRY
Worldwide Market
The timeshare industry originated in France during the late 1960s, and
has achieved significant growth in Europe and other non-American markets. With
close to 5,000 resorts worldwide and global sales estimated at nearly $6.2
billion, timeshare development is now the fastest growing segment of the global
travel and tourism industry. Timeshare resorts are located in 81 countries and
an estimated 4.5 million timeshare interval owners reside in 174 different
countries. The popularity of timeshares around the world has been fostered by
vacation exchange programs, through which owners can swap intervals at their
resort for those at another destination.
WORLDWIDE TIMESHARE INTERVAL SALES VOLUME
[GRAPHIC OMITTED]
This bar graph shows the total dollar amount of timeshare interval sales
worldwide for each year from 1980 through 1997. The total for each year is
as follows:
1980 = $490 million; 1981 = $965 million; 1982 = 1,165 million; 1983 = 1,340
million; 1984 = 1,735 million; 1985 = 1,580 million; 1986 = 1,610 million;
1987 = 1,940 million; 1988 = 2,390 million; 1989 = 2,970 million; 1990 =
3,240 million; 1991 = 3,740 million; 1992 = 4,250 million; 1993 = 4,505
million; 1994 = 4,760 million; 1995 = 5,200 million; 1996 = 5,700 million;
and 1997 = 6,200 million.
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<PAGE>
U.S. Market
In 1997, approximately 260,000 timeshare intervals were sold in the
United States at an average price of $10,500, resulting in a total sales volume
of $2.7 billion. This compares to a 1996 sales volume of $2.2 billion generated
through the sale of 218,000 intervals at an average price of $10,000. There are
now over 1,204 domestic timeshare resorts with 64,300 units in the aggregate.
U.S. TIMESHARE INTERVAL SALES VOLUME
[GRAPHIC OMITTED]
This bar graph shows the total dollar amount of timeshare interval sales in
the United States for each year from 1992 through 1997. The total for each
year is as follows:
1992 = 1,300 million; 1993 = 1,470 million; 1994 = 1,700 million; 1995 =
1,970 million; 1996 = 2,180 million; and 1997 = 2,720 million.
49
<PAGE>
Industry Growth Drivers
The following factors have played substantial roles in accelerating the growth
and development of the timeshare industry in the United States.
o Favorable demographic trends. Population of 45- to 55-year olds will
grow by approximately 33% over the next ten years. This age group
will account for approximately 40% of all households over the next
decade.
o Untapped market. Overall timeshare penetration is only 4.8% of U.S.
households with annual income above $50,000.
o Improving range of products. Companies have developed a number of
variations on the standard timeshare interval in recent years,
including points programs and other "club" arrangements, floating
weeks, biennial weeks and sampler weeks (one-time vacation packages),
all geared to offer the consumer greater flexibility of use and more
flexible price points.
o Branding. The entrance of well-known companies such as Marriott and
Disney has been a catalyst in improving the popular acceptance of
timesharing.
o Improved exchange options. Exchange networks have become more
user-friendly and create "liquidity." Owners can exchange the use
periods associated with their ownership weeks for use periods
associated with other weeks at other timeshare resorts around the
world affiliated with external exchange programs. External exchange
programs are coordinated by two major exchange networks: RCI, which
has a membership base of over 2 million, and Interval International,
which has a membership base of over 900,000.
o Consolidation. The timeshare industry remains fragmented, with over
200 U.S. developers and no single firm controlling more than 10% of
the market.
o Regulation. ARDA has developed a "Code of Standards & Ethics"
delineating acceptable standards of conduct for members and
elucidating general requirements, solicitation protocols, sales
procedures, and stipulations for administrative enforcement of this
Code.
50
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BUSINESS
Overview
Equivest finances timeshare projects throughout the United States and
in selected foreign markets, and is a leading developer and operator of
timeshare resorts which are located in New England. Since 1991, the Company has
provided financing for the acquisition and development of timeshare resorts, as
well as for consumer receivables resulting from the sale of timeshare intervals.
As of September 30, 1998, the Company's loan portfolio had an outstanding
balance of approximately $156.6 million. In August 1998, the Company acquired
Eastern Resorts, which operates six timeshare resorts in and around Newport,
Rhode Island and one resort in the Berkshire mountains of western Massachusetts.
The Company is focused on increasing shareholder value by growing its
existing timeshare finance business and further diversifying its timeshare
resort development business.
The Company believes that combining its nationwide timeshare finance
operations with Eastern Resorts, a major regional timeshare resort developer,
provides the Company with significant growth capabilities. The financing
business should continue to lead to attractive resort acquisition opportunities,
as it did with Eastern Resorts, which was a customer of the Company prior to its
acquisition. Likewise, acquisitions of successful developers will contribute
significantly to the growth of the Company's loan portfolio.
The Company believes it has positioned itself well to take advantage of
the favorable growth trends in the U.S. timeshare market, as well as the broader
leisure market. In 1997, the U.S. timeshare industry recorded total timeshare
interval sales of approximately $2.7 billion, which represents a growth of
nearly 25% over 1996 and a compound annual growth rate of approximately 16% over
the past six years. Overall, worldwide timeshare interval sales grew at a
compound annual growth rate of approximately 16% since 1980.
Growth Strategy
The Company's goal is to increase shareholder value through growth and
diversification in the timeshare industry, and potentially in the broader
leisure and finance markets. As part of that objective, the Company seeks to
become a full-service lender and developer in the timeshare industry. Key
elements of the Company's current growth strategy include the following:
o Increase Consumer Financing portfolio. The Company intends to increase
its Consumer Financing business by increasing its originations of
Consumer Loans and A&D Loans. The Company generally expects that each
$1,000 invested in its own resorts or in A&D Loans to third-party
developers will generate $3,000 to $4,000 in Consumer Financing. The
Company believes it can increase its volume of A&D Loans, without
lowering the interest rate it charges, by continuing to target
high-quality, small to midsize development projects, and by expanding
its financing activities to somewhat larger development projects that
satisfy the Company's underwriting criteria. To support this growth,
the Company intends to expand its capital base through increased
borrowings from financial institutions and the issuance of debt,
equity or asset-backed securities in the capital markets.
o Develop and acquire additional resorts. The Company intends to
construct or acquire additional resorts in New England and in other
locations as opportunities arise. The Company seeks project sites in
desirable locations that are within driving distance of areas with
favorable demographics. The Company believes that its experience in
resort development, knowledge of the timeshare industry, and its
market presence will help it to accomplish this strategy.
o Reduce borrowing costs. By improving its arrangements with its lenders
and its internal cash flow, the Company has reduced the weighted
average interest rate it pays on its debt from 9.6% to 7.1%
51
<PAGE>
between September 30, 1996 and September 30, 1998. As the Company
grows, its borrowing arrangements and internal cash flow will continue
to improve. This will allow the Company to compete even more
effectively for new development projects and against larger lenders.
o Increase sales and marketing efforts. The Company uses extensive
marketing programs to inform potential timeshare interval buyers about
its resorts. By adding staff to reinforce its marketing efforts in the
markets in which it currently operates, and expanding its efforts into
new markets, the Company believes it can sell more timeshare intervals
per year than it has in the past. In addition, the Company will
continue to expand its internal marketing staff, which concentrates on
selling additional timeshare intervals to the Company's existing
membership base. Approximately 11% of the Company's existing customers
owned multiple timeshare intervals at a Company resort at September
30, 1998.
o Explore potential opportunities in broader leisure and finance
markets. We are continually reviewing potential opportunities to
expand into the broader leisure and finance markets, particularly
those for which its existing businesses provide relevant experience
and expertise. There is no assurance that such opportunities will be
identified or, if the Company finds them, that they will be
successfully undertaken.
Competitive Strengths
The Company believes that the following qualities provide it with
certain competitive strengths and operating efficiencies.
o Exceptional customer service to developers. The Company provides
exceptional customer service to existing and potential borrowers,
including:
o quick credit decisions;
o flexible transaction structuring;
o comprehensive loan servicing; and
o direct access to senior management.
o Proven underwriting criteria. The Company believes it can maintain low
loan loss ratios as its loan portfolio grows by continuing to fund
projects in attractive locations with favorable economic and
demographic characteristics, as well as by broadening its analytical
capabilities. The Company's ability to assess new development projects
has been enhanced by its acquisition of Eastern Resorts.
o Low marketing costs. The Company has been able to stabilize marketing
costs through various means. By developing resorts in desirable
tourist destinations, typically within driving distance of its
customers, the Company can invite potential buyers to tour its resorts
without relying on costly gift programs, such as subsidized airline
tickets and lodging. Also, the Company expects its marketing costs, as
a percentage of timeshare interval sales, to benefit as a result of
the expansion of its internal marketing efforts.
o In-house capabilities. The Company has developed significant in-house
operational capabilities. This enables the Company to maintain greater
control over all phases of its financing and development operations,
and to improve its customer service while reducing overall costs. For
example, the Company utilizes internal personnel to supervise advances
on and servicing of both
52
<PAGE>
A&D Loans and its Consumer Financing portfolio. In addition, the
Company has in-house marketing, sales, legal, accounting, financing,
development, and property management capabilities.
o Experienced management team. The Company has experienced management
and personnel in both its financing and development businesses. The
Company's Chairman, Chief Executive Officer and President, Richard C.
Breeden, has overseen the restructuring of Equivest since 1996 and was
responsible for our combination with Eastern Resorts. In addition, he
is a former senior economic advisor to President Bush, former Chairman
of the United States Securities and Exchange Commission and former
chairman of the worldwide financial services practice of Coopers &
Lybrand LLP. Thomas J. Hamel, who leads the Company's resort financing
business, has 12 years of experience in financing timeshare resort
developers and is well-known in the timeshare sector nationally. R.
Perry Harris, who leads the Company's timeshare development efforts,
has been in the timeshare industry since 1981 and has earned
recognition in the course of developing and marketing seven resorts in
New England. Moreover, the top five executives of Eastern Resorts have
an average of over 14 years experience in the timeshare industry and
have been with Eastern Resorts for an average of 12 years.
Finance Operations
Overview
Historically, the Company has concentrated on funding small to midsize
timeshare projects (involving loans ranging from $1 million to $10 million).
Since 1991, the Company has provided approximately $350 million in financing for
approximately 70 projects in the United States and the Caribbean, one project in
Canada and two in Ireland. The Company intends to use its extensive experience
in the timeshare industry to expand into the financing of larger development
projects.
The Company's focus on the timeshare industry, broad market presence
and extensive experience have provided it with many advantages as compared to
less specialized financing providers, including:
o Solid, long-standing relationships with many timeshare industry
developers;
o A comprehensive understanding of timeshare development and financing;
and
o A knowledgeable and creative management team with the ability to
respond quickly to proposals from developers, as well as an effective
and experienced loan servicing staff.
As of September 30, 1998, the Company's total loan portfolio had an
outstanding balance of $156.6 million, which included $37.3 million (24%) of A&D
Loans, $116.3 million (74%) of Consumer Financing, and $3.0 million (2%) of
other loans.
53
<PAGE>
Loan Portfolio Composition
(Dollars in thousands)
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
1995 1996 1997 1998(1)
---- ---- ---- -------
<S> <C> <C> <C> <C>
A&D Loans........................................... $ 32,838 $ 31,475 $ 39,390 $ 37,258
Purchased Receivables............................... 51,820 66,201 91,102 90,163
Hypothecation Loans................................. -- 1,570 5,275 9,050
Consumer Loans...................................... -- -- -- 17,127
Other Loans......................................... 6,605 3,447 763 3,045
----------- ---------- ----------- ----------
Total Loans Outstanding............................. $ 91,263 $102,693 $136,530 $156,643
</TABLE>
- --------------
(1) Does not include loans between Resort Funding and Eastern Resorts
eliminated in consolidation.
The following table sets forth certain key characteristics of the
Company's loan portfolio as of September 30, 1998.
Characteristics of the Loan Portfolio
as of September 30, 1998(1)
(Dollars in thousands)
<TABLE>
<CAPTION>
Total Weighted Weighted
Principal Average Average Number of Number Number
Amount Remaining Interest Developers of of
Outstanding Maturity Rate Financed Resorts Loans
----------- -------- ---- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
A&D Loans.................... $ 37,258 4.0 12.0% 14 20 20
Purchased Receivables........ 90,163 5.1 13.3 38 48 17,066
Hypothecation Loans.......... 9,050 3.3 10.9 7 9 8(2)
Consumer Loans............... 17,127 4.9 16.5 -- 8 2,976
Other Loans.................. 3,045 1.6 10.2 10 10 10
----------
Total Outstanding Loans...... $156,643
========
</TABLE>
- --------------------
(1) Does not include loans between Resort Funding and Eastern Resorts
eliminated in consolidation.
(2) Includes 2,380 underlying Consumer Loans.
Note: Weighted average remaining maturity in years.
Loan Product Overview
The Company makes A&D Loans to timeshare resort developers to acquire
land and construct a resort, or to acquire a hotel, club or other previously
developed property for conversion into a timeshare resort. In addition to A&D
Loans, the Company provides financing both indirectly and directly to the
consumers who purchase timeshare intervals. Consumers typically purchase such
intervals with a 10% down payment, and the developer makes a Consumer Loan to
the consumer for the remaining 90% of the purchase price. Through its timeshare
development operations, the Company directly generates Consumer Loans. The
Company's financing operations indirectly fund consumer purchases of timeshare
intervals by purchasing developers' Consumer Loans or making loans to developers
secured by their Consumer Loans. The cost and tax benefits of Hypothecation
Loans are generally more advantageous to developers, although Purchased
Receivables generally result in greater upfront cash. In the case of
Hypothecation Loans and Purchased Receivables, the Company has direct recourse
against the developer and the consumers whose obligations underlie these loans.
54
<PAGE>
A&D Loans. The first loan that developers typically require in the
process of developing a timeshare resort is an A&D Loan. A&D Loans are generally
collateralized by a first mortgage on the property with full recourse to the
developer. In addition, the Company typically obtains personal or corporate
guarantees from the developer. The Company does not normally make an A&D Loan
without obtaining the exclusive right to provide financing for all of the
Consumer Loans resulting from the resort project. The A&D Loan is the earliest
stage of developer financing, and a significant expertise is required by the
lender in order to evaluate a project properly. The Company has developed an
expertise in making A&D Loans since it began offering this product in 1994. The
Company has found that it is becoming more important to provide a project's A&D
Loan in order to finance the receivables generated by such project. As a
developer makes sales of timeshare intervals, a portion of the proceeds from
each sale is paid to the Company and applied to the A&D Loan ("release
payment").
Since 1991, the Company has financed approximately $100 million of A&D
Loans to over 30 projects. Over the past two years the Company has reduced the
cost of funding its A&D Loans, thereby increasing its rate of profitability. As
of September 30, 1996, the Company had $31.0 million in outstanding A&D Loans
with a weighted average interest rate of 12.9%. The average cost of funding such
loans was 10.9%, resulting in a positive spread of 2.0%. By September 30, 1998,
the Company had a total A&D Loan portfolio of $37.3 million, which earned a
weighted average interest rate of 12.0%. The average cost of funding such loans
was 8.3%, resulting in a positive spread of 3.7%.
A&D LOAN PORTFOLIO
[GRAPHIC OMITTED]
This bar graph shows the dollar amount outstanding of the Company's A&D Loan
portfolio as: $32.8 million as of 12/31/95; $31.5 million as of 12/31/96;
$39.4 million as of 12/31/97; and $37.3 million as of 09/30/98.
55
<PAGE>
The following table sets forth information about the Company's A&D
Loans by size as of September 30, 1998:
A&D Loan Portfolio Distribution
as of September 30, 1998(1)
(Dollars in thousands)
<TABLE>
<CAPTION>
Percentage
Average of Total
Number of Aggregate Principal A&D Loan
Loans (2) Principal Amount Amount Portfolio
--------- ---------------- ------ ---------
<S> <C> <C> <C> <C>
Less than $1 million......... 8 $ 4,665 $ 583 12.5%
$1-$2 million................ 5 8,473 1,695 22.7
$2-$3 million................ 4 9,040 2,260 24.3
$3-$4 million................ 1 3,435 3,435 9.2
$5 million or more........... 2 11,645 5,823 31.3
--------- ---------- ------- ------
Total A&D Loans.............. 20 $37,258 $1,863 100.0%
========== ========== ====== =====
</TABLE>
- ------------------
(1) Does not include loans between Resort Funding and Eastern Resorts
eliminated in consolidation. (2) In general, the Company makes one A&D Loan
for each resort being financed.
Consumer Financing. The Company considers its Consumer Financing
portfolio, which consists of its Consumer Loans, together with Hypothecation
Loans and Purchased Receivables, the most significant aspect of its financing
business. After being adjusted for defaults, the yield on the Company's Consumer
Financing portfolio is significantly higher than that on its A&D Loan portfolio.
At September 30, 1998, the Company's Consumer Financing portfolio
totaled to $116.3 million with a weighted average interest rate of 13.6%. The
portfolio included $90.2 million (77%) of Purchased Receivables, $9.0 million
(8%) of Hypothecation Loans and $17.1 million (15%) of Consumer Loans.
CONSUMER FINANCING PORTFOLIO
[GRAPHIC OMITTED]
This bar graph shows the dollar amount outstanding of the Company's Consumer
Financing portfolio as: $51.8 million as of 12/31/95; $67.8 million as of
12/31/96; $96.4 million as of 12/31/97; and $116.3 million as of 09/30/98
(which includes $17.1 million of Consumer Loans held by Eastern Resorts).
56
<PAGE>
Purchased Receivables. When the Company purchases a developer's
Consumer Loans, the consumers' obligations are assigned to the Company and the
consumers become obligated directly to the Company. The Company then has
recourse directly against the consumers and has the timeshare interval itself as
security if the consumers fail to pay. The Company also has the right to require
the developer to repurchase a particular Consumer Loan if the consumer's payment
is 90 days past due. To date the Company has not needed to take action against
consumers directly. As of September 30, 1998, the Company's Purchased
Receivables portfolio had a weighted average interest rate of 13.3%.
Timeshare loans by developers to consumers typically have a seven-year
maturity and are payable monthly. In a Purchased Receivables transaction, the
Company negotiates an interest rate, which includes servicing fees, with the
developer, and then calculates the present value of the monthly payments that
the developer is receiving from the consumer at that interest rate. The Company
then advances to the developer an amount that is typically between 85% and 90%
of this present value (the remainder of the value being called the holdback). As
the principal balance of a Purchased Receivable decreases, the holdback
increases as a percentage of the principal balance outstanding. The holdback is
not paid to the developer until the developer's obligation to the Company is
paid in full. An example of this process is as follows:
o A consumer enters into an agreement with a developer to
finance $10,000 at 18% over seven years, which results in 84
monthly payments of approximately $210;
o The Company agrees to purchase the loan from the developer at
a 13% interest rate;
o The present value of the monthly payments of $210 at 13% is
approximately $11,500, of which the Company advances 85%, or
approximately $9,800 to the developer, and does not advance
the remaining 15% holdback, or approximately $1,700;
o The Company receives and retains 84 payments of $210; and
o The 15% holdback is paid to the developer at maturity in
month 84, or when the Consumer Loan is paid in full.
Hypothecation Loans. As an alternative to purchasing Consumer Loans
from the developer, the Company may furnish the developer with a loan,
collateralized by a pool of the developer's Consumer Loans with respect to a
particular resort. The Company negotiates an interest rate which excludes
servicing and commitment fees. The developer assigns Consumer Loans with respect
to a particular resort to the Company as collateral and, by virtue of such
assignment, the Company has the right to service these Consumer Loans in its own
name. Thus, the Company collects payments from consumers on their obligations,
and these payments are applied towards the developer's obligations under the
Hypothecation Loan. The developer typically may borrow an amount up to 85% to
90% of the value of the pool of Consumer Loans pledged as collateral. If a
Consumer Loan becomes 60 days past due, it becomes ineligible as collateral. In
this case, the developer may be required either to replace that Consumer Loan
with a Consumer Loan on which payments are current, or refund to the Company the
amount owed on that particular Consumer Loan or do nothing if the Hypothecation
Loan has sufficient overcollateralization. The Company has full recourse against
the developer with respect to a Hypothecation Loan, and has the timeshare
interval as security. To date the Company has not needed to take action against
consumers directly. As of September 30, 1998, the Company's Hypothecation Loan
portfolio had a weighted average interest rate of 10.9%. An example of a
Hypothecation Loan is as follows:
o A consumer enters into an agreement with a developer to
finance $10,000 at 18% over seven years, which results in 84
monthly payments of approximately $210;
o The Company agrees to lend the developer 85%, or $8,500, for
each Consumer Loan assigned as collateral to the Company
while retaining the entire $10,000 value of each Consumer
Loan as collateral; and
57
<PAGE>
o When the Company has collected the $8,500 advanced, together
with accrued interest and fees, it passes through the
remaining payments to the developer.
Consumer Loans. Once an individual decides to purchase a timeshare
interval, a minimum deposit of 10% of the purchase price is generally required,
while the balance is typically financed through the developer. The loan to the
consumer is secured by a first mortgage on the timeshare interval. The developer
bears the risk of defaults on these promissory notes. On its own timeshare
interval sales, the Company requires a minimum 10% down payment with the
remainder typically financed over seven years, at a 16.5% interest rate. The
Company has historically provided financing for approximately 75% of its
customers, while the other 25% pay the full purchase price at the time of
purchase.
Consumer Financing is the most important aspect of the Company's
financing business. With respect to Hypothecation Loans and Purchased
Receivables, the Company has recourse against the developer. In addition, on all
of its Consumer Loans, the Company has recourse against each of the consumers,
and has the right to foreclose on each of the timeshare intervals associated
with each Consumer Loan, which interval can be re-sold by the Company. In
addition the Company can and typically does chargeback the defaulted loan to the
developer, who must replace it with cash or a new performing contract. The
Company has full recourse to the developer to enforce these commitments. In the
case of an A&D Loan, the Company has recourse against the developer and the
project and it can foreclose on a potentially uncompleted resort, which may be
more difficult to realize a recovery on. For these reasons the Company believes
its Consumer Financing portfolio offers better risk-adjusted returns than its
A&D Loan portfolio.
Underwriting Criteria and Funding Approval Process
In reviewing potential loans to developers, the Company typically
evaluates the following:
o Developer experience. The Company reviews the developer's general
business experience as well as its performance with other resort
projects.
o Financial condition. The Company examines the developer's
financial condition in order to assess its ability to meet its
commitments.
o Resort location. The Company believes that location can mean the
success or failure of a resort, and therefore considers such
factors as demographic characteristics, area attractions and the
success or failure of other timeshare resorts in the market.
o Sales and marketing. The Company evaluates the competitive
environment in order to determine the feasibility of the
financial projections of the project, including the cost and
availability of tour flow.
o Resort property. The Company believes that the quality and
amenities of the resort and the condition of the property are
critical to the success of the developer's sales efforts.
In addition to the criteria discussed above, the Company also conducts
a site visit of the property. The Company's decision to provide funding to a
developer is typically conditioned upon the satisfactory completion of due
diligence.
Loan Servicing, Collections and Delinquencies
Servicing Consumer Loans, including collection activities, is an
important part of the Company's finance business. The Company services nearly
all of the Consumer Loans in its Consumer Financing portfolio. Servicing
Consumer Loans provides the Company with direct access to consumers and prompt
feedback from those consumers
58
<PAGE>
regarding resort conditions and developer performance. Also, in the event of a
consumer default, it provides the Company the ability to exercise expeditiously
its remedies against the developer.
59
<PAGE>
Overcollateralization Chart
(Dollars in thousands)
<TABLE>
<CAPTION>
As of
September 30, 1998
without with
As of December 31, Eastern Eastern
1995 1996 1997 Resorts Resorts
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
A&D Loans past due ............................. -- $ 5,315 $ 9,485 $ 3,435 $ 3,435
Consumer Financing past due .................... $ 1,524 3,286 1,458 983 1,683
------- -------- -------- -------- --------
Total past due loans ....................... $ 1,524 $ 8,601 $ 10,943 $ 4,418 $ 5,118
Total loans .................................... $91,263 $102,693 $136,530 $139,516 $156,643
Total past due loans as % of 1.7% 8.4% 8.0% 3.2% 3.3%
total loans ................................
General reserves ............................... $ 1,800 $ 1,979 $ 2,442 $ 3,017 $ 3,881
Specific reserves .............................. 9,126 12,386 17,320 17,476 17,476
Overcollateralization .......................... -- 199 1,006 3,606 3,606
------- -------- -------- -------- --------
Total reserves and
overcollateralization(1) ................. $10,926 $ 14,564 $ 20,768 $ 24,099 $ 24,963
Total reserves and
overcollateralization as %
of total loans ............................. 12.0% 14.2% 15.2% 17.3% 15.9%
Chargebacks .................................... 3,389 6,066 6,376 4,339 N/A
Chargebacks as % of
Consumer Financing(2) ...................... 6.5% 9.0% 6.6% 4.3% N/A
</TABLE>
- ------------------------
(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.
90 Day Past Due Loans for Resort Funding
(Dollars in thousands)
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
1995 1996 1997 1998(1)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Total loan portfolio balance.................. $91,263 $102,693 $136,530 $139,516
Principal amount of past due loans:
A&D Loans..................................... -- 5,315 $9,485 $3,435
Purchased Receivables......................... 1,524 3,286 1,458 983
Hypothecation Loans........................... -- -- -- --
Other Loans................................... -- -- -- --
-------- -------- --------- -------
Total principal amount of past due loans...... $1,524 $8,601 $10,943 $4,418
Past due loans as a percentage of total
principal amount of loans outstanding....... 1.7% 8.4% 8.0% 3.2%
</TABLE>
- ------------------------
(1) Does not include Eastern Resorts' delinquency portfolio.
60
<PAGE>
60 Day Past Due Loans for Eastern Resorts
(Dollars in thousands)
<TABLE>
<CAPTION>
As of
As of December 31, September 30, 1998
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Principal amount of past due loans................ $414 $485 $112
Past due loans as a percentage of
total principal amount of loans outstanding....... 3.2% 3.3% 0.7%
</TABLE>
Changes in Allowance for Doubtful
Accounts of Resort Funding
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1995(3) 1996(3) 1997 1998(1)
------- ------- ---- -------
($ in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts,
beginning of year..................... $1,006 $1,800 $1,979 $2,442
Provision for loan losses............... 794 179 925 585
Charges to allowance for doubtful
accounts.............................. -- -- (601) (10)
Charges applied against specific
developer holdbacks(2)................ -- -- 139 --
-------- -------- -------- --------
Allowance for doubtful accounts, $1,800 $1,979 $2,442 $3,017
end of year........................... ======== ======== ======== ========
</TABLE>
- ----------------
(1) Does not include Eastern Resorts' allowance for doubtful accounts, which
had a balance of $864,000 as of September 30, 1998.
(2) 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.
(3) 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 $602,000
and $0 for 1995 and 1996, respectively, and loan losses of $842,000 and
$50,000 for 1995 and 1996, respectively. These amounts pertain to the
insurance premium finance business discontinued in 1995.
Changes in Allowance for Doubtful
Accounts of Eastern Resorts
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
As of December 31, September 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts, $604,454 $651,126 $731,906
beginning of year...................
Provision for loan losses............. 532,701 353,204 531,000
Charges to allowance for doubtful
accounts............................ (486,029) (272,424) (398,047)
Allowance for doubtful accounts, $651,126 $731,906 $864,859
end of year......................... ======== ======== ========
</TABLE>
61
<PAGE>
Client Base
Historically, the Company has targeted developers of small to midsize
resort projects. Since such projects require modest initial financing, the
Company believes that no individual loan is critical to the Company's success.
As of September 30, 1998, only one developer accounted for more than 10% of the
Company's outstanding loan portfolio (ILX, which accounted for 16%). As of
September 30, 1998, Resort Funding had advanced to Eastern Resorts $9.3 million
in Hypothecation Loans and $9.7 million in A&D Loans.
Resort Development Operations
Overview
The Company entered the resort development business in August 1998,
when, as part of its strategy for diversification and growth, it acquired
Eastern Resorts. Eastern Resorts, either on its own or through its predecessor,
has been in the resort development business since 1981. It operates six resorts
in and around Newport, Rhode Island and one resort in the Berkshire mountains of
western Massachusetts. As of September 30, 1998, Eastern Resorts operated
resorts containing 325 units, representing 16,838 timeshare intervals, of which
4,363 remained unsold. The Company currently has under development 174
additional units, representing 9,048 intervals. In the first nine months of
1998, the Company sold approximately 1,000 timeshare intervals at an average
price of $9,619.
The Company's resort operations include:
o Marketing and selling timeshare intervals in its resorts;
o Providing financing to consumers who purchase the Company's
timeshare intervals;
o Managing its resorts on behalf of homeowner associations;
o Owning and managing two restaurants at its resorts;
o Renting unoccupied timeshare units on an overnight basis; and
o Acquiring property and constructing or converting timeshare
resorts.
Newport is one of the principal destination resorts in the
northeastern United States. Newport is noteworthy for its jazz and folk music
festivals, sailing, the historic summer mansions of leading American families
and many other attractions. The Bentley Brook Mountain Club is a major new
project at the Jiminy Peak ski resort in the Berkshire mountains of
Massachusetts. The Bentley Brook Mountain Club, which has direct access to ski
slopes and is a short drive from the summer music festival at Tanglewood, offers
a broad range of year-round outdoor activities. According to local visitors
bureaus, Newport hosts approximately 3.75 million visitors, and Berkshire County
hosts approximately 2.25 million visitors each year.
The Company's affiliation with RCI allows the Company's customers to
exchange their timeshare interval for one in over 3,200 other resorts around the
world at any time of the year. According to ARDA, the ability to exchange
timeshare intervals through a worldwide network such as RCI is an important
factor a customer considers when deciding to purchase a timeshare interval. Each
year, a substantial percentage of the Company's owners takes advantage of the
exchange opportunity.
All of the Company's resorts are designed to furnish customers with a
high-quality vacation experience and offer many leisure amenities. The Company's
resorts are situated in desirable locations that are accessible by car from
Boston and the greater New York City area and other parts of the Northeast
region. The Company estimates that more than 11 million households are within
driving distance (200 miles) of its properties. The percentage of
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these households having an annual income in excess of $50,000 exceeds the
national average.
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Resort Summary
The following table sets forth certain information regarding each of
the Company's resorts at September 30, 1998.
Overview of Resorts as of September 30, 1998
<TABLE>
<CAPTION>
Completion Total Intervals Intervals
Date Total Units Intervals Sold for Sale
---- ----------- --------- ---- --------
<S> <C> <C> <C> <C> <C>
Resorts in Operation
Inn on the Harbor............................. 1983 58 3,016 2,921 95
Newport Overlook.............................. 1985 19 988 938 50
Inn on Long Wharf............................. 1985 40 2,080 1,997 83
Bay Voyage Inn................................ 1988 32 1,664 1,486 178
Newport Onshore............................... 1985 62 3,162 3,081 81
Long Wharf Resort, Phase I(1)................. 1996 11 572 508 64
Long Wharf Resort, Phase II(1)................ 1998 71 3,692 999 2,693
Bentley Brook, Phase I(1)..................... 1997 12 624 370 254
Bentley Brook, Phase II(2)(1)................. 1998 20 1,040 175 865
------- ------- ------ ------
Total in Operation 325 16,838 12,475 4,363
======= ======= ====== ======
Resorts under Development(6)
Bentley Brook, Phase III(3)................... 1999 46 2,392 -- --
Bentley Brook, Phase IV(3)(4)................. 2000 72 3,744 -- --
Long Wharf Resort, Phase III(4)(5)............ 1999 16 832 -- --
Long Wharf Resort, Phase IV(5)................ 2000 40 2,080 -- --
------- -------
Total under Development 174 9,048
======= =======
</TABLE>
- ----------------
(1) Designated a "Gold Crown Resort" by RCI.
(2) Certificate of occupancy issued on December 4, 1998.
(3) Capable of being constructed without additional permits other than
customary building permits.
(4) Currently under contract for purchase.
(5) Subject to permit approvals.
(6) All completion dates are estimates.
Development Process
The Company continuously seeks to identify potential development
projects with the favorable characteristics necessary for a successful timeshare
resort. The Company determines the feasibility of a particular site for a
potential resort development or conversion through:
o Site Evaluation. The Company looks for sites that are generally
within 200 miles of an area with favorable demographic
characteristics. Further, the Company seeks sites which it
expects to be particularly desirable to potential customers due
to either proximity to popular tourist destinations, such as is
the case with Newport, or their scenic or natural value, such as
a beachfront resort on a particularly attractive stretch of
coastline. The Company does not have any resorts outside New
England, and it does not currently anticipate seeking to open
resorts in highly competitive timeshare resort destinations, such
as Orlando and Hawaii.
o Assessment of Zoning Regulations. The Company explores the zoning
and land-use laws applicable to the potential site and the
regulatory issues pertaining to licenses and permits for
timeshare sales and operations. The Company will contact various
governmental entities and submit applications for necessary
permits and approvals.
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o Governmental Regulation of Timeshare Industry. The Company
evaluates the regulation of the sale and marketing of timeshare
intervals in the prospective resort location.
After the Company has determined that a site meets its criteria for
development it will prepare a development plan using the Company's standard
lodging unit design. The Company also prepares a budget which estimates the cost
of developing the resort, including costs of lodging facilities, a sales office,
infrastructure and amenities, as well as projected sales, marketing, and general
and administrative costs. To the extent practicable the Company will internally
finance all development projects. Contracts for the purchase of the site
typically provide for additional site review by the Company, including obtaining
a survey of the property and a title commitment. The Company may employ local
counsel to provide advice regarding pertinent jurisdictional legal issues. If
the Company continues to be satisfied with the site after the completion of the
site review, the Company will negotiate for the purchase of the property.
The Company contracts with an outside architectural firm to design,
supervise and assist in the construction of new units. Contracts are generally
bonded, fixed price and subject to completion guarantees. The Company generally
seeks initial completion of the development of a new resort's basic
infrastructure and models within one year of construction. See "Risk
Factors--Development, Construction and Property Acquisition Activities."
Sales and Marketing
The Company's marketing activities are intended to attract potential
qualified customers to visit and tour a resort or attend a sales presentation in
order to sell timeshare intervals.
Marketing. The Company focuses its marketing activities on potential
purchasers of timeshare intervals who live within driving distance of one of the
Company's resorts. The Company estimates that the number of households within
200 miles of its New England resorts is approximately 11 million. Marketing to
potential customers within driving distance of its resorts stabilizes the
Company's marketing costs because the Company does not have to rely on costly
gift programs such as subsidized airline tickets and lodging in order to attract
potential customers to take a tour.
To market its resorts to prospective purchasers, the Company has
historically contracted with third-party lead generation companies. The Company
currently has a marketing contract with Data King Corporation, a company which
provides tour generation services. This contract expires on July 31, 2001 and is
subject to a renewal for an additional three-year term. Data King is compensated
based on the number of qualified prospective buyers that it causes to attend
sales tours at the Company's resorts.
While approximately 85% of the Company's prospective purchasers in the
nine-month period ended September 30, 1998 were provided by Data King, the
Company is in the process of expanding its own telemarketing capacity. The
Company anticipates generating a substantial number of tours as part of its
in-house marketing capacity. Also, the Company will continue to expand that
portion of its sales force devoted specifically to selling a second timeshare
interval to persons in the Company's existing membership base.
Sales. The Company sells timeshare intervals primarily through its
on-site sales forces. Upon arrival for a scheduled tour, the prospect is met by
a member of the Company's on-site sales force who conducts a one to two hour
tour of the resort. At the conclusion of the tour, the sales representative
explains the benefits and costs of owning a timeshare interval at one of the
Company's resorts. The presentation also includes a description of the financing
alternatives offered by the Company. A verification officer (a
non-commissionable employee of Eastern Resorts who reports to the Vice President
of Sales) explains the transaction documents and closes the sale. No sale
becomes final until a statutory waiting period of up to 10 days has passed.
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At September 30, 1998, the Company employed 47 salespeople. The
Company seeks to attract, train and retain a dedicated sales force and provides
extensive training to its salespeople. Each sales representative is an employee
of the Company and receives some employment benefits.
Resort Management
Eastern Resorts' management staff and centralized support services
monitor the Company's operation and system standards and provide support,
training and assistance to each resort. The Company receives a fee of 6% to 10%
of budgeted operating expenses to manage its resorts. At each resort, the fee is
paid pursuant to a management agreement between the Company and a homeowner's
association to which all timeshare interval owners must contribute annual dues.
The Company generally controls the homeowner's association until it has sold
more than 75% of the total timeshare intervals at a resort, at which time the
homeowner's association takes control. The following table summarizes the
revenues expected to be generated in 1998 by the Company's management
activities.
MANAGEMENT CONTRACTS
<TABLE>
<CAPTION>
Contract Expiration Date 1998 Operating Budget
------------------------ ---------------------
<S> <C> <C>
Long Wharf Resort........................... December 31, 2001 $1,247,672
Newport Overlook............................ December 31, 2001 349,656
Newport Onshore............................. December 31, 2001 1,224,335
Bay Voyage.................................. December 31, 2001 540,276
Inn on Long Wharf........................... December 31, 2001 663,616
Inn on the Harbor........................... December 31, 2001 939,942
Bentley Brook Mountain Club................. December 31, 2002 117,492
----------
Total Current Contracts..................... $5,082,989
==========
</TABLE>
The Company's resort operations business includes a centralized
accounting system that processes all payables, prepares and disburses checks and
prepares detailed operating statements that enable management to review each
resort's financial results, including timely reports that contain key data to
alert management to variances from a particular resort's budget. Management has
implemented a quality assurance program that includes compliance audits to
ensure that operations are in accordance with the Company's standards. The
Company's resort operations business also uses a centralized payroll system that
closely tracks payroll activity.
The Company conducts preventative maintenance at each of its
properties and conducts major renovations as the need arises. The Company also
has a centralized purchasing system that reduces costs and maximizes its
purchasing power. All food and beverages, room furnishings, guest room supplies,
linens and cleaning supplies are ordered through national vendors and the
requested quantities are delivered to each resort. The Company's resorts
operations business also has national accounts for telephone, credit card
processing, carpet cleaning and pest control services. By using centralized
purchasing, the Company establishes cost standards for all products and services
and takes advantage of competitive bidding from national vendors which help to
ensure that products are purchased at the lowest cost available.
A staff of more than 100 individuals uses state-of-the-art multiple
property management software to operate all of the Company's sites. The Company
has used several computer systems since its inception. The Company uses a
completely integrated MIS system installed in June 1996 to operate its sites.
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Central Reservations Services
The Company's full-time central reservations staff books more than
15,000 reservations per year for both timeshare interval owners and individuals
seeking rental accommodations. The reservations staff is on-line with all of the
Company's resorts, which allows the reservations staff to provide
up-to-the-minute booking information to a potential customer. In addition,
reservations can be made through the Company's toll free telephone service.
Rental of Unoccupied Units
The Company maximizes revenues on its inventory of unused or unsold
timeshare intervals by renting unoccupied units as hotel rooms on an overnight
basis. The Company offers these unoccupied units through direct consumer sales,
travel agents and package vacation wholesalers. In addition to providing the
Company with supplemental revenues, the Company's room rental operations provide
it with a good source of lead generation for the sale of timeshare intervals. As
part of the management services provided by the Company, the Company generally
will rent owners' timeshare intervals at their request when the owners are
unable to use or exchange their timeshare intervals.
Description of Resorts
Long Wharf Resort. The administrative offices of Eastern Resorts are
located at Long Wharf Resort. This resort has 82 two- and three-bedroom
timeshare units across from scenic Newport Harbor. Boat rentals, charters, and a
variety of water sports are located close by at the Inn on Long Wharf, another
of the Company's resorts. An abundance of waterfront shops, boutiques,
restaurants and a children's arcade are within easy walking distance. The Long
Wharf Resort combines a superb location with harbor view rooms with classic
architecture in a shingle-sided building. It has numerous amenities, including
an indoor/outdoor pool, hot tubs and movie room. This resort is also the only
timeshare resort in Newport with full kitchen facilities.
As of September 30, 1998, the resort contained 4,264 timeshare
intervals, of which 2,757 intervals remained available for sale. The Company
plans to build an additional 56 units (Long Wharf Resort, Phases III and IV),
which would yield an additional 2,912 timeshare intervals available for sale.
Timeshare intervals at Long Wharf Resort are currently priced from $7,900 to
$17,900 per one-week interval. During the nine months ended September 30, 1998,
633 timeshare intervals were sold. In addition to the ownership of timeshare
intervals, the Company owns those units in Long Wharf Resort Phase II where all
conference facilities and common area amenities are situated.
The Bentley Brook Mountain Club. In addition to its Newport base, the
Company has developed a major new property at the Jiminy Peak ski resort in
Hancock, Massachusetts. A short drive from the summer music festival at
Tanglewood and offering a broad range of outdoor activities, the Bentley Brook
Mountain Club is an all-year facility. Winter activities include skiing,
skating, cross country skiing and a wide variety of seasonal activities. Summer
activities include an alpine slide, golf, tennis and other mountain related
activities. There is a 100-room hotel and conference center with two restaurants
on site, though independently owned. In addition to the ownership of units and
timeshare intervals, the Company owns a resort office unit in the Bentley Brook
Mountain Club.
The Company acquired its first property on the Jiminy Peak Mountain in
November 1997, when Eastern Resorts purchased existing timeshare units of the
Bentley Brook Mountain Club from the owner of Jiminy Peak. Eastern Resorts also
purchased additional land for development and the right to purchase an "option
parcel" for future development. In November 1997, Eastern Resorts also entered
into an agreement with the owner of Jiminy Peak which provides for certain
rights of Eastern Resorts with respect to access to mountain patrons, discounts
on available amenities, and shared use of resort personnel.
As of September 30, 1998, the resort included 32 studio, one-bedroom
and two-bedroom units, comprising 1,664 timeshare intervals, of which 1,119
intervals remained available for sale. The Company plans to build an additional
118 units (Bentley Brook, Phases III and IV), which would yield an additional
6,136 timeshare intervals available for sale. Timeshare intervals at the Bentley
Brook Mountain Club are currently priced from $4,400 to
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$14,900 per one-week interval. During the nine months ended September 30, 1998,
275 timeshare intervals were sold, although the Company spent considerable time
in 1998 obtaining necessary licenses and hiring and training a sales staff.
The Bay Voyage Inn. The Bay Voyage Inn is the last standing wood-frame
hotel in Jamestown. The Bay Voyage Inn preserves the charm of Jamestown's
history in an historic building directly across the East Passage of Narragansett
Bay from Newport. The resort, which contains 32 one-bedroom units, overlooks
Narragansett Bay, with a marina adjacent to the property. The resort's
restaurant offers gourmet dining at its finest. The Bay and the Atlantic Ocean
beyond offer superb boating and fishing opportunities. In addition to the
ownership of timeshare intervals, the Company owns two common area units at this
resort.
As of September 30, 1998, the resort contained 46 quarter shares and
1,066 timeshare intervals, of which 178 intervals remained available for sale.
Timeshare intervals at the Bay Voyage Inn are currently priced from $6,500 to
$10,900 per one-week interval. During the nine months ended September 30, 1998,
eight timeshare intervals were sold.
Newport Onshore. Newport Onshore is located in downtown Newport and
offers spacious units with working fireplaces. Resort amenities include an
indoor and an outdoor pool. Newport Onshore offers 62 one-, two-and three-
bedroom units and is located directly on Newport Harbor, with marina facilities
on three sides of the property. The resort is located downtown in the heart of
Newport's charming shopping district.
As of September 30, 1998, the resort contained 3,162 timeshare
intervals, of which 81 intervals remained available for sale. Timeshare
intervals at the Newport Onshore Resort are currently priced from $6,500 to
$12,900 per one-week interval. During the nine months ended September 30, 1998,
29 timeshare intervals were sold.
Newport Overlook. Newport Overlook is on Conanicus Island, which is
accessible by bridge to the Rhode Island mainland on the west and to Newport on
the east. The island is known for the rugged beauty of its coastline. Aside from
its proximity to the beach, the resort also offers an outdoor pool on site. In
the summer, both Narragansett Bay and Conanicus Island are dedicated to
recreation. Golf, scuba diving, swimming and tennis are just a few of the
activities that can be enjoyed close to the resort. The resort has large
two-bedroom units with full kitchens.
As of September 30, 1998, the resort had 19 two-bedroom condominium
units or 988 timeshare intervals, of which 50 intervals remained available for
sale. Timeshare intervals at Newport Overlook Resort are currently priced from
$7,400 to $12,900 per one-week interval. During the nine months ended September
30, 1998, 17 timeshare intervals were sold.
Inn on Long Wharf. From its restaurant that offers a wonderful view of
Newport Harbor to the whirlpool found in each unit, Inn on Long Wharf was
designed for comfort and convenience. This waterfront resort has its own docking
facilities for guest boats, rentals and charters. Known as the "Yachting Capital
of the East," Newport Harbor offers many other water sport activities. The
resort contains 40 one-bedroom units, all of which have harbor views.
As of September 30, 1998, the resort contained 2,080 timeshare
intervals, of which 83 intervals remained available for sale. Timeshare
intervals at Inn on Long Wharf are currently priced from $6,900 to $11,900 per
one- week interval. During the nine months ended September 30, 1998, 36
timeshare intervals were sold.
Inn on the Harbor. Located directly on the harbor in Newport, Inn on
the Harbor is just a short walk from Newport's endless array of historic and
modern sight-seeing attractions. Its proximity to the Atlantic Ocean makes the
city a popular spot for boating, fishing, sailing and windsurfing. Guests may
enjoy the many restaurants, clubs and shopping malls within walking distance.
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As of September 30, 1998, the resort had 58 one-bedroom suites or
3,016 timeshare intervals, of which 95 intervals remained available for sale.
Timeshare intervals at Inn on the Harbor are currently priced from $6,300 to
$10,900 per one-week interval. During the nine months ended September 30, 1998,
25 timeshare intervals were sold.
Restaurants Owned by Eastern Resorts. As an attraction for its resorts
in Newport, the Company owns and operates two restaurants.
Exchange Networks
The Company's affiliation with RCI allows the Company's customers to
exchange the use periods associated with their timeshare intervals for one in
over 3,200 other resorts around the world in the RCI network at any time of the
year. It is estimated that approximately 180,000 RCI owners live within driving
distance of one of the Company's resorts. Eastern Resorts has had resorts
affiliated with RCI since 1981, and in 1997 approximately 40% (or 5,115) of the
Company's membership base took advantage of the opportunity to exchange their
timeshare intervals. The Company's affiliation contracts with RCI allow the
owners of timeshare intervals at the Company's affiliated resorts to participate
in RCI's exchange network for a subscription fee. Pursuant to the terms of these
affiliation contracts, the Company agrees to promote RCI's exchange program to
the Company's prospective timeshare interval purchasers. Each of the Company's
seven resorts is affiliated with RCI and Long Wharf Resort and Bentley Brook are
"Gold Crown" resorts, RCI's highest rating. Two others, Newport Onshore and
Newport Overlook, were rated "Resorts of International Distinction." In 1997,
Eastern Resorts became an RCI "Preferred Customer" with a limited number of
other prominent developers throughout the world.
Insurance
The Company carries comprehensive liability, fire, windstorm and
business interruption insurance with respect to its properties and interests in
its resorts (i.e., its inventory of unsold timeshare intervals), with policy
specifications, insured limits and deductibles customarily carried for similar
properties which the Company believes are adequate. There are certain types of
losses (such as losses arising from flooding) that are either uninsurable or not
economically insurable or for which the Company or its borrowers have limited
insurance coverage. Should an uninsured loss or a loss in excess of insured
limits occur, the Company could be required to repair damages at its expense, or
lose its capital invested in an owned resort or face loan default in the case of
a financed resort to the extent that the relevant homeowners' association does
not and cannot cover such losses. Any such loss could materially adversely
affect the Company's financial condition, results of operations, or liquidity.
Competition
Financing Operations
The Company's finance business is highly competitive. Most of the
Company's lending competitors are much larger than the Company and have
significantly more money to lend, including Finova Capital Corp., Textron
Financial Corporation, Heller Financial, Litchfield Financial Corporation,
various banks and others. The Company views its target market as developers of
midsize and smaller resorts, in which area it feels that the services it
provides to its borrowers make it most competitive. Recently, some of the
Company's larger competitors have also targeted this segment, thereby increasing
pressures on price and terms.
The availability of financing for new timeshare projects through
capital markets transactions, as well as generous terms offered by other
lenders, could result in overbuilding and an oversupply of intervals in the
timeshare market. This could lead to declining values or over-saturation for
timeshare assets similar to other real estate over-expansions. In addition, the
availability of financing at rates and on terms more favorable than those
offered by the Company may negatively affect the Company's ability to provide
additional financing to certain of its existing customers, as well as its
ability to attract new customers. Further, lenders who traditionally did not
provide financing to the Company's target customers may be forced to do so as
other loans made by such lenders are repaid as a result
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of financings in the capital markets. These alternative sources of financing
expose the Company to more intense competition for new A&D Loans which, among
other things, tends to reduce yield and enhance risk.
Resort Development Operations
The timeshare resort industry remains fragmented and includes a large
number of local and regional resort developers and operators. However, some of
the world's most recognized lodging, hospitality and entertainment companies,
such as Marriott International, The Walt Disney Company, Hilton Hotels, Hyatt
Corporation, and Four Seasons Resorts, have entered the industry. Other
companies in the timeshare industry, including Sunterra Corporation, Fairfield
Communities, Vistana, Ramada Vacation Suites, Silverleaf Resorts and TrendWest
Resorts, are, or are subsidiaries of, public companies with enhanced access to
capital and other resources. In particular, Marriott International and
Silverleaf Resorts develop resorts in the same geographic region as the Company.
In the future, competitors may seek to develop, or may increase their
development of, resorts in New England.
While the principal competitors of the Company's resort development
business are other developers of timeshare resorts, the Company is also subject
to competition from (i) service providers in the commercial lodging business,
including condominiums, hotels and motels, (ii) service providers in the leisure
business and (iii) to a lesser extent, campgrounds, recreational vehicles, tour
packages and second home sales. A reduction in the product costs associated with
any of these competitors, or an increase in the Company's costs relative to such
competitors' costs, could materially adversely affect the Company's financial
condition, results of operations, or liquidity.
Numerous businesses, individuals and other entities compete with the
Company in seeking properties for development and acquisition of resorts. Many
of these competitors are larger and have greater financial and other resources
than the Company. Such competition may result in a higher cost for properties
the Company wishes to acquire or may cause the Company to be unable to acquire
suitable properties for the development of new resorts.
Employees
As of September 30, 1998, the Company had approximately 160 full-time
employees. All of the Company's timeshare sales agents are employees who are
paid on a 100% commission basis, with certain health and other benefits. Most of
the Company's management level employees are also compensated in part through
incentive-based rewards. It is the Company's policy to award no less than 100
stock options to each employee who has served at least one year. The Company
believes that its employee relations are good. None of the Company's employees
is represented by a labor union. All the full-time employees of the Company who
have at least 12 months of service are awarded stock options in the Company. The
Company believes that all employees should participate in equity ownership.
Property
Eastern Resorts was the original developer of three of its resorts. It
acquired the land on which these resorts were built, developed the resorts, and
then, as the condominium declarant, filed the appropriate documentation to make
such resorts into condominiums. Finally, Eastern Resorts marketed and sold and
continues to sell timeshare intervals at these resorts at which time it no
longer owned the land underlying these resorts. With respect to the resorts it
did not originally develop, Eastern Resorts purchased the right to manage,
market and sell timeshare intervals from the condominium declarant but did not
purchase the land underlying these resorts.
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The Company owns common area units at its Long Wharf Resort and the
Bentley Brook Mountain Club facilities. It also owns a warehouse facility/rental
property and Eastern Resorts' corporate offices, all of which are located in
Newport, Rhode Island. The Company also rents offices in Syracuse, New York, and
it will also rent additional space in Greenwich, Connecticut once Mr. Breeden's
employment contract goes into effect on the date of the offering. See
"Bankruptcy of Affiliates and Related-Party Transactions."
Litigation
The Estate and certain affiliated entities, including the Company and
Resort Funding, are currently the subject of several lawsuits and a bankruptcy
proceeding. See "Bankruptcy of Affiliates and Related-Party Transactions." In
addition, the Company is currently subject to litigation and claims regarding
employment, tort, contract, construction and commission disputes, among others.
With the exception of the matters discussed below, the Company expects none of
these lawsuits or claims, even if adversely decided, to have a material adverse
effect on the Company, its business, results of operations or financial
condition.
In September 1997, Resort Funding commenced foreclosure proceedings
against a resort property located in Hilton Head, South Carolina which was
approximately four-months delinquent in payment of its obligations to Resort
Funding under an acquisition and development loan agreement. On November 3,
1997, Resort Funding reached an agreement with the developer to settle the
arrears. As part of the agreement, the developer paid Resort Funding all past
due amounts in full and remitted payment in advance for installments due for
October, November and December, 1997. As additional security for future
payments, the developer agreed to grant Resort Funding a deed in lieu of
foreclosure to be held in escrow pending Resort Funding's receipt of all other
payments as they were to become due. However, in January, 1998, the developer
refused to deliver the deed in lieu of foreclosure and terminated the November 3
agreement. On March 17, 1998, the developer filed an answer and counterclaims in
the foreclosure action alleging, among other things, that it was not in default
of the loan agreements. Resort Funding intends to pursue vigorously its claims
and defend the counterclaims. On September 30, 1998, the developer agreed to
deposit all past-due interest amounts into an escrow account accessible only by
order of the court. Additionally, the developer agreed to pay into the escrow
account all future interest payments as they become due, pending the outcome of
the foreclosure action. In the event that any such payments are not received on
a timely basis, Resort Funding shall have the right to have a receiver appointed
to operate the resort.
In May 1995, Joseph Mooney resigned from the Company as Senior
Executive Vice President and Director pursuant to a termination agreement. In
January 1996, Mr. Mooney filed a lawsuit in the Circuit Court of Broward County,
Florida against the Company, the former Chairman of the Board of the Company,
and another defendant alleging, among other things, that the Company breached
its obligations to him under the termination agreement and a prior letter of
intent that Mr. Mooney claims would have permitted him to acquire certain assets
of the Company. Mr. Mooney alleged that the Company tortiously interfered with
certain business opportunities that were rightfully his and seeks damages in
excess of $1.1 million. On February 4, 1997, the court granted partial summary
judgment to Mr. Mooney with respect to his claim that the termination agreement
had been breached and ruled that Mr. Mooney was entitled to damages in the
amount of approximately $37,000 with respect to the breach. The Company
determined not to appeal this judgment, and the amount awarded was covered by
insurance. The Company believes that it has meritorious defenses to the
remaining allegations in the complaint, in particular the tortious interference
with certain business opportunities, and intends to defend the matter
vigorously.
In addition, the Company has filed certain counterclaims against Mr.
Mooney alleging that Mr. Mooney wrongfully retained certain Company property and
wrongfully interfered with the Company's conduct of its business, all in
violation of the terms of his termination agreement. The counterclaims further
allege that Mr. Mooney knowingly and feloniously obtained, or converted to his
own use and benefit, at least $250,000 of the Company's money.
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REGULATION
The Company's operations are subject to extensive regulation by
federal, state and local government authorities and are subject to various laws
and judicial and administrative decisions. Among other things, such governmental
authorities require protection and rehabilitation of the environment, regulate
credit granting activities, establish maximum interest rates and finance
charges, require disclosure to customers, set collection, repossession and
claims-handling procedures and restrict the marketing of timeshare intervals to
consumers. Following is a brief discussion of the laws and regulations
applicable to the Company's business. It is possible that more restrictive laws,
rules and regulations will be adopted in the future, and that such changes could
make compliance much more difficult or expensive, restrict the Company's ability
to make and sell loans, further limit or restrict the amount of interest and
other charges earned under loans, restrict the Company's sale and marketing of
timeshare intervals or the development of new properties, or otherwise adversely
affect the business or prospects of the Company.
Environmental Regulation
The Company believes that its operations are in substantial compliance
with all applicable environmental, health and safety laws and regulations. The
Company's timeshare lending and development operations generally do not entail a
high risk of causing environmental damage or incurring liability. Nevertheless,
primarily through its acquisitions of real estate on which it has developed
resorts and its lending to third parties for resort development, the Company may
become liable under various federal, state and local environmental laws for the
properties and operations involved. See "Risk Factors -- Possible Environmental
Liabilities."
In 1995, the Rhode Island Department of Environmental Management
notified Eastern Resorts that the Long Wharf area in Newport had been placed on
CERCLIS and listed as a "State Site" due to the presence of lead in this area.
The source of the lead contaminated soil is not known but is suspected to be
fill dating back many years or possibly other prior uses. The Company has taken
no action that may have contributed to or exacerbated the presence of
contamination on any of its properties located in the Long Wharf area.
As part of its development of the Long Wharf Resort, Eastern Resorts
entered into an agreement with DEM to remediate voluntarily lead contamination
in exchange for a release of liability for the cleanup. After Eastern Resorts
successfully completed this remediation project, DEM issued a letter on March
26, 1998 declaring the site in compliance with respect to this agreement.
The Company recently entered into an agreement for the purchase of
land in the vicinity of Long Wharf Resort. This property also is within the area
placed on CERCLIS and listed as a State Site. Environmental studies of this
property have indicated the presence of elevated levels of environmental
pollutants. The Company has developed a remediation plan for the development of
this property and anticipates receiving DEM approval in connection with the
further development of this land.
The Company engaged environmental consultants to perform environmental
site assessments of the Company's properties. These environmental site
assessments, performed in general conformance with ASTM standards, have not
revealed any recognized ongoing environmental liability that the Company
believes would have a materially adverse effect on the Company's financial
condition, results of operations, or liquidity.
Regulation of Lenders and Collection Agencies
The Company's lending activities subject it to extensive regulation
under federal, state and foreign laws and regulations. At the federal level, the
Company's consumer lending activities are regulated under a variety of laws,
including, but not limited to, the Truth in Lending Act and Regulation Z, Equal
Credit Opportunity Act, Fair Housing Act, Fair Credit Reporting Act, Interstate
Land Sales Full Disclosure Act, Real Estate Settlement Procedures Act and Fair
Debt Collection Practices Act, the Telephone Consumer Protection Act, the
Telemarketing and Consumer Fraud
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<PAGE>
Abuse Protection Act, and the Civil Rights Acts of 1964 and 1968. These statutes
generally require detailed disclosure of information concerning consumer loans,
and they regulate the manner in which consumer loans are made, including
advertising, disclosure of consumer information, servicing of loans and
collection practices. Failure to comply with applicable laws could result in
exposure of the Company and its responsible officers to civil liability to
borrowers and to civil or criminal penalties. As a result of making
Hypothecation Loans and acquiring Purchased Receivables, Resort Funding may be
subject to liability resulting from the failure of any developer to whom it has
made a Hypothecation Loan or from whom it has acquired Consumer Loans to have
complied with any of the aforesaid laws and regulations. In addition, to the
extent Resort Funding is servicing any of the Consumer Loans originated by
timeshare developers, it is required to comply with certain aspects of the
aforesaid laws and regulations governing such servicing activities.
At the state level, the Company may be subject to licensing in the
states where it makes A&D Loans or Hypothecation Loans to developers, where it
acquires Purchased Receivables and where it collects payments on such loans. The
Company currently has made or acquired such loans in 20 states. Many states
require licensing of consumer mortgage lenders, purchasers of consumer loans,
loan servicers and debt collectors, although some such statutes do not apply to
timeshare loans, particularly where such loans are acquired and serviced by a
lender or investor for its own account.
Even where states do not require licensing, most states regulate some
or all of the activities described above. State statutes that regulate mortgage
lending, consumer lending and servicing activities include those that prohibit
unfair and deceptive trade practices, require certain disclosures in connection
with making loans, restrict the types and amount of interest and fees that may
be charged in connection with making or servicing loans, limit remedies upon
default, regulate foreclosure, require maintenance of certain records and impose
limits on contacts with borrowers in connection with debt collection. In
addition to the direct liability that Eastern Resorts may have as a consumer
lender to its purchasers and Resort Funding may have as a hypothecation lender
to various developers, Resort Funding may be subject to successor liability if
any developer from whom it acquires receivables, either by purchase, foreclosure
or exercise of other remedies, failed to comply with any of the aforesaid state
laws or regulations.
The Company has also acquired Consumer Loans made to U.S. residents by
developers for purchases of timeshare intervals in Aruba, the Bahamas, Canada,
Ireland and the U.S. Virgin Islands. The Company may be subject to regulation in
these jurisdictions, as a successor to the developers who originated these
Consumer Loans.
Regulation of Timeshare Marketing and Sales
The Company is subject to various federal, state and local laws
regulating consumer marketing and sales practices generally and the timeshare
industry in particular. These laws generally apply wherever the Company markets
or sells timeshare intervals, as well as in the states and communities in which
its resorts are located.
On a federal level, the Federal Trade Commission has taken the most
active regulatory role through the Federal Trade Commission Act, which prohibits
unfair or deceptive acts or competition in interstate commerce. Other federal
legislation to which the Company is or may be subject includes the Telephone
Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse
Prevention Act, the Fair Housing Act, the Civil Rights Acts of 1964 and 1968 and
the Americans with Disabilities Act.
In order to protect their citizens from fraudulent marketing practices
in the timeshare industry, various states have enacted legislation aimed at
curbing such abuses. Rhode Island and Massachusetts, the states in which the
Company currently operates timeshare resorts, as well as other states in which
the Company markets timeshare intervals, have adopted specific laws and
regulations regarding the marketing and sale of timeshare intervals. The laws of
most states, including Rhode Island and Massachusetts, require the Company to
file a detailed offering statement and supporting documents with a designated
state authority, which describe the Company's resorts and the promotion and sale
of timeshare intervals. The offering statement must be approved by the
appropriate state agency
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<PAGE>
before the Company may solicit residents of such state to purchase timeshare
intervals, although such approval does not address the substantive content of
disclosures contained therein nor relieve Eastern Resorts from liability arising
from false or misleading disclosure. The laws of Rhode Island and Massachusetts
require the Company to deliver such an offering statement, together with certain
additional information concerning the terms of the purchase, to prospective
purchasers of timeshare intervals who are residents of such state, even if the
resort is not located in such state. There are also laws in each state where the
Company currently sells timeshare intervals which grant the purchaser of a
timeshare interval the right to cancel a contract of purchase at any time up to
three to ten calendar days following the date the contract was signed by the
purchaser.
The Company registers all of its resorts in each of the states where
registration is required and believes it is in material compliance with all
federal, state and local laws and regulations to which it is currently subject
relating to the sale and marketing of timeshare intervals. The Company also
strongly believes that such regulation of sales practices is in the best
interests of the Company and of owners of intervals in its resorts. The Company
is strongly committed to working with regulatory bodies and industry
associations to strengthen marketing and ethical standards in the industry.
Finally, the Company believes that a strong program designed to enable potential
purchasers to understand fully the nature of the Company's product and to avoid
misunderstanding will prove beneficial over the long run.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Title
Richard C. Breeden 49 President, Chairman of the Board of
Directors and Chief Executive Officer
Thomas J. Hamel 40 Executive Vice President and Director
R. Perry Harris 59 Executive Vice President and Director
George W. Carmany III 58 Director
John R. Petty 68 Director
Gerald L. Klaben, Jr. 34 Chief Financial Officer and Senior Vice
President
James R. Petrie 34 Controller
Eric C. Cotton 34 Secretary and General Counsel
James A. Mercurio 38 Senior Vice President and Treasurer
Richard G. Winkler 42 Senior Vice President
Richard C. Breeden has been Chairman of the Board of Directors and
Chief Executive Officer of the Company since October 1997, and since October
1998, Mr. Breeden has served as President of the Company. Mr. Breeden has also
been President and CEO of Richard C. Breeden & Co., Inc., in Greenwich,
Connecticut, and Trustee for the Estate since 1996. An honors graduate of
Stanford University and the Harvard Law School, Mr. Breeden practiced law in New
York City specializing in corporate finance following law school. Mr. Breeden
served in the White House as a senior economics and financial advisor to
President George Bush, where he was one of the principal architects of the
government's program to restructure the savings and loan industry and to create
the Resolution Trust Corporation. From 1989-1993 he served as Chairman of the
U.S. Securities and Exchange Commission, following appointment by President Bush
and unanimous confirmation by the U.S. Senate. During a portion of this time Mr.
Breeden also served as President of the International Organization of Securities
Commissions, and of its standards-setting body for global markets. From
1993-1996, Mr. Breeden served as Chairman of the worldwide financial services
practice of Coopers & Lybrand L.L.P., and was a consultant on risk management
systems, internal controls and international capital markets. Mr. Breeden has
served on numerous boards and commissions, including the North American Advisory
Board of Daimler-Benz A.G., The Philadelphia Stock Exchange, Inc., W.P. Stewart
& Co., Ltd., the German-American Chamber of Commerce, and advisory commissions
on capital markets in Italy, China and Russia. Prior to the Offering, Mr.
Breeden has served as a director of the Company in his capacity as Trustee and
the representative of the Estate.
Thomas J. Hamel has been a director and Executive Vice President of
the Company since October 1998. Mr. Hamel also served as a director and as
President and Chief Operating Officer of Equivest from October 1997 through
October 1998. Mr. Hamel is also the President and Chief Operating Officer of
Resort Funding and has held those positions since November 1996. From 1992
through October 1996, Mr. Hamel served as Executive Vice-President of Resort
Funding and was responsible for business development. He is a trustee of ARDA
and serves as a member of the Finance Committee. Mr. Hamel is a graduate of
LeMoyne College.
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<PAGE>
R. Perry Harris currently serves as Executive Vice President and
director of the Company. Mr. Harris founded Eastern Resorts, a wholly owned
subsidiary of the Company, in 1981. A graduate of the University of
Massachusetts, Mr. Harris began his career at Digital Equipment Corporation. Mr.
Harris founded First Data Corporation in 1970 and served as a director and its
President until 1977. Mr. Harris has spent the last 16 years as the Chief
Executive Officer of Eastern Resorts. He is a trustee of, and a Registered
Professional within, ARDA. Mr. Harris is also a past chairman of ARDA New
England.
George W. Carmany III has been a director of the Company since October
1997, has served as Chairman of the compensation committee of the Board of
Directors (the "Compensation Committee") since October 1997, and is a member of
the audit committee of the Board of Directors (the "Audit Committee"). Since
1995, Mr. Carmany has served as President of The G.W. Carmany Co., Inc. in
Boston, Massachusetts, which provides consulting advices to, and invests in,
small companies. A graduate of Amherst College, Mr. Carmany began his business
career with Bankers Trust Company as an officer in its International Banking
Department in New York, and later as Executive Director of its merchant banking
subsidiary in Australia. From 1975 to 1995 he served in a variety of senior
positions with American Express Company, including Senior Vice President,
Corporate Strategic Planning. At American Express Bank, Mr. Carmany served as
Senior Executive Vice President and Chief Administrative Officer before joining
American Express' subsidiary The Boston Company as Senior Executive Vice
President, Treasurer and Director, a position he held until the sale of that
company to Mellon Bank Corporation. Mr. Carmany subsequently served as Chairman
of the Olympia and York Noteholder's Steering Committee. Mr. Carmany is the
former Chairman of the New England Medical Center, Inc., and since 1997 has
served as Vice Chairman of Lifespan Inc., a regional healthcare system based in
Providence, Rhode Island, and as a director or trustee of numerous
organizations, including Ekco Group, Inc., Bentley College, the U.S.S.
Constitution Museum and The South Street Seaport Museum. Mr. Carmany's family
owned and operated resort hotels in various locations in the United States.
John R. Petty has been a director of the Company since October 1997,
has served as Chairman of the Audit Committee since October 1997 and is a member
of the Compensation Committee. Mr. Petty was formerly the Chairman and Chief
Executive Officer of Marine Midland Bank, and is currently Chairman of Federal
National Payables, Inc., Bethesda, Maryland. Since 1997, Mr. Petty has served as
Chairman of TECSEC, Inc., Vienna, Virginia. Following his graduation from Brown
University and a tour in the US Navy, Mr. Petty joined the Chase Manhattan Bank,
where he worked until serving in the U.S. Treasury Department from 1966 - 1972,
primarily as Assistant Secretary of the Treasury for International Affairs.
After five years as a partner of Lehman Brothers, Mr. Petty joined Marine
Midland, serving as President and/or Chairman and CEO from 1976 - 1988. Since
retiring from Marine Midland, Mr. Petty has pursued a variety of interests
including serving as Chairman of the Nippon Credit Trust Company from 1993 to
1998. He has formed and managed finance companies and is a principal in high
technology ventures. Mr. Petty has served as a director of numerous public
companies, including Hongkong and Shanghai Banking Corporation, RCA, NBC,
Hercules, Inc., Anixter International Corporation, ANTEC Corporation and others.
He is a trustee of American University, a member of the Council on Foreign
Relations and of the Inter-American Dialogue and President of the Foreign
Bondholders Protective Council.
Gerald L. Klaben, Jr. currently serves as Chief Financial Officer and
Senior Vice President of the Company. Mr. Klaben also served as Executive Vice
President and Treasurer of Equivest from October 1997 through October 1998. Mr.
Klaben is also the Executive Vice President and Chief Financial Officer of
Resort Funding and has held those positions since July 1996. From November 1989
through July 1996, he served as a financial officer of the Pyramid Companies,
one of the largest developers of shopping malls in the Northeastern United
States. Mr. Klaben is a graduate of LeMoyne College.
James R. Petrie has been Controller of the Company since October 1997
and Controller of Resort Funding since September 1996. From June 1992 to
September 1996, he served in various accounting and financial capacities for the
Pyramid Companies. Mr. Petrie is a graduate of Loyola College.
Eric C. Cotton has been Secretary and General Counsel of the Company
since October 1997 and General Counsel of Resort Funding since June 1997. From
July 1990 through June 1997, he served as Assistant General
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<PAGE>
Counsel of the Pyramid Companies. Mr. Cotton received his B.A. degree from
Indiana University of Pennsylvania and his J.D. from the University of Akron
School of Law.
James A. Mercurio has been Senior Vice President and Treasurer of the
Company since October 1998. Mr. Mercurio also serves as Vice President,
Treasurer and Chief Financial Officer of Eastern Resorts, a position he has held
since 1994 and has served as controller since 1987. From 1984 through 1987, Mr.
Mercurio served as controller of a large regional developer and manager of
apartment complexes and from 1981 through 1984, he was in the audit and tax
departments of the then Peat, Marwick, Mitchell & Co. where he became licensed
as a Certified Public Accountant in 1983. Mr. Mercurio received his B.S. degree
from Bryant College.
Richard G. Winkler has been Senior Vice President of the Company since
October 1998. Mr. Winkler also serves as Senior Vice President, Chief Operating
Officer and General Counsel of Eastern Resorts Company, a position he has held
since October of 1998. Mr. Winkler has been General Counsel to Eastern Resorts
and its predecessor, Inn Group Associates, since 1983 and, since 1994, a Vice
President of Eastern Resorts. Mr. Winkler received his B.A. degree from the
University of Rhode Island and his J.D. from New England School of Law.
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<PAGE>
INFORMATION REGARDING EXECUTIVE COMPENSATION
The following table summarizes compensation information for the last
three fiscal years for (i) Mr. Breeden, (ii) Mr. Hamel and (iii) Mr. Klaben
(together, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Other Common
Annual Stock
Compen- Underlying All Other
Name and Principal Fiscal Salary Bonus sation(2) Options Compensation
Position(1) Year ($) ($) ($) (Shares) ($)
----------- ---- --- --- --- -------- ---
<S> <C> <C> <C> <C> <C>
Richard C. Breeden(3)
Chief Executive Officer 1997 $-- $-- $-- --(4) $--
Thomas J. Hamel
Executive Vice President 1997 227,463 80,000 -- 300,000 1,350 (5)
1996 217,958 -- -- -- 854 (5)
1995 224,019 -- -- -- 570 (5)
Gerald L. Klaben, Jr.
Chief Financial Officer 1997 149,819 50,000 -- 75,000 900 (5)
1996(6) $ 58,385 $-- $-- -- $ 375 (5)
</TABLE>
- ------------------
(1) Messrs. Hamel and Klaben became executive officers of the Company during
1997 and Mr. Breeden became Chief Executive Officer during 1997. Prior to
1996, Mr. Hamel has been an executive officer of Resort Funding, where he
currently serves as President and Chief Operating Officer.
(2) Excludes certain perquisites which do not exceed the lesser of $50,000 or
10% of the named individual's aggregate salary and bonus.
(3) For the period ending December 31, 1997 and from January 1, 1998 to the
date hereof, the Company did not compensate Mr. Breeden for his services as
Chief Executive Officer. Prior to the Offering, Mr. Breeden has served as
Chief Executive Officer in his capacity as Trustee, and was not separately
compensated by the Estate for his services to the Company. See "Information
Regarding Executive Compensation--Employment and Consulting Agreements" for
a description of Mr. Breeden's employment agreement beginning with the
Offering.
(4) The Estate is the beneficial holder of 200,000 stock options issued in the
name of Mr. Breeden as Trustee.
(5) The amount represents Company-paid life insurance premiums.
(6) Reflects compensation earned from the commencement of Mr. Klaben's
employment with the Company through December 31, 1996. Mr. Klaben became an
executive officer of Resort Funding beginning in July, 1996.
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<PAGE>
Option Grants in Last Fiscal Year
The following table provides information about grants of options on
Common Stock to the Named Executive Officers during fiscal year 1997.
Option Grants In Last Fiscal Year(1)
(Individual Grants)
<TABLE>
<CAPTION>
Percent of Total
Common Stock Options
Underlying Granted to Exercise or Base
Options Employees Price
Granted (Shares) in Fiscal Year $/Share Expiration Date
---------------- -------------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Mr. Breeden........... -(2) 0.0% NA NA
Mr. Hamel............. 300,000 (3) 35.0 $1.00 5/29/2002
Mr. Klaben............ 75,000 (3) 8.7 $1.00 5/29/2002
</TABLE>
- ------------------------
(1) All stock options were issued pursuant to the Company's 1997 Long-Term
Incentive Plan.
(2) The Estate is the beneficial holder of 200,000 stock options issued in the
name of Mr. Breeden as Trustee. In addition, in connection with the
Offering, Mr. Breeden is to be granted 1,000,000 options at the Offering
price pursuant to his proposed employment contract.
(3) Options will expire on the fifth anniversary of the date of grant and 50%
will vest 18 months following the date of the agreement and, as to the
remaining 50%, on the third anniversary of the date of the employment
agreement. Options will expire 60 days after termination of employment
where they have vested but have not been exercised. If the employee resigns
for "Good Reason" (as defined in the agreement) arising following a "Change
of Control" (as defined in the agreement), or is terminated for any reason
other than for "Cause" (as defined in the agreement), all outstanding
options will immediately vest.
Options Exercised and Year-End Option Holdings
The following table provides information about the exercise of options
on Common Stock by the Named Executive Officers during fiscal year 1997 and
stock options held by each of them at fiscal year-end.
Aggregated Option Exercises In Last Fiscal Year
And Year-End Option Values
<TABLE>
<CAPTION>
Common Stock
Underlying Unexercised Value of Unexercised
Shares Value Options at Fiscal Year-End In-the-Money Options at
Acquired on Realized (Shares) Fiscal Year-End ($) (1)
Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
-------- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Breeden(2)............. -- -- -- -- -- --
Mr. Hamel.................. -- -- -- 300,000 -- 1,312,500
Mr. Klaben................. -- -- -- 75,000 -- 328,125
</TABLE>
- ----------------------
(1) Values for "in-the money" outstanding options represent the positive spread
between the respective exercise prices of the outstanding options and the
value of the Common Stock as of December 31, 1997.
(2) The Estate is the beneficial holder of 200,000 stock options issued in the
name of Mr. Breeden as Trustee.
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<PAGE>
Employment and Consulting Agreements
Richard C. Breeden. Mr. Breeden and the Company have reached an
agreement on the terms of his employment with the Company, subject to entering
into a definitive written contract prior to the date of the Offering. The
parties intend that the term of the agreement will commence upon the effective
date of the Offering, subject to the Estate being able to sell all of its shares
of Common Stock in the Offering, and would continue for a term of three years,
subject to automatic one-year extensions unless either party elects in writing
not to extend the term. Under the terms of the agreement, Mr. Breeden would
serve as the Chief Executive Officer of the Company. The agreement will provide
for a base salary of $410,000, which amount will be increased annually to
reflect changes in the consumer price index in the New York metropolitan area.
In addition, for each calendar year ending during the term of the agreement, Mr.
Breeden would be eligible to earn a cash target bonus amount of 75% of his
annual rate of base salary in effect for such year, subject to the achievement
of specified performance targets approved by the Compensation Committee. If the
Company achieves less than 80% of its target for any given year, Mr. Breeden
will not receive a cash bonus for such year. On the other hand, if the Company
exceeds its target for a given year, Mr. Breeden's cash bonus would increase in
proportion with such excess. In no event, however, will the Company be obligated
to pay Mr. Breeden a cash bonus for any calendar year in excess of 125% of the
target bonus amount for such year. The agreement will also provide Mr. Breeden
with welfare and fringe benefits on the same terms as other executive officers
of the Company and reimbursement of certain expenses related to the negotiation
of the agreement.
Under the terms of the agreement, Mr. Breeden will be granted, on the
date of the Offering, a stock option covering 1,000,000 shares of the Common
Stock of the Company at an exercise price equal to the Offering price. The
option will vest in three equal annual installments subject to accelerated
vesting in the event of a change in control of the Company. In addition, on the
first anniversary of the Offering, the Company will grant Mr. Breeden 125,000
restricted shares if either (i) the closing price of a share of Common Stock
exceeds the Offering price by 30% or more on at least 40 trading days during the
12-month period ending on such anniversary date or (ii) the average price of the
Common Stock over a specified measurement period has exceeded the NASDAQ
Composite Index by at least 15% and the stock has appreciated by at least 20%
over the Offering price during such measurement period. In lieu of the above, on
the first anniversary of the Offering, the Company will grant Mr. Breeden
250,000 restricted shares if either (i) the closing price of a share of Common
Stock exceeds the Offering price by 60% or more on at least 40 trading days
during the 12-month period ending on such anniversary date or (ii) the average
price of the Common Stock over a specified measurement period has exceeded the
NASDAQ Composite Index by at least 30% and the stock has appreciated by at least
20% over the Offering price during such measurement period.
In addition, on the second anniversary of the Offering, the Company
will grant Mr. Breeden 125,000 restricted shares if either (i) the closing price
of a share of Common Stock exceeds the Offering price by 60% or more on at least
40 trading days during the 12-month period ending on such anniversary date or
(ii) the average price of the Common Stock over a specified measurement period
has exceeded the NASDAQ Composite Index by at least 30% and the stock has
appreciated by at least 35% over the Offering price during such measurement
period. In lieu of the above, on the second anniversary of the Offering, the
Company will grant Mr. Breeden 250,000 restricted shares if either (i) the
closing price of a share of Common Stock exceeds the Offering price by 100% or
more on at least 40 trading days during the 12-month period ending on such
anniversary date or (ii) the average price of the Common Stock over a specified
measurement period has exceeded the NASDAQ Composite Index by at least 60% and
the stock has appreciated by at least 35% over the Offering price during such
measurement period. Restricted shares will vest ratably over a 3-year period
following the date of grant. Vesting will be accelerated upon a change in
control, upon the attainment of specified targets for earnings per share or upon
Mr. Breeden's termination of employment by reason of his death, disability,
resignation for "good reason," non-renewal of the employment term by the Company
or termination of employment by the Company other than for "cause."
Under the proposed agreement, Mr. Breeden would be prohibited from
disclosing the Company's confidential information and trade secrets at any time,
whether during or after his employment. In addition, during his employment and
for two years thereafter, Mr. Breeden would be subject to "non-compete" and
"non-solicitation" provisions. In the event that, prior to the termination of
the agreement, Mr. Breeden is terminated without "cause" or resigns for "good
reason" (as described below), he will be entitled to receive (i) his base salary
in regular payment installments for the remainder of the employment term (as
then in effect) and (ii) a pro rata cash bonus based on the actual performance
of the Company for the full calendar year in which the termination or
resignation occurs. If, however, Mr. Breeden violates the confidentiality,
non-compete and non-solicitation provisions, he will not be entitled to any
payment or benefits upon his termination or resignation.
Thomas J. Hamel. Resort Funding entered into an employment agreement
with Thomas J. Hamel on
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May 29, 1997 pursuant to which he is serving as Resort Funding's President and
Chief Operating Officer for a three-year term and thereafter for successive
one-year renewal terms unless either party elects not to renew the agreement,
pursuant to the terms set forth therein. The agreement provides for an annual
base salary of $220,000 during the first year, increased annually at the
discretion of the board of directors of the Company (but not less than the
percentage increase in the urban consumer price index). The agreement also
provides for a bonus of $80,000 in 1997, and a bonus each year thereafter based
on performance measures agreed to by the parties (but not less than $80,000).
The Trustee is a party to the agreement solely for the purpose of agreeing (i)
to recommend to the board of directors of the Company the issuance of stock
options ("Options") to Mr. Hamel covering 300,000 shares of Common Stock (the
"Option Shares"); (ii) to take related actions intended to facilitate issuance
of the Option Shares; and (iii) at the initial meeting following a
reconstitution of the board of directors of the Company with at least two duly
elected members other than Mr. Hamel, to recommend and to seek the opinion of
such board as to the level and nature of stock incentives that should be
provided to Mr. Hamel. Resort Funding and Mr. Hamel agreed that for the years
after 1997, Mr. Hamel's total compensation should include an incentive component
and both parties agreed to revisit this issue one year from the date of the
agreement to negotiate a mutually agreeable incentive compensation structure.
The issue has been revisited but, as yet, no determination has been made. The
agreement provides that the Options (i) shall have an exercise price of $1.00
per share; (ii) shall expire on the fifth anniversary of the date of grant;
(iii) shall vest as to 150,000 Option Shares 18 months following the date of the
agreement and, as to the remaining 150,000 Option Shares, on the third
anniversary of the agreement (provided Mr. Hamel is employed by Resort Funding
on each such date); and (iv) shall expire 60 days after Mr. Hamel's employment
terminates (if Mr. Hamel's employment terminates after the vesting of such
Options but before the exercise thereof). Mr. Hamel will be released from his
obligations under the agreement if the issuance of such Options is not approved
by the board of directors of the Company within 90 days after their initial
meeting following reconstitution of such board with at least two duly elected
members other than Mr. Hamel.
In addition, the agreement provides Mr. Hamel with employee benefits
on the same terms as those available to senior executive officers of Resort
Funding. Resort Funding has also agreed to provide at least $600,000 of life
insurance for Mr. Hamel. Under the agreement, Resort Funding may terminate Mr.
Hamel's employment at any time for any reason, and Mr. Hamel may terminate his
employment for any reason at any time upon 90 days' prior written notice. If,
prior to the agreement termination date then in effect, Mr. Hamel resigns for
"Good Reason" (as defined in the agreement) arising following a "Change of
Control" (as defined in the agreement), or is terminated by Resort Funding for
any reason other than for "Cause" (as defined in the agreement), then Mr. Hamel
(provided that he executes a release) will be entitled to receive a cash
severance amount equal to 100% of the remaining then-current base salary and
bonus due through the end of the term of his employment agreement (or due for
the year of termination, if the termination or resignation occurs subsequent to
the third anniversary of the agreement), plus the immediate vesting of all
outstanding Options. "Change of Control" is defined in the agreement so as to
include the filing by Resort Funding of a case under the Bankruptcy Code (other
than a pre-packaged bankruptcy filed on the motion of Mr. Breeden, in which it
is proposed that the agreement be continued), provided a bankruptcy trustee is
appointed for Resort Funding. In such event, prior to the filing of such case,
Resort Funding agrees to confess judgment in Mr. Hamel's favor in an amount
equal to the outstanding compensation then due under the agreement. Resort
Funding also has agreed that if it should entertain a formal offer for the
acquisition of a controlling stake of its voting shares or all or substantially
all of its assets, then it will inform Mr. Hamel of such offer and invite him to
submit a competing offer.
Mr. Hamel has agreed to preserve the confidentiality of information
regarding Resort Funding. Mr. Hamel has also agreed that, during the period
commencing on the date of the agreement and ending on the date of the later of
the third anniversary of the date of the agreement or the date his employment
terminates (or one year following such later date if he terminates his
employment without Good Reason following the second anniversary of the date of
the agreement), he will not become employed by, consult with or otherwise become
involved with any "Prohibited Entity" (as defined in the agreement). During such
period, Mr. Hamel has further agreed not to employ any employee, agent or
representative of Resort Funding or its affiliates, or to seek to influence any
such individual to terminate his or her relationship with such entity. Such
non-compete and non-solicitation covenants will become void, however, if, prior
to the third anniversary of the agreement but subsequent to the reconstitution
of the board of directors of the Company with at least two duly elected members
other than Mr. Hamel, the Trustee ceases to be a
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<PAGE>
member of such board other than by reason of his death, disability or voluntary
resignation. In such event, Mr. Hamel may terminate his employment upon 90 days'
notice, but will not be entitled to any severance payments. Resort Funding also
has agreed to indemnify Mr. Hamel if he incurs any liabilities as a result of
his affiliation with Resort Funding, unless his employment terminates for
"Cause," as defined in the agreement.
Gerald L. Klaben, Jr. Resort Funding entered into an employment
agreement with Gerald L. Klaben, Jr. on July 15, 1996 pursuant to which he is
serving as Resort Funding's Chief Financial Officer for a three-year term and
thereafter for successive one-year renewal terms unless either party elects not
to renew the agreement at least 90 days prior to the end of the original term or
any renewal term. The Company subsequently agreed to provide an annual base
salary of $150,000 during the first year, increased annually by the same
percentage increase as the urban consumer price index and a bonus of $50,000.
The Company also subsequently agreed to the granting of 75,000 Option Shares to
Mr. Klaben. The terms of the Option Shares for Mr. Klaben are substantially
similar to those set forth in Mr. Hamel's employment agreement. Mr. Klaben's
compensation includes $1,500 for coverage of medical premiums, which will be
increased only in the event of an increase in such premiums and will receive
medical family coverage at a cost as provided to other employees of Resort
Funding. He may participate in Resort Funding's pension, profit-sharing and
retirement plans, including a 401(k) plan, on the same basis as those plans are
made available to other senior executives of Resort Funding. Mr. Klaben has
agreed to preserve the confidentiality of information regarding Resort Funding.
Under the agreement, Mr. Klaben may terminate his employment upon 30
days' prior written notice to Resort Funding. Resort Funding may terminate Mr.
Klaben's employment agreement for "Cause" (as defined in the agreement) upon 30
days' prior notice to Mr. Klaben. If Mr. Klaben resigns for Good Reason or is
terminated by Resort Funding for any reason other than for Cause on or after
July 16, 1998 but before July 16, 1999, Mr. Klaben is entitled to a cash
severance amount equal to the remaining salary due through the end of the term
of the agreement plus 50% multiplied by Mr. Klaben's then-current base salary.
Following the third anniversary of the employment agreement, Mr. Klaben is
entitled to a cash lump sum severance of 50% multiplied by Mr. Klaben's
then-current base salary.
R. Perry Harris. The Company entered into an employment agreement with
R. Perry Harris on August 24, 1998, pursuant to which he is serving as Eastern
Resorts' Chief Executive Officer for a five-year term and thereafter for
successive one-year renewal terms unless either party elects not to renew the
agreement pursuant to the terms set forth therein. The Company agrees to use all
reasonable efforts to have Mr. Harris elected to the Board of Directors of
Equivest. The agreement provides for an annual base salary of $300,000 during
the first year, increased annually at the discretion of the Board of Directors
of Eastern Resorts (but not less than the percentage increase in the urban
consumer price index). The agreement also provides for an annual bonus of 40%-
60% of the Base Salary (the "Target Annual Bonus") and the terms of payment of
this bonus are outlined in the agreement. Equivest is a party to the agreement
solely for the purpose of (i) the issuance of Options to Mr. Harris covering (1)
30,000 Option Shares if Equivest reaches at least 100%, but less than 125%, of
the "Pre-Tax Profit Target" (as defined in this agreement) for any fiscal year,
and (2) 60,000 Option Shares if Equivest equals or exceeds 125% of the Pre-Tax
Profit Target for a fiscal year; (ii) taking related actions intended to
facilitate issuance of the Common Stock; (iii) seeking the opinion of the Board
of Directors of Equivest as to the level of pre-tax profits of Equivest; and
(iv) guaranteeing the performance by Eastern Resorts of all of its obligations
under the agreement. The agreement provides that Options granted will have an
exercise price of the fair market value of the Option Shares on the date of
grant of such Options and will expire on the tenth anniversary from their date
of grant. The Options granted will vest and become exercisable at a rate of 20%
per year for a five-year period but will immediately expire upon the termination
of Mr. Harris' employment unless Mr. Harris resigns for "Good Reason" (as
defined in the agreement) or his employment terminates for "Cause" (as defined
in his agreement), in which case Mr. Harris will become immediately vested and
will retain the right to exercise all outstanding Options for one year from the
date of such termination.
In addition, the agreement provides Mr. Harris with employee benefits
on the same terms as those available to senior executive officers of Eastern
Resorts. Under the agreement, the Company may terminate Mr. Harris' employment
at any time for any reason, and Mr. Harris may terminate his employment for any
reason upon 90 days'
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prior written notice to Eastern Resorts. If prior to the agreement termination
date then in effect, Mr. Harris resigns for Good Reason or is terminated by
Eastern Resorts for any reason other than for Cause, then Mr. Harris (provided
he executes a release) will be entitled to receive (i) a cash severance amount
equal to 100% of the remaining then-current base salary until the end of the
employment period as then in effect; (ii) the Target Annual Bonus due for any
completed fiscal year that ended prior to the date of termination; (iii) a pro
rata Target Annual Bonus where Mr. Harris' employment is terminated after June
30th of a fiscal year in which it is subsequently determined that the applicable
Pre-Tax Profit Target has been met; (iv) the immediate vesting of all
outstanding Options; (v) continuation in all employee benefits on the same terms
as those available to senior executive officers of Eastern Resorts until the
earlier of the expiration of the remaining term of the employment period or
until Mr. Harris becomes eligible for coverage under comparable plans of a
subsequent employer; (vi) earned but unpaid base salary through the date of
termination; and (vii) any unreimbursed business expenses and all payments,
rights and benefits due under the terms of Eastern Resorts' employee and fringe
benefit plans. Notwithstanding this, the Company will have the right to
terminate Mr. Harris' employment agreement where pre-tax profits of Eastern
Resorts fall below 75% of the Pre-Tax Profit Target for fiscal year 2000 or 2001
and Mr. Harris will only be entitled to the benefits had his employment
terminated for Cause or other than Good Reason, that is (i) earned but unpaid
base salary through the date of termination; (ii) earned but unpaid Target
Annual Bonus for any completed fiscal year that ended prior to the date of
termination; and (iii) any unreimbursed business expenses.
Mr. Harris has agreed to preserve the confidentiality of information
regarding Eastern Resorts. Mr. Harris has also agreed to preserve the
non-compete and non-solicitation covenants detailed in his employment agreement
for a maximum period of seven years with certain geographical limitations
outlined in his employment agreement. A breach of such non-compete and
non-solicitation covenants by either Mr. Harris or by Mr. Harris' wife, Karen
Harris, will be treated as a breach of the agreement by Mr. Harris and Eastern
Resorts will be entitled to equitable relief and all severance payments
otherwise payable to Mr. Harris and discussed above, will cease. In the event of
any controversy or claim arising out of, or relating to the agreement, the
losing party will bear the cost of all reasonable attorney fees and expenses of
both parties.
BANKRUPTCY OF AFFILIATES AND RELATED-PARTY TRANSACTIONS
Bankruptcy Proceedings of Affiliated Companies and Related Litigation
On March 29, 1996, BFG, BMDC and several of their respective
affiliates filed voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code in the Bankruptcy Court. At the time the petitions
were filed, BFG and BMDC together owned 88.9% of the Company's voting stock. As
of September 30, 1998, the Estate, as successor to those entities, owned 80.1%
of the Common Stock and all of the Series 2 Class A Redeemable Preferred Stock.
The petitions were filed after (i) the U.S. Securities and Exchange
Commission filed a civil complaint in the United States District Court for the
Southern District of New York against BFG, BMDC, certain of their affiliates,
and Patrick R. Bennett, the former Chief Financial Officer of BFG, and (ii) the
U.S. Attorney for the Southern District of New York filed a criminal complaint
in the same court against Mr. Bennett, alleging perjury and criminal violations
of the antifraud provisions of the federal securities laws. The civil complaint
alleged numerous violations of the antifraud provisions of the federal
securities laws, based in part on allegations of sales of fictitious equipment
leases, fraudulent misrepresentations to investors in private placements of debt
securities, and misappropriation of corporate assets. On June 26, 1997, a
federal grand jury issued a 43-count indictment (since expanded to more than 100
counts) against Mr. Bennett, his brother Michael, and two associates on charges
ranging from conspiracy to obstruction of justice. Michael Bennett pleaded
guilty in November 1998; he is awaiting sentencing. Patrick Bennett's criminal
trial began on December 7, 1998 and has not been completed as of the date
hereof.
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On April 18, 1996, the U.S. Trustee (a part of the U.S. Department of
Justice) appointed, and the Bankruptcy Court approved, Richard C. Breeden as
Trustee in bankruptcy for the Estate. In June 1996, the Trustee filed an
adversary proceeding seeking more than $1 billion in damages from prior
controlling stockholders of BFG and its affiliates and certain of their business
associates, BFG's previous auditing firm and others. Numerous additional
lawsuits have been filed since that time.
In addition to the civil and criminal complaints described above, BFG
and several of its affiliates, including Equivest and Resort Funding, are named
as defendants in several federal and state class actions in which creditors of
the Estate allege private damages stemming from the fraudulent transactions
alleged in the civil and criminal complaints. The federal class actions were
subsequently consolidated in the Consolidated Class Actions. In October 1998,
the Trustee and class counsel for the plaintiffs in the Consolidated Class
Actions signed an MOU to settle certain major litigation between the Estate and
an insurance carrier for its leases. The MOU requires approval of both the
District Court and the Bankruptcy Court, as well as satisfaction of certain
other conditions. The Company has not participated in negotiations concerning
the MOU, and it is not a party to the MOU. Pursuant to the MOU, the parties to
the MOU have signed a settlement agreement which is to be submitted for approval
of the Bankruptcy Court and the District Court. Among other things, the
Settlement Agreement is contingent on our releasing one of the parties to the
settlement agreement. If approved, the settlement agreement would provide for
the dismissal with prejudice of Equivest and Resort Funding from the
Consolidated Class Actions. As a result of the resolution of certain common
legal issues, several related state actions will be barred, as well. We know of
no other material litigation involving the alleged fraud described above that
names Resort Funding or Equivest as a defendant.
Acquisition of Resort Funding
Prior to BFG and BMDC filing the petitions for bankruptcy, the Company
entered into an Agreement and Plan of Exchange with BFG and Resort Funding (the
"Exchange Agreement"), which became effective as of February 16, 1996. Pursuant
to the Exchange Agreement, the Company acquired all of the common stock of
Resort Funding from BFG in exchange for the issuance to BFG of 10,000 shares of
the Company's Series 2 Class A Redeemable Preferred Stock, and 3,000 shares of
the Company's Series 2 Cumulative Convertible Preferred Stock. As a result of
the Exchange Agreement and certain prior investments, BFG and BMDC acquired
beneficial ownership of approximately 88.9% of the Company's voting stock,
giving effect to the subsequent conversion of the Series 2 Cumulative
Convertible Preferred Stock into Common Stock.
To date, neither the Trustee nor any other party in interest to the
Estate has challenged the Exchange Agreement or sought to consolidate the assets
of the Company or Resort Funding into the Estate. The Company believes that it
is unlikely that any party could successfully move to annul the Exchange
Agreement or otherwise cause substantive consolidation of the Company or Resort
Funding with the Estate. Nevertheless, no assurance can be given that this will
be the case.
Certain Low-Interest Loans
In September 1996, the Trustee submitted a motion to the Bankruptcy
Court and, with the approval of the Bankruptcy Court, settled the claims of
certain lenders against the Estate. The settlements required the lenders to make
several Settlement Loans to the Company at favorable 0.5% to 4.0% interest
rates. As of September 30, 1998, the outstanding balance on the Settlement Loans
was approximately $22.8 million. The Company is obligated to pay the Estate an
annual arrangement fee of 3% of the unpaid principal balance of the Settlement
Loans. As part of these arrangements, the Company lent approximately $20 million
of the proceeds from the Settlement Loans to the Estate on a non-recourse basis
at 10% per annum. The Trustee pledged certain lease payment collateral to the
Company to secure the loan. As of September 30, 1998, the balance outstanding on
the Company's loan to the Estate was approximately $1.2 million.
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Satisfaction of Related-Party Debt, Conversion of Preferred Stock and Payment of
Stock Dividends
The Company, as of December 31, 1996, owed BFG a total amount of $23.8
million in principal and accrued interest on several demand notes. The Company
repaid this amount, together with $1.2 million in subsequently accrued interest,
less certain set-offs, in November 1997, through the issuance of 4,645,596
shares of Common Stock to the Estate. The Bankruptcy Court subsequently adjusted
the amount of certain set-offs applied by the Company and, as a result, the
court corrected its determination of the amount of the Company's indebtedness to
BFG upward by approximately $361,000. The Company satisfied this order by
issuing an additional 67,113 shares of Common Stock to the Estate.
On October 29, 1997, the Company also issued 7,500,000 shares of
Common Stock to BFG upon conversion of 3,000 shares of Series 2 Cumulative
Convertible Preferred Stock. On February 9, 1998, the Company issued 20,541
shares of Common Stock pursuant to a conversion of shares of Series 1 Class A 12
1/2% Cumulative Convertible Preferred Stock. After such conversion, all
remaining outstanding shares of Series 1 Class A 12 1/2% Cumulative Convertible
Preferred Stock were redeemed on February 13, 1998.
Between October 1, 1997 and September 30, 1998, the Company issued a
total of 254,722 shares of Common Stock in payment of dividends on its Series 2
Cumulative Convertible Preferred Stock and Series 2 Class A Redeemable Preferred
Stock.
Transfer of Certain Assets
On September 8, 1998, the Bankruptcy Court authorized the Trustee to
transfer legal title owned by the Estate, and any and all claims or rights of
the Estate to approximately $27 million of Consumer Loans and A&D Loans from the
Estate to Resort Funding at no cost to the Company. The Court authorized the
Trustee to execute any and all documents necessary to release all potential
claims of the Estate in or to such assets. This order confirmed that Resort
Funding was the equitable owner of those assets, for which Resort Funding had
already paid full consideration. As part of its order, the Bankruptcy Court
found that the Company and Resort Funding had satisfied in full the $25 million
promissory note owed to the Estate.
Bankruptcy Court Approval of the Offering
By an order dated September 24, 1998, the Bankruptcy Court approved
the Trustee's motion to sell all shares of Common Stock held by the Estate in a
registered public offering. If market conditions prevent the Estate from selling
all of its shares of the Company in the Offering, Bankruptcy Court approval
would be required for a partial sale. The sale will be subject to unanimous
approval of a pricing committee consisting of the Trustee, two Equivest
Directors, Mr. George Carmany and Mr. John Petty and two representatives of the
Creditors' Committee. The Bankruptcy Court also authorized the Trustee to either
(i) exchange the 10,000 shares of Series 2 Class A Redeemable Preferred Stock
into 1,860,465 shares of Common Stock, or (ii) sell the 10,000 shares of Series
2 Class A Redeemable Preferred Stock to the Company for a sum which is the
multiple of 1,860,465 times the public offering price for the Common Stock minus
the underwriter's discount. The Offering is intended to implement the sale
approved by the Bankruptcy Court.
Stockholders' Agreement
The Company, Karen Harris and Perry Harris are parties to a
stockholders' agreement. Pursuant to the terms of this agreement, Mr. Harris may
request registration under the Securities Act of the shares of Common Stock
currently held by him, subject to the Company's right to postpone compliance
with such request under certain circumstances. The stockholders' agreement also
provides that Mr. Harris may not sell his shares of Common Stock prior to August
24, 1999, except that Mr. Harris may request to include up to 1,500,000 of his
shares of Common Stock in the Company's first registered public offering of its
Common Stock which commences after the date of the
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stockholders' agreement. The Company has the right to postpone compliance with
that request under certain circumstances. Mr. Harris is a Selling Stockholder in
the Offering and is selling 1,500,000 shares.
Trustee as Chairman, CEO and President of the Company
Richard C. Breeden, who also serves as the Trustee, was elected as a
director of the Company on October 2, 1997. He currently serves as the Company's
Chairman, Chief Executive Officer and President. The Trustee agreed that, for so
long as the Estate continued to own any shares of the Company, the Trustee would
not vote such shares or exercise any other rights with regard to such shares
without consultation with the Creditors' Committee and Bankruptcy Court
approval. Following the Offering, the Estate will own no shares in the Company
and thus should have no right to influence the Company's management directly.
The bankruptcy proceedings involving the Estate, however, are likely
to carry on through 1999 and to a lesser extent thereafter. Mr. Breeden will be
the Trustee and, possibly, the liquidating trustee for the Estate throughout
these proceedings. Accordingly, he will not be able to devote all of his
energies to the affairs of the Company. Although Mr. Breeden does not expect
that his responsibilities as Trustee or liquidating trustee will interfere with
his duties for the Company, he will, from time to time, be called upon to devote
his attention to the ongoing bankruptcy proceedings.
In addition, Mr. Breeden, as Trustee, receives a commission of up to
3% of all funds he recovers for the Estate. This commission may apply to the
proceeds to the Estate from the Offering.
Administrative Services Provided by Related Party
Under an agreement which expired March 31, 1996, the Company paid TPC
approximately $1,340,000 and $420,000 in 1995 and 1996, respectively, for
various administrative services including billing, collection, legal and
management services. In April 1996, the Company negotiated with TPC and hired
all the employees responsible for such services from TPC. The Company currently
receives administrative services from TPC relating to the mailing of invoices to
customers for amounts due under Consumer Loans. The Company shares with TPC a
computer system owned by TPC and pays TPC a fee.
Office Facilities
The Company's five-year lease of its office facilities in Syracuse
with an affiliate of BFG was terminated without penalty in 1997 when the Company
relocated within the same property. Rent expense paid by the Company amounted to
approximately $150,000 in 1997. The Company currently leases its office
facilities from an affiliate of BFG on a month-to-month basis at a monthly rate
of approximately $6,800.
Pursuant to the proposed employment contract with Mr. Breeden, after
the Offering the Company will sublet an office in Greenwich, Connecticut from
Mr. Breeden at a monthly rate of approximately $4,100. This is the same price
that Mr. Breeden pays the landlord under the existing lease agreement.
Loans to Eastern Resorts
In 1995, Resort Funding entered into an A&D Loan and a Hypothecation
Loan with Eastern Resorts for the development and construction of the Long Wharf
Resort. At September 30, 1998, $6.4 million was outstanding under the
Hypothecation Loan, which was the largest aggregate amount outstanding under
such loan. At August 28, 1998, $5.9 million was outstanding under the A&D Loan.
The largest aggregate amount outstanding under the A&D Loan was $6.2 million.
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In 1995, the Company advanced Eastern Resorts $750,000 on the A&D
Loan. In the same year Eastern Resorts paid the Company $21,900 in interest and
$0 in principal on the A&D Loan. In 1996, the Company advanced Eastern Resorts
$1,499,200 under the A&D Loan and $1,795,000 under the Hypothecation Loan. In
1996, Eastern Resorts paid the Company $190,100 in interest and $686,400 in
principal on the A&D Loan, and $54,200 in interest and $225,000 in principal on
the Hypothecation Loan. In 1997, the Company advanced Eastern Resorts $5,264,200
under the A&D Loan and $3,471,000 under the Hypothecation Loan. In 1997, Eastern
Resorts paid the Company $78,600 in interest and $1,734,900 in principal on the
A&D Loan, and $286,400 in interest and $1,124,800 in principal on the
Hypothecation Loan. In 1998 through the date of the acquisition, the Company
advanced Eastern Resorts $2,222,800 under the A&D Loan and $3,611,900 under the
Hypothecation Loan. In 1998 through the date of the acquisition, Eastern Resorts
paid the Company $440,200 in interest and $1,399,900 in principal on the A&D
Loan, and $357,000 in interest and $1,352,900 in principal on the Hypothecation
Loan.
RESIGNATION OF ACCOUNTANTS
On March 29, 1996, Mahoney Cohen Rashba & Pokart, CPA, PC ("Mahoney
Cohen") sent a letter to BFG resigning as BFG's auditor and withdrawing its
reports on all financial statements of BFG and its related entities, including
Resort Funding. In its letter, Mahoney Cohen stated that such financial
statements were based on, among other things, information supplied by Patrick
Bennett and, in light of the allegations in the Civil Complaint, including
allegations that Mr. Bennett had provided Mahoney Cohen with false and
materially misleading information relating to BFG and BMDC, Mahoney Cohen had no
choice but to withdraw its reports on such financial statements.
Although there were no allegations in the civil complaint filed by the
Securities and Exchange Commission that Mr. Bennett had provided false or
materially misleading information regarding Resort Funding to Mahoney Cohen in
connection with its reports on Resort Funding's financial statements, Mahoney
Cohen nevertheless subsequently confirmed that its letter of resignation and
withdrawal covered reports on financial statements of Resort Funding (formerly
known as Bennett Funding International, Ltd.), as well. Prior to such
resignation and withdrawal of reports, Resort Funding had no disagreements with
Mahoney Cohen as to any matter of accounting principles or practices, financial
statement disclosure or audit scope or procedure, and Mahoney Cohen's reports on
its financial statements did not contain any adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
On April 5, 1996, the Company received a letter from Puritz &
Weintraub, its independent accountants, stating that such firm was resigning as
the Company's auditor effective as of the date of such letter. The opinions of
Puritz & Weintraub with respect to the financial statements of the Company for
the periods ended August 31, 1994 and 1995 and December 31, 1995 did not contain
any adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles.
Such resignations were not recommended or approved by the Company's
Board of Directors or any audit or other committee thereof.
On January 24, 1997, Firley, Moran, Freer & Eassa, P.C. was appointed
by the Company as its independent accounting firm. Since that time, there has
been no disagreement as to any matter of accounting principles or practices,
financial statement disclosure or audit scope or procedure in the course of
Firley Moran's auditing of the Company's financial statements for the three most
recent fiscal years.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary of the instruments governing certain
indebtedness of the Company does not purport to be complete and is qualified in
its entirety by reference to such instruments, copies of which have been filed,
or incorporated by reference, as exhibits to the Registration Statement of which
this Prospectus is a part.
1997 Credit Facilities
In November 1997, the Company obtained the 1997 Credit Facility from
CSFBMC. The 1997 Credit Facility includes a $75 million facility to fund the
Purchased Receivables and Hypothecation Loans and a $30 million facility to fund
A&D Loans to developers. The Consumer Receivables Line has a two-year revolving
period ending in November 1999 and a one-year payment period ending in November
2000. Outstanding balances bear interest at a floating rate (7.275% at September
30, 1998). The A&D Line has a two-year revolving term ending in November 1999
and a one-year payment period ending in November 2000. Outstanding balances bear
interest at a floating rate (8.275% at September 30, 1998). At September 30,
1998, the Company had an outstanding balance of $60.6 million under the 1997
Credit Facility, with $45.3 million outstanding under the Consumer Receivables
Line and $15.3 million outstanding A&D Line. The maximum borrowing amount under
the 1997 Credit Facility was reduced by approximately $9.7 million in connection
with the Long Wharf Resort Loan. This $9.7 million will again become available
for borrowing under the 1997 Credit Facility, when the Long Wharf Resort Loan is
repaid in full.
Indebtedness under the 1997 Credit Facility is secured by the
collateral assignment of mortgages on the resort properties, security agreements
on the pledged receivables and by assignments of payments due on the collateral.
In connection with the 1997 Credit Facility, the Company agreed to certain
limitations on its operations and financial structure, including maintenance of
specified collateralization, default rates with respect to pledged receivables,
and tangible and overall net worth requirements. As consideration for extending
the loans, CSFBMC also received a warrant exercisable for 125,000 shares of
Common Stock at $3.50 per share, and for an additional 125,000 shares at $4.00
per share.
Bridge Loan
In August 1998, the Company entered into the Bridge Loan with CSFBMC.
The Bridge Loan provided the Company with up to $15 million to finance the cash
portion of the purchase price of Eastern Resorts, of which the Company actually
borrowed $12.1 million. The Bridge Loan bears interest at a floating rate equal
to LIBOR plus 3.0% (8.375% at September 30, 1998) and had an initial maturity of
December 11, 1998. As a result of negotiations with the Company, CSFBMC extended
the maturity of the Bridge Loan to the earlier of the closing date of a
registered public offering of the Company's Common Stock or June 11, 1999.
Indebtedness under the Bridge Loan is secured by certain collateral, including
all collateral pledged under the 1997 Credit Facility described above, security
agreements on the pledged receivables, all outstanding capital stock of Eastern
Resorts Company, all outstanding membership interests of its subsidiary, Eastern
Resorts, and all unencumbered assets of the consolidated Eastern Resorts. In
connection with the Bridge Loan, the Company agreed to certain limitations on
its operations and financial structure, including maintenance of specified
collateralization, and tangible and overall net worth requirements. As part of
the consideration for providing the Bridge Loan, CSFBMC also received a warrant
exercisable for 180,000 shares of Common Stock at $8.00 per share.
Long Wharf Resort Loan
In August 1998, Eastern Resorts entered into the Long Wharf Resort
Loan with CSFBMC for an amount of up to $11.5 million, at an interest rate of
LIBOR plus 3.0% (8.375% at September 30, 1998). The Company actually borrowed
approximately $9.7 million on this loan. The Long Wharf Resort Loan had an
initial maturity of December 11, 1998. As a result of negotiations with the
Company, CSFBMC extended the maturity of the Long Wharf Resort Loan to the
earlier of the closing date of a registered public offering of the Company's
Common
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Stock or June 11, 1999. Proceeds from the loan were used to repay part of the
1997 Credit Facility and for working capital purposes. All amounts under the
1997 Credit Facility that were secured by the assets of Eastern Resorts were
repaid. In addition to this repayment, the amount available for borrowing under
the 1997 Credit Facility was reduced by the amount of the Long Wharf Resort
Loan. As this loan is repaid, the amount available for borrowing under the 1997
Credit Facility increases by an amount equal to the amount repaid on the Long
Wharf Resort Loan. The Long Wharf Resort Loan is secured by Eastern Resorts'
interest in certain Mortgaged Real Property (as defined in the Long Wharf Resort
Loan Agreement) and all present and future interest of Eastern Resorts in
certain pledged receivables at the Long Wharf Resort. The Long Wharf Resort Loan
also contains covenants which require, among other things, that Eastern Resorts
maintain collateral and insurance policies, pay taxes, meet certain reporting
requirements, comply with applicable regulations and indemnify CSFBMC against
certain losses.
As of August 28, 1998, the closing date of the Eastern Resorts
acquisition, the Bridge Loan and the Long Wharf Resort Loan had a combined
principal amount of $21.8 million. Through December 11, 1998, $9.5 million was
repaid, and had a remaining aggregate balance of $12.3 million. This loan
matures on June 11, 1999.
Indebtedness to Community Banks
In connection with certain A&D Loans and Purchased Receivables, the
Company assigns a portion of the collateral to one or more community banks as
security for loans made by such banks to the Company. The community bank loans
are made in some cases without recourse to the Company. In the event of a
default by the developer borrower, the Company might have certain obligations to
attempt to collect the defaulted amounts, but would otherwise have no obligation
to repay the defaulted portion of the principal amount to the community banks,
unless it subsequently collected from the defaulting developer.
As of September 30, 1998, the Company's aggregate outstanding
indebtedness to community banks on such community bank loans (excluding any
amounts as to which the developer borrower was past due in payment) was $11.1
million.
Outstanding Promissory Notes
In December 1996, Resort Funding exchanged $3.4 million of 8% bonds
for unsecured promissory notes. These notes matured on December 1, 1998. The
Company repaid approximately $1.6 million of these notes, and holders of the
remaining notes agreed to extend the maturity of their notes for periods of
three months to two years.
Certain Low-Interest Loans
In September 1996, the Trustee submitted a motion to the Bankruptcy
Court, and with the approval of the Bankruptcy Court, settled the claims of
certain lenders against the Estate. The settlements required the lenders to make
several Settlement Loans to the Company at favorable 0.5% to 4.0% interest
rates. As of September 30, 1998, the outstanding balance on the Settlement Loans
was approximately $22.8 million. The Company is obligated to pay the Estate an
annual arrangement fee of 3% of the unpaid principal balance of the Settlement
Loans. The Company lent approximately $20 million of the proceeds from the
Settlement Loans to the Estate on a non-recourse basis at 10% per annum. The
Trustee pledged certain lease payment collateral to the Company to secure the
loan. As of September 30, 1998, the balance outstanding on the Company's loan to
the Estate was approximately $1.2 million.
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Dividends Payable
As of the date of the Offering, the Company owed the Estate $150,000
in dividends on its Series 2 Class A Redeemable Preferred Stock. These dividends
are payable in cash, Common Stock or additional Series 2 Class A Redeemable
Preferred Stock.
Bentley Brook Acquisition & Development Loan
In connection with the development of the Bentley Brook Mountain Club,
Eastern Resorts entered into a revolving A&D Loan with Textron Financial
Corporation (the "Bentley Brook A&D Loan"). Under the Bentley Brook A&D Loan,
the Company may borrow up to $3 million and pays interest on outstanding amounts
at 2% over the prime rate, payable in monthly installments. In addition, the
Company must make a release payment to pay down principal on the loan in the
amount of $2,600 for each timeshare interval sale. The Bentley Brook A&D Loan is
secured by a first mortgage on two parcels of land on Jiminy Peak Mountain,
personal property and a second mortgage on a third parcel.
In connection with the Bentley Brook A&D Loan, the Company also
granted Textron a right of first refusal with regard to (i) providing any
further financing requires for improvements to specified parts of land at the
Bentley Brook Mountain Club and (ii) financing, by purchase or hypothecation
loans, of all Consumer Loans generated through sales of timeshare intervals in
the units constructed on such specified land at the Bentley Brook Mountain Club.
All amounts currently outstanding on the Bentley Brook A& D Loan are due to be
repaid in full no later than December 20, 2000, subject to the Company's right
to extend the loan's maturity date for 12 months, provided certain conditions
are met.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of September 30, 1998
with respect to persons known to the Company to be the beneficial owners of more
than five percent of the outstanding shares of Common Stock or Series 2 Class A
Preferred Stock of the Company, and with respect to the beneficial ownership of
the outstanding shares of Common Stock and Series 2 Class A Preferred Stock of
the Company held by (i) each director or nominee for director, (ii) Thomas J.
Hamel and Gerald L. Klaben (together, the "Named Executive Officers"), and (iii)
the directors and the executive officers as a group. Except as otherwise noted
below, each director and executive officer has sole voting and investment power
with respect to the shares he or she owns. The table below regarding beneficial
ownership of the Common Stock sets forth the number of shares of Common Stock
that each beneficial owner is offering for sale in the Offering, as well as that
person's beneficial ownership both prior to and after the Offering. The sale in
the Offering of all shares held by Richard Breeden in his capacity as trustee of
the Estate has been approved by the Bankruptcy Court. See "Bankruptcy of
Affiliates and Related-Party Transactions."
<TABLE>
<CAPTION>
Shares to
Beneficial Ownership Be Sold Beneficial Ownership After
Name Prior to Offering in Offering Completion of Offering
---- ----------------- ----------- ----------------------
Shares Percentage(1) Shares Shares Percentage
------ ------------- ------ ------ ----------
Common Stock
<S> <C> <C> <C> <C> <C>
Trustee(2)........................... 20,121,603 79.55% 20,121,603 -- --
Thomas J. Hamel(3)................... 150,000 0.59 --
George W. Carmany III................ -- -- --
R. Perry Harris (4).................. 3,200,000 12.65
John R. Petty........................ -- -- --
Gerald L. Klaben, Jr.(3) ............ 37,500 0.15 --
All directors and executive officers
(8 persons) as a group............. 23,509,103 92.95
Series 2 Class A Redeemable
Preferred Stock
Trustee.............................. 10,000 100% --
</TABLE>
- --------------
(1) The percentage ownership is based upon 25,293,206 shares, comprised of
25,105,706 shares of Common Stock issued and outstanding as of September
30, 1998, and options to purchase 187,500 shares of Common Stock granted
pursuant to the 1997 Long-Term Incentive Plan that are exercisable within
60 days from the date hereof. These amounts do not include 25,532 shares
issued to the Estate in payment of dividends and 67,113 shares issued
to the Estate in the satisfaction of certain indebtedness in October 1998.
(2) Richard C. Breeden, in his capacity as Trustee.
(3) Consists of options granted pursuant to the 1997 Long-Term Incentive Plan
that are exercisable within 60 days from the date hereof.
(4) Includes 160,000 shares owned by his wife, Karen Harris, as to which Mr.
Harris disclaims beneficial ownership.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Common Stock issued and outstanding ( if the Underwriter's over-
allotment option is exercised in full). Of these shares, the shares
of Common Stock to be sold in the Offering will be freely tradable without
restrictions or further registration under the Securities Act, except that
shares purchased by an "affiliate" of the Company (as that term is defined in
Rule 144 promulgated under the Securities Act ("Rule 144")) will be subject to
the resale limitations of Rule 144. Of the remaining shares of Common Stock
outstanding, will be "restricted securities" as the term is defined by Rule 144
(the "Restricted Shares"). In addition, at December 21, 1998, (i) 3,500,000
shares of Common Stock were reserved for issuance upon exercise of outstanding
stock options pursuant to the 1997 Long-Term Incentive Plan at prices ranging
from $1.00 to $5.05 per share, (ii) 430,000 shares of Common Stock were reserved
for issuance upon exercise of outstanding warrants at exercise prices ranging
from $3.50 to $8.00 per share, and (iii) 1,860,465 shares of Common Stock were
reserved for issuance upon conversion of the Series 2 Class A Redeemable
Preferred Stock.
The Company and Perry Harris are also parties to a stockholders'
agreement, to which Karen Harris is also a party. Pursuant to the terms of such
stockholders' agreement, Mr. Harris may request registration under the
Securities Act of the shares of Common Stock currently held by him, subject to
the Company's right to postpone compliance with such request under certain
circumstances. The stockholders' agreement also provides that Mr. Harris may not
sell his shares of Common Stock prior to August 24, 1999, except that Mr. Harris
may request to include up to 1,500,000 of his shares of Common Stock in the
Company's first registered public offering of its Common Stock which commences
after the date of the stockholders' agreement. The Company has the right to
postpone compliance with that request under certain circumstances. Mr. Harris is
a Selling Stockholder in the Offering and is selling 1,500,000 shares.
The Company and CSFBMC are parties to an agreement that provides for
"piggy back" registration rights for the warrants and underlying Common Stock in
connection with any registration statement filed by the Company as well as the
right to demand registration of such warrants and common stock in certain
eventS.
In general, under Rule 144 as currently in effect, if a period of at
least one year has elapsed between the later of the date on which "restricted
shares" (as that phrase is defined in Rule 144) were acquired from the Company
and the date on which they were acquired from an "affiliate" of the Company (an
"Affiliate," as that term is defined in Rule 144), then the holder of such
restricted shares (including an Affiliate) is entitled to sell a number of
shares within any three-month period that does not exceed the greater of (i) one
percent of the then outstanding shares of the Common Stock or (ii) the average
weekly reported volume of trading of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted shares in accordance with
the foregoing volume limitations and other requirements but without regard to
the one-year period. Under Rule 144(k), if a period of at least two years has
elapsed between the later of the date on which restricted shares were acquired
from the Company and the date on which they were acquired from an Affiliate, a
holder of such restricted shares who is not an Affiliate at the time of the sale
and has not been an Affiliate for at least three months prior to the sale would
be entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above. The foregoing description of
Rule 144 is not intended to be a complete description thereof.
Sales of significant amounts of the Common Stock, or the perception
that such sales could occur, could have an adverse impact on the market price of
the Common Stock. The Company, and its directors and officers (including Perry
Harris) have agreed that during the period beginning on the date of the
Prospectus and continuing to and including the date 180 days after the date of
the Prospectus, they will not offer, sell, contract to sell or otherwise dispose
of any shares of Common Stock, any securities of the Company that are
substantially similar to the shares of the Common Stock or that are convertible
or exchangeable into Common Stock or securities that are substantially similar
to the shares of the Common Stock (other than pursuant to employee stock option
plans existing, or on conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this
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<PAGE>
Prospectus) without the prior written consent of Credit Suisse First Boston
Corporation, on behalf of the Underwriters, except for the shares of Common
Stock offered in connection with the Offering. See "Underwriting."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, par value $.01 per share, and 1,000,000 shares of
preferred stock, par value $3.00 per share (the "Preferred Stock"). The
following summary does not purport to be complete and is subject to the detailed
provisions of, and qualified in its entirety by reference to, the Certificate of
Incorporation and the By-Laws of the Company currently in effect which have been
filed as exhibits to the Registration Statement of which this Prospectus forms a
part, and to the applicable provisions of the General Corporation Law of the
State of Delaware (the "DGCL").
Common Stock
Upon completion of the Offering, the Company will have shares
of Common Stock outstanding ( if the Underwriter's over-allotment option is
exercised in full).
Voting Rights. The Common Stock as a class is entitled to 80% of the
votes in any election of directors and all other matters submitted to a vote of
stockholders. The remaining 20% of the votes are held by the Series 2 Class A
Redeemable Preferred Stock. Subject to the foregoing, each share of Common Stock
entitles the holder thereof to one vote.
Dividends. Each share of Common Stock has an equal and ratable right,
subject to any preferential rights of any outstanding Preferred Stock, to
receive dividends to be paid from the Company's assets legally available
therefor when, as and if declared by the Board of Directors. Delaware law
generally requires that dividends are payable only out of the Company's capital
surplus or current net profits in accordance with the DGCL. See "--Restrictions
on Dividends."
Liquidation. Subject to the rights of any holders of Preferred Stock
outstanding, upon the dissolution, liquidation or winding up of the Company, the
holders of Common Stock are entitled to share equally and ratably in the assets
available for distribution after payments are made to the Company's creditors.
Other. The holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights and are not liable for further
call or assessment. All of the outstanding shares of Common Stock are, and the
Common Stock offered hereby will be, validly issued, fully paid and
non-assessable.
Series 2 Class A Preferred Stock
As of the date of this Prospectus, there are 10,000 shares of Series 2
Class A Preferred Stock outstanding.
Rank. The Series 2 Class A Preferred Stock shall, with respect to
dividend rights and rights on liquidation, winding up and dissolution, rank
senior to all other series and classes of capital stock of the Company, whether
such series and classes are now existing or are created in the future.
Voting Rights. The holders of the Series 2 Class A Preferred Stock are
entitled to vote on all matters presented to the stockholders of the Company for
their vote. The Series 2 Class A Preferred Stock as a class holds 20% of the
total number of votes of the Company, while 80% is reserved to the shares of
Common Stock.
Dividends. The Series 2 Class A Preferred Stock dividends are
cumulative and payable quarterly when declared by the Company at the rate of
$60.00 per annum per share, payable in cash, Common Stock or additional
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<PAGE>
shares of Series 2 Class A Preferred Stock. Holders of shares of the Series 2
Class A Preferred Stock are entitled to receive the dividends in preference to
and in priority over the holders of shares of the Common Stock, when and as
declared by the Company.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of shares of Series 2
Class A Preferred Stock then outstanding will be entitled to be paid ratably out
of the assets of the Company available for distribution to its stockholders
after the payment or provision for any payment of amounts due to holders of
securities ranking senior to the Series 2 Class A Preferred Stock in an
aggregate amount in cash equal to $1,000 per share, plus all accrued and unpaid
dividends, whether or not such accrued and unpaid dividends have been declared,
before any payment may be made or any assets distributed to the holders of the
Common Stock.
Redemption. The Company may at its option any time after February 16,
2003, redeem the Series 2 Class A Preferred Stock in whole or in part at the $10
million liquidation value plus accrued and unpaid dividends.
Other. By an order dated September 24, 1998, the Bankruptcy Court
approved the Trustee's motion to either (i) exchange the 10,000 shares of Series
2 Class A Preferred Stock into 1,860,465 shares of Common Stock (completed on
the basis of $5.375 per share), or (ii) sell the 10,000 shares of Series 2 Class
A Preferred Stock to the Company for a sum which is the multiple of 1,860,465
times the public offering price for the Common Stock minus the underwriter's
discount. The Company expects to purchase all outstanding Series 2 Class A
Preferred Stock from the Estate immediately following the Offering.
Authorized Preferred Stock
The Board of Directors of the Company has authorized 1,000,000 shares
of Preferred Stock, of which only 10,000 shares are issued and outstanding. See
"Series 2 Class A Preferred Stock" above. The Board of Directors of the Company
is authorized, without further stockholder action, to divide any or all shares
of the authorized but unissued Preferred Stock into one or more series and to
fix and determine the designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion or
exchange privileges. There are no plans, agreements or understandings for the
issuance of any new series of Preferred Stock at this time.
The Company believes that the ability of the Board of Directors to
issue one or more additional series of Preferred Stock will provide the Company
with flexibility in structuring possible future financings and acquisitions and
in meeting other corporate needs that might arise. The authorized shares of
Preferred Stock will be available for issuance without further action by the
Company's stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which the Company's
securities may be listed or traded.
Although the Board of Directors has no intention at the present time
of doing so, it could issue a series of Preferred Stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of the Company
and its stockholders. The Board of Directors, in so acting, could issue
Preferred Stock having terms that could discourage a potential acquirer from
making, without first negotiating with the Board of Directors, an acquisition
attempt that would enable the potential acquirer to change the composition of
the Board of Directors. This could discourage a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then-current market price of such stock.
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<PAGE>
Warrant and Rights
As of the date of this Prospectus, 430,000 shares of Common Stock were
reserved for issuance upon the exercise of outstanding warrants. Pursuant to the
1997 Credit Facilities, CSFBMC received a warrant exercisable for 125,000 shares
of Common Stock at $3.50 per share and a warrant exercisable for 125,000 shares
of Common Stock at $4.00 per share (collectively, the "1997 Warrants"). As part
of the consideration for providing the Bridge Loan, CSFBMC also received a
warrant exercisable for 180,000 shares of Common Stock at $8.00 per share (the
"Bridge Loan Warrant"). The 1997 Warrants expire on November 14, 2002 and the
Bridge Loan Warrant expires on July 18, 2003. The 1997 Warrants and the Bridge
Loan Warrant may be exercised at any time prior to such expiration date, subject
to certain restrictions.
CSFBMC, as a warrant holder, may request registration under the
Securities Act of the shares of Common Stock which were reserved for issuance
upon the exercise of the 1997 Warrants and/or the Bridge Loan Warrant, subject
to the right of the Company's underwriter to limit the number of shares so
registered under certain circumstances.
Indemnification of Directors and Officers
Section 145 of the DGCL ("Section 145"), in summary, empowers a
Delaware corporation, within certain limitations, to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section
145 permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court of
Chancery or the court in which such action or suit was brought approves such
indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.
Article IX of the by-laws of the Company provides for the
indemnification of officers and directors and certain other parties of the
Company to the fullest extent permitted by law.
Limitations on Payment of Dividends
Currently, the right of each share of Common Stock to receive
dividends is subject to the preferential rights of the outstanding shares of
Series 2 Class A Preferred Stock. As of the date of the Prospectus, there are
10,000 shares of Series 2 Class A Preferred Stock outstanding. So long as any
shares of the Series 2 Class A Preferred Stock are outstanding, the Company may
not declare, pay or set apart for payment, any dividend on any of the Common
Stock or any other capital stock of the Company ranking junior to the Series 2
Class A Preferred Stock, unless prior to or concurrently with any such
declaration, payment or setting apart for payment, all dividends accrued on the
Series 2 Class A Preferred Stock have been paid or set apart for payment. As of
September 30, 1998, the Company owed the Estate $150,000 in dividends on the
Series 2 Class A Preferred Stock. Until such dividends have been paid in full,
the Company is not permitted to pay dividends on its Common Stock.
Additionally, the Company's obligations under the Bridge Loan Facility
restrict the declaration or payment of dividends by the Company under certain
circumstances so long as any portion of the Company's obligations under the
Bridge Loan Facility remains unsatisfied. In addition, the Long Wharf Loan
Facility and the 1997 Credit Facilities impose on the Company certain minimum
net worth requirements that may limit the Company's abilities
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<PAGE>
to declare or pay dividends. As of the date of the Prospectus, the Company is in
compliance with its minimum net worth requirement obligations under each of the
Bridge Loan Facility, the Long Wharf Loan Facility and the 1997 Credit
Facilities.
The Company has never paid dividends on its Common Stock. The Company
intends to retain any future earnings to finance the development and expansion
of its business and, therefore, does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. The declaration and payment of
dividends, as well as the amount thereof, is subject to the discretion of the
Board of Directors of the Company and will depend upon the Company's results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors.
Certain Voting Rights
As long as any shares of the Series 2 Class A Preferred Stock remain
outstanding, the Company will not, without the approval of at least 66 2/3% in
voting power of shares of the Series 2 Class A Preferred Stock, (i) amend, alter
or repeal any of the provisions of the statement establishing the Series 2 Class
A Preferred Stock or the Restated Certificate of Incorporation, as amended, of
the Company or authorize any reclassification of the Series 2 Class A Preferred
Stock, amend, alter or repeal any of the provisions of the statement
establishing the Series 2 Class A Preferred Stock of the Restated Certificate of
Incorporation, as amended, of the Company, or authorize any reclassification of
the Series 2 Class A Preferred Stock, so as in any such case to affect adversely
the preferences, special rights or powers of the Series 2 Class A Preferred
Stock, or authorize any capital stock of the Company ranking, either as to
payment of dividends or upon liquidation, dissolution or winding up of the
Company, prior to the Series 2 Class A Preferred Stock, or (ii) increase the
authorized number of shares of Series 2 Class A Preferred Stock or create, or
increase the authorized number of shares of, any other class of capital stock of
the Company ranking on a parity with the Series 2 Preferred Stock either as to
payment of dividends or upon liquidation, dissolution or winding up of the
Company.
Stockholder Meetings and Action By Written Consent
In order for stockholders to call special meetings, the Company's
by-laws require the written request of holders of shares entitled to cast not
less than 10% of all votes entitled to be cast at such meeting. Such provisions
do not, however, affect the ability of the stockholders to submit a proposal to
the vote of all stockholders of the Company in accordance with the by-laws.
The by-laws provide that any action required or permitted to be taken
at a meeting of stockholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at amending at which all shares
entitled to vote thereon were present and voted.
Section 203 of the Delaware General Corporation Law
Section 203 of DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder," which is defined as a person who,
together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value of 10% or more of the consolidated assets of
the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder acquired its stock. A Delaware corporation,
pursuant to a provision in its certificate of incorporation or by-laws, may
elect not to be governed by Section 203 of the DGCL. The Restated Certificate of
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Incorporation of the Company does not exclude the Company from the restrictions
imposed by Section 203 of the DGCL and, as a result, the Company will be subject
to its provisions upon consummation of the Offering.
Under certain circumstances, Section 203 of the DGCL makes it more
difficult for a person who could be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. The Restated Certificate of Incorporation of
the Company does not exclude the Company from the restrictions imposed under
Section 203 of the DGCL. It is anticipated that the provisions of Section 203 of
the DGCL may encourage companies interested in acquiring the Company to
negotiate in advance with the Board of Directors, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves, prior to the date on which a stockholder becomes an interested
stockholder, either the business combination or the transaction which results in
the stockholder becoming an interested stockholder.
Registrar and Transfer Agent
Continental Stock Transfer & Trust Company will act as Registrar and
Transfer Agent for the Common Stock.
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UNDERWRITING
Under the terms and subject to the conditions contained in an
Underwriting Agreement dated (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation is acting as representative (the "Representative"), have
severally but not jointly agreed to purchase from the Company and the Selling
Stockholders the following respective numbers of shares of Common Stock.
Number
Underwriter of Shares
- ----------- ---------
Credit Suisse First Boston Corporation.......................
Total................................................ ___________
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances, the
purchase commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to purchase
up to additional shares at the public offering price less the
underwriting discounts and commissions, all as set forth on the cover page of
this Prospectus. Such option may be exercised only to cover over-allotments in
the sale of the shares of Common Stock. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares of Common
Stock as it was obligated to purchase pursuant to the Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representative that the Underwriters propose to offer the shares of Common Stock
to the public initially at the public offering price set forth on the cover page
of this Prospectus and, through the Representative, to certain dealers at such
price less a concession of $ per share, and the Underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers. After the public offering, the public offering price and concession and
discount to dealers may be changed by the Representative.
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The following table summarizes the compensation to be paid to the
Underwriters by the Company and the Selling Stockholders and the expenses
payable by the Company and the Selling Stockholders.
<TABLE>
<CAPTION>
Total
Without With
Per Share Over-allotment Over-allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions paid
by the Company........................................ $ $ $
Expenses payable by the Company ........................... $ $ $
Underwriting Discounts and Commissions paid
by the Selling Stockholders........................... $ $ $
Expenses payable by the Selling Stockholders .............. $ $ $
</TABLE>
The Representative has informed the Company that it does not intend to
confirm sales to any accounts over which it exercises discretionary authority.
The Company intends to use more than 10% of the net proceeds from the
sale of the Common Stock to repay indebtedness owed by it to Credit Suisse First
Boston Mortgage Capital LLC, an affiliate of the lead managing underwriter.
Accordingly, the Offering is being made in compliance with the requirements of
Rule 2710(C)(8) of the National Association of Securities Dealers, Inc. Conduct
Rules. This rule provides generally that if more than 10% of the net proceeds
from the sale of stock, not including underwriting compensation, is paid to the
underwriters or their affiliates, the public offering price of the stock may not
be higher than that recommended by a "qualified independent underwriter" meeting
certain standards. Accordingly, is assuming the responsibilities
of acting as the qualified independent underwriter in pricing the Offering and
conducting due diligence. The public offering price of the Common Stock set
forth on the cover page of this Prospectus is no higher than the price
recommended by .
The Company, its officers and directors and the Selling Stockholders
have agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any additional shares of the Company or
securities convertible or exchangeable into or exercisable for any shares of
Common Stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.
Application will be made to list the Common Stock on The Nasdaq Stock
Market's National Market.
Prior to the Offering, the Common Stock has been listed on The Nasdaq
Stock Market's SmallCap Market. Due to the low number of publicly held shares of
Common Stock and other factors, the price of the Common Stock on The Nasdaq
Stock Market's SmallCap Market may not be representative of the actual value of
the Common Stock. The price to the public for the shares of Common Stock will be
negotiated among the Company, the Selling Stockholders and the Representative,
taking into account the level of public interest in the Common Stock. Such price
will be based on, among other things, prevailing market conditions, the
Company's financial and operating history and condition, its prospects and the
prospects for its industry in general, the management of the Company and the
market prices for securities of companies in businesses similar to that of the
Company.
The Representative, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Exchange Act. Over-allotment involves syndicate sales in excess of the
Offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing
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bids do not exceed a specified maximum. Syndicate covering transactions involve
purchases of the Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Representative to reclaim a selling concession from a syndicate member when
shares of Common Stock originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. In
"passive" market making, market makers in the Common Stock who are Underwriters
or prospective underwriters may, subject to certain limitations, make bids for
or purchases of the Common Stock until the time, if any, at which a stabilizing
bid is made. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected in The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
The public offering price for the Common Stock is subject to the
approval of a pricing committee, including members appointed by the Bankruptcy
Court.
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NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
Representations of Purchasers
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."
Right of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts
named herein and the Selling Stockholders may be located outside of Canada and,
as a result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against the issuer or such persons outside of Canada.
Notice to British Columbia Residents
A purchaser of Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Common Stock acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only
one such report must be filed in respect of Common Stock acquired on the same
date and under the same prospectus exemption.
102
<PAGE>
Taxation and Eligibility for Investment
Canadian purchasers of Common Stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
103
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Securities offered hereby
will be passed upon for the Company by Shearman & Sterling, New York, New York.
Latham & Watkins, Los Angeles, California, is acting as counsel for the
Underwriters in connection with the Offering.
EXPERTS
The Consolidated Financial Statements of Equivest as of December 31,
1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997 included
in this Prospectus have been audited by Firley, Moran, Freer & Eassa, P.C.,
independent auditor, as stated in its report appearing herein. The Consolidated
Financial Statements of Eastern Resorts as of and for the years ended December
31, 1996 and 1997 included in this Prospectus have been audited by Donovan,
Sullivan & Ryan, independent auditor, as stated in their report appearing
herein. The financial statements of Equivest and Eastern Resorts have been
included in reliance upon the report of each such firm given upon its authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (as
amended, the "Registration Statement") of which this Prospectus is a part under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
summaries of the material terms of such contract, agreement or other document.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit. The
Registration Statement (including the exhibits and schedules thereto) may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street (Suite
1400), Chicago, Illinois 60661. Copies of such material may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of this website is http://www.sec.gov. Reports, proxy statements and
other information concerning the Company can also be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information statements
and other information can be inspected and copied at the addresses set forth
above.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Financial Statements of Equivest Finance, Inc. and Subsidiaries Page
<S> <C>
Independent Auditor's Report..............................................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997, and
as of September 30, 1998 (Unaudited)...............................................................F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996
and 1997, and for the nine-month periods ended September 30, 1997
and 1998 (Unaudited)...............................................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997, and for the nine-month period
ended September 30, 1998 (Unaudited) ..............................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997, and for the nine-month period ended September 30, 1998 (Unaudited) .................F-7
Notes to Consolidated Financial Statements................................................................F-8
Consolidated Financial Statements of Eastern Resorts Company, LLC and Subsidiary
Independent Auditors' Report..............................................................................F-35
Consolidated Balance Sheets as of December 31, 1997 and 1996..............................................F-36
Consolidated Statements of Income and Members' Equity for the years ended
December 31, 1997 and 1996.........................................................................F-37
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996......................F-38
Notes to Consolidated Financial Statements of Eastern Resorts.............................................F-39
Unaudited Condensed Consolidated Financial Statements of Eastern Resorts Company, LLC and
Subsidiary
Unaudited Condensed Consolidated Balance Sheets as of August 28, 1998 and 1997............................F-48
Unaudited Condensed Consolidated Statements of Income and Members' Equity for the
periods January 1 to August 28, 1998 and 1997......................................................F-49
Unaudited Condensed Consolidated Statements of Cash Flows for the periods January 1
to August 28, 1998 and 1997........................................................................F-50
Notes to the Unaudited Condensed Consolidated Financial Statements of Eastern Resorts.....................F-51
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Equivest Finance, Inc.
Syracuse, New York
We have audited the accompanying consolidated balance sheets of Equivest
Finance, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ FIRLEY, MORAN, FREER & EASSA, P.C.
Syracuse, New York
February 20, 1998
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------- ----------------
1996 1997 1998
--------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
ASSETS
Cash and cash equivalents........................................... $ 4,037,201 $ 4,620,479 $ 2,504,676
Receivables......................................................... 102,772,188 122,229,365 139,188,884
Inventory........................................................... -- -- 9,506,048
Deferred financing costs, net....................................... 3,859,554 4,125,972 3,867,659
Cash--restricted.................................................... 1,128,773 855,138 1,719,294
Accrued interest receivable......................................... 425,471 341,107 857,654
Deferred taxes...................................................... 824,536 1,141,536 --
Property and equipment, net......................................... 2,295 26,990 3,060,831
Goodwill, net....................................................... -- - 26,919,890
Other assets........................................................ 153,789 143,380 1,106,877
------------- ------------- -------------
TOTAL ASSETS..................................................... $ 113,203,807 $ 133,483,967 $ 188,731,813
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable.................................................... $ 715,698 $ 434,072 $ 1,336,655
Accounts payable--related parties................................... 680,842 11,235 --
Accrued expenses and other liabilities.............................. 994,788 519,109 5,682,525
Deferred taxes...................................................... -- - 1,686,464
Notes payable....................................................... 82,942,196 99,961,357 128,364,965
Notes payable--related party........................................ 23,803,257 -- --
------------- ------------- -------------
TOTAL LIABILITIES................................................ $ 109,136,781 $ 100,925,773 $ 137,070,609
SUBSEQUENT EVENTS, CONTINGENCIES AND COMMITMENTS
12.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK........................... 29,745 29,745 --
STOCKHOLDERS' EQUITY
Cumulative Redeemable Preferred Stock--Series 2 Class A, $3 par
value; 15,000 shares authorized, 10,000 shares outstanding;
$10,000,000 liquidation value.................................... $ 30,000 $ 30,000 $ 30,000
Cumulative Convertible Preferred Stock--Series 2, $3 par value;
3,000 shares authorized, 3,000 shares outstanding--1996 and -0-
shares outstanding-- 1997 and 1998............................... 9,000 -- --
Common Stock, $.05 par value; 50,000,000 shares authorized,
9,484,847 shares outstanding--1996, 21,834,443 shares
outstanding--1997 and 25,105,706 shares outstanding-- 1998....... 474,243 1,091,723 1,255,286
Additional paid in capital............................................. 6,330,956 32,078,721 47,601,421
Retained earnings (deficit)............................................ (2,806,918) (671,995) 2,774,497
------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY....................................... 4,037,281 32,528,449 51,661,204
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $ 113,203,807 $ 133,483,967 $ 188,731,813
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended
September 30,
1995 1996 1997 1997 1998
------------------------------------------- ---------------- -----------
(Unaudited) (Unaudited)
REVENUE
<S> <C> <C> <C> <C> <C>
Interest ...................................... $ 11,022,331 $ 12,997,682 $ 15,109,185 $ 11,328,952 $ 15,010,759
Gains on sales of contracts ................... 1,402,733 422,328 29,689 29,689 --
Timeshare interval sales ...................... -- -- -- -- 1,103,256
Resort operations ............................. -- -- -- -- 1,214,308
Other income .................................. 769,544 843,349 825,612 175,640 867,982
------------ ------------ ------------ ------------ ------------
13,194,608 14,263,359 15,964,486 11,534,281 18,196,305
COSTS AND EXPENSES
Provision for doubtful receivables ............ 794,322 178,543 925,000 225,000 649,710
Interest ...................................... 5,982,164 8,270,593 8,076,569 6,301,626 5,318,413
Cost of vacation intervals sold ............... -- -- -- -- 272,835
Debt related costs including amortization of
financing costs ............................ 847,507 903,613 1,063,377 768,977 1,336,769
Goodwill amortization ......................... -- -- -- -- 65,783
Sales and marketing ........................... -- -- -- -- 567,524
Resort management ............................. -- -- -- -- 989,549
General and administrative .................... 3,449,267 3,221,365 2,475,117 1,825,663 2,786,078
------------ ------------ ------------ ------------ ------------
11,073,260 12,574,114 12,540,063 9,121,266 11,986,661
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES ............. 2,121,348 1,689,245 3,424,423 2,413,015 6,209,644
PROVISION FOR INCOME TAXES
Current ....................................... 1,132,992 195,000 510,000 270,000 2,272,000
Deferred (credit) ............................. (537,602) (166,000) (317,000) (90,000) 28,000
------------ ------------ ------------ ------------ ------------
595,390 29,000 193,000 180,000 2,300,000
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS ................ 1,525,958 1,660,245 3,231,423 2,233,015 3,909,644
LOSS FROM OPERATIONS OF DISCONTINUED
SEGMENT (less applicable income taxes of $-0-). (2,186,065) -- -- -- --
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................ $ (660,107) $ 1,660,245 $ 3,231,423 $ 2,233,015 $ 3,909,644
============ ============ ============ ============ ============
NET INCOME (LOSS) TO COMMON
STOCKHOLDERS .................................. $ (1,263,825) $ 1,133,194 $ 2,500,205 $ 1,672,059 $ 3,459,190
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE
Basic earnings per Common Share:
Income from continuing operations .......... $ .10 $ .12 $ .22 $ .18 $ .16
Loss from operations of discontinued segment (.23) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) .......................... $ (.13) $ .12 $ .22 $ .18 $ .16
============ ============ ============ ============ ============
Diluted earnings per Common Share:
Diluted earnings per Common Share:
Income from continuing operations .......... $ .05 $ .07 $ .15 $ .10 $ .15
Loss from operations of discontinued segment (.13) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) ............................. $ (.08) $ .07 $ .15 $ .10 .15
============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Preferred Common Stock Retained
Stock--Series 2 Stock-- ---------------------- Additional Earnings
Total Class A Series 2 Shares Amount Paid In Capital (Deficit)
-------------- --------------- -------------- ----------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 $ 2,826,220 $ 30,000 $ 9,000 9,344,810 $ 467,241 $ 6,120,241 $ (3,800,262)
Stock options exercised 2,500 1,000 50 2,450
Conversions of Debentures
to Common Stock 162,050 90,230 4,462 157,588
Conversion of 12.5%
Redeemable Preferred
Stock 53,167 48,807 2,490 50,677
Preferred stock dividends (6,794) (6,794)
Net loss (660,107) (660,107)
----------- ----------- ----------- ---------- ---------- ------------ ------------
Balances, December 31, 1995 2,377,036 30,000 9,000 9,484,847 474,243 6,330,956 (4,467,163)
Net income 1,660,245 1,660,245
----------- ----------- ----------- ---------- ---------- ------------ ------------
Balances, December 31, 1996 4,037,281 30,000 9,000 9,484,847 474,243 6,330,956 (2,806,918)
Conversion of debt owed
to related party 24,970,079 4,645,596 232,280 24,737,799
Conversion of Series 2
Preferred Stock to
Common Stock -- (9,000) 7,500,000 375,000 (366,000)
Dividends on Series 2
Preferred Stock paid
in Common Stock shares -- 23,721 1,186 126,314 (127,500)
Dividends on Series 2 Class
A Preferred Stock paid in
Common Stock shares -- 180,279 9,014 959,986 (969,000)
Common Stock warrants
issued 289,666 289,666
Net income 3,231,423 3,231,423
----------- ----------- ----------- ---------- ---------- ------------ ------------
Balances, December 31, 1997 $32,528,449 $ 30,000 $ -- 21,834,443 $1,091,723 $ 32,078,721 $ (671,995)
=========== =========== =========== ========== ========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
Nine months ended September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Redeemable
Preferred
Stock-- Common Stock Additional Retained
Series 2 --------------------------- Paid In Earnings
Total Class A Shares Amount Capital (Deficit)
------------ -------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 $ 32,528,449 $ 30,000 21,834,443 $ 1,091,723 $ 32,078,721 $ (671,995)
Dividends on 12.5% Redeemable
Convertible Preferred Stock (8,819) (8,819)
Conversion of 12.5% Redeemable
Convertible Preferred Stock to
Common Stock 21,930 20,541 1,027 20,903
Dividends on Series 2 Class A
Preferred Stock paid in Common
Stock shares -- 50,722 2,536 301,797 (304,333)
Dividends declared on Series
2 Class A Preferred Stock (150,000) (150,000)
Common Stock issued (see Note Q) 15,360,000 3,200,000 160,000 15,200,000
Net income 3,909,644 3,909,644
------------ ------------ ------------ ------------ ------------ ------------
Balances, September 30, 1998 $ 51,661,204 $ 30,000 25,105,706 $ 1,255,286 $ 47,601,421 $ 2,774,497
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
--------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
--------------- ------------- --------------- --------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES
Net income from continuing operations $ 1,525,958 $ 1,660,245 $ 3,231,423 $ 2,233,015 $ 3,909,644
Net loss from discontinued segment (2,186,065)
Adjustments to reconcile net income (loss)
to net cash from (used in) operating
activities:
Amortization and depreciation 439,137 733,903 1,048,534 753,925 1,392,101
Provision for doubtful receivables 1,396,496 178,543 925,000 225,000 649,710
Deferred tax (credit) (537,602) (166,000) (317,000) (90,000) 28,000
Gains on sales of contracts (1,402,733) (422,328) (29,689) (29,689) --
Changes in assets and liabilities,
net of effects from purchase of
Eastern Resorts:
Other assets (1,726,603) (2,754,358) (1,218,644) (885,804) (1,534,452)
Inventory -- -- -- -- 402,374
Accounts receivable--related party -- (671,411) 163,025 (66,334) --
Restricted cash (229,225) (864,295) 273,635 (52,335) (812,044)
Accounts payable and accrued expenses 2,746,468 (3,815,884) 1,473,509 (186,012) 2,312,665
Accounts payable--related parties 2,150,150 (1,469,308) (365,585) 1,532 (11,235)
------------- ------------- ------------- --------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,175,981 (7,590,893) 5,184,208 1,903,298 6,336,763
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in receivables, net (49,421,487) (17,433,818) (25,745,306) (14,030,108) (15,992,901)
Increase in inventory, net -- -- -- -- (766,237)
Proceeds from sales of contracts 18,568,111 6,966,882 1,206,870 1,206,870 --
Sale (purchase) of equipment -- 22,951 (26,230) (26,230) (46,987)
Purchase of Eastern Resorts, net of cash
acquired of $908,031 -- -- -- -- (14,091,968)
----------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (30,853,376) (10,443,985) (24,564,666) (12,849,468) (30,898,093)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from recourse notes payable 32,868,261 26,096,575 21,042,826 7,334,812 59,767,842
Payments on recourse notes payable (5,093,969) (15,944,991) (14,092,955) (9,266,832) (38,269,151)
Proceeds from non-recourse notes payable 24,689,900 36,785,065 23,821,115 16,258,116 2,498,753
Payments on non-recourse notes payable (7,183,411) (15,547,922) (14,109,373) (13,755,690) (4,308,887)
Loans to related party (100,753) (12,482,296) (6,545,967) -- (355,976)
Payments on notes receivable--related party -- 5,044,328 9,960,503 8,791,239 3,129,580
(Payments on) proceeds from notes payable (1,332,655) 280,156 (112,413) -- --
Payments on redemption of preferred stock -- -- -- -- (7,815)
Preferred stock dividends paid -- -- -- -- (8,819)
(Payments on) proceeds from loans payable--
related party (19,358,448) (3,461,770) -- -- --
Proceeds from subordinated debt-related party 5,000,000 -- -- -- --
-------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,488,925 20,769,145 19,963,736 9,361,645 22,445,527
------------ ------------ ------------ ------------- ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 811,530 2,734,267 583,278 (1,584,525) (2,115,803)
Cash and cash equivalents at beginning of period 491,404 1,302,934 4,037,201 4,037,201 4,620,479
------------- ------------- ------------- --------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,302,934 $ 4,037,201 $ 4,620,479 $ 2,452,676 $ 2,504,676
============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information
Pertaining to the Nine Months Ended September 30, 1997
and 1998 is Unaudited)
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 lender, developer and operator
in the timeshare industry. Equivest is a holding company. Through its
wholly-owned subsidiary, Resort Funding, Inc. and its subsidiary, BFICP
Corporation (collectively, "Resort Funding"), the Company provides financing to
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. Through its wholly-owned subsidiary, Eastern Resorts
Corporation and its subsidiary, Long Wharf Marina Restaurant, Inc. (collectively
Eastern Resorts), the Company acquires and operates resort properties and
markets and sells timeshare intervals in its own resorts in the New England
area.
On August 28, 1998, Equivest entered into an Agreement and Plan of Merger with
Eastern Resorts. In this transaction, Equivest acquired all of the capital stock
of Eastern Resorts in exchange for $15,000,000 in cash and 3,200,000 shares of
Equivest common stock together with the assumption of Eastern Resorts
liabilities (see Note Q).
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 84% of the Company's voting shares.
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Equivest Finance, Inc. and its subsidiaries, Equivest
Capital Funding, Inc. (inactive), Resort Funding, Inc. and its subsidiary, BFICP
Corporation, and as of August 28, 1998, Eastern Resorts Corporation and its
subsidiary, Long Wharf Marina Restaurant, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
Interim Financial Statements: The accompanying consolidated financial statements
for the nine months ended September 30, 1997 and 1998 and related disclosures
are unaudited. In the opinion of the Company, all adjustments necessary to
fairly present the financial position, results of operations, and cash flows
have been reflected in these financial statements.
The accompanying consolidated financial statements for the nine months ended
September 30, 1998 include nine months of operations of Equivest and its
subsidiaries, Resort Funding, Inc. and BFICP Corporation, and the operations of
Eastern Resorts for the thirty-three days since acquisition. Consequently, the
accompanying consolidated statement of income for the nine months ended 1998 is
not necessarily indicative of an on-going twelve month accounting period.
Use of Estimates: The preparation of these consolidated 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 consolidated 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: Cash and cash equivalents consist of cash and money
market investment accounts. These accounts are maintained at several banks;
nevertheless, several are concentrated credit risks because they customarily
exceed the FDIC $100,000 insured limit.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Pertaining to the Nine Months Ended
September 30, 1997 and 1998 is Unaudited) (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. That amount
cannot be estimated.
Inventory: Inventory is stated at the lower of cost or market and consists of
unsold timeshare intervals available for sale and the cost of timeshare resorts
under construction. Upon a sale of a timeshare interval, inventory is charged to
cost of sales using the specific cost allocated to the interval. 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 represent unamortized
expenses associated with issuing certain debt. Amortization of these costs is
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
$210,335 in 1995, $712,367 in 1996, $1,046,998 in 1997, and $752,861 and
$1,226,356 for the nine months ended September 30, 1997 and 1998, respectively.
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:
Restaurant condominiums/office building/warehouse 39 years
Computers 5 years
Marina 7-10 years
Furniture and fixtures 7 years
Motor vehicles 5 years
Equipment 7 years
Goodwill: This asset represents the excess of costs over net assets arising from
the acquisition of the Eastern Resort Corporation. Goodwill is being amortized
on a straight-line basis over forty years. Amortization of $65,783 was charged
to operations during the nine months ended September 30, 1998.
Interest Income: The Company recognizes interest income on its outstanding loans
receivables 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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Pertaining to the Nine Months Ended
September 30, 1997 and 1998 is Unaudited) (Continued)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Gains on Sales of Contracts and Transfers of Assets: Gains on sales of contracts
result from periodic sales of consumer receivables on a nonrecourse basis. The
Company records gains to the extent net proceeds exceed the net investment in
the consumer receivables sold. Proceeds from sales of consumer receivables were
$18,568,111 in 1995, $6,966,882 in 1996, $1,206,870 in 1997, and $1,206,870 and
$-0- for the nine months ended September 30, 1997 and 1998, respectively.
Effective January 1, 1997 the Company adopted Statement of Financial Accounting
Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" (SFAS 125). SFAS 125 became effective January
1, 1997 and covers the accounting for transfer and servicing of financial assets
where the transferor has some continuing involvement with the assets transferred
or with the transferee. Under this statement, when it applies, the Company will
recognize the financial and servicing assets it controls and the liabilities it
has incurred from the transfer; and will derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished.
There were no transfers subject to this statement during 1997 or the nine month
period ended September 30, 1998.
Timeshare Interval Sales: Vacation interval sales are made in exchange for cash
and mortgage notes receivable which are secured by a deed of trust on the
vacation interval sold. The Company recognizes the sale of an interval under the
accrual method. Revenues are recognized after a binding sales contract has been
executed, a 10% minimum down payment has been received, and the statutory
recession period has expired. If all criteria are met except that construction
is not substantially complete, revenues are recognized on the
percentage-of-completion basis.
Resort Operations: Revenues from resort operations primarily consist of (1) fees
received for management services provided to several homeowner associations,
(2) revenues generated from renting unoccupied units on a transient basis, and
(3) revenues generated 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 commitments, chargebacks and collection
fees charged to resorts.
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: The Company computes earnings per share under Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and became effective for
periods ending after December 15, 1997. Earnings per share for 1995 and 1996
have been restated to reflect SFAS 128. SFAS 128 requires the presentation of
earnings per share by all entities that have common stock or potential common
stock (such as options, warrants and convertible securities) outstanding that
trade in a public market. Those entities that have only common stock outstanding
present basic
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Pertaining to the Nine Months Ended
September 30, 1997 and 1998 is Unaudited) (Continued)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
earnings per share amounts. All other entities present basic and diluted per
share amounts. Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce a loss or increase the income per common share from continuing
operations.
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: The Company became subject to segment information reporting
when it acquired Eastern Resorts on August 28, 1998. 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 establishes 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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information
Pertaining to the Nine Months Ended September 30, 1997 and
1998 is Unaudited) (Continued)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE B--RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------- -------------
1996 1997 1998
------------------ ----------------- -------------
<S> <C> <C> <C>
Accounts receivable $ 6,234,491 $ 1,437,928 $ 2,034,748
Notes and advance receivable 90,307,500 119,210,250 139,167,716
Less allowance for doubtful receivables (1,979,182) (2,442,244) (3,881,377)
------------- -------------- -------------
94,562,809 118,205,934 137,321,087
Promissory note receivable -- -- 617,970
Accounts receivable--related party 671,411 -- --
Notes receivable--related party 7,537,968 4,023,431 1,249,827
------------- ------------- -------------
$ 102,772,188 $ 122,229,365 $ 138,188,884
============= ============= =============
</TABLE>
Accounts receivable primarily consist of: (1) amounts due from timeshare
interval owners for maintenance and service charges which the Company remits to
the resorts upon receipt, (2) the principal amount of unpaid and delinquent
timeshare interval contracts which are receivable from resorts under the
recourse provisions of applicable financing agreements, (3) amounts due from
homeowner associations for management services rendered, (4) amounts due from
renting unoccupied units on a transient basis, and (5) at December 31, 1996, an
amount due from a bank in connection with its financing facility. 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 and advance receivables include: (1) amounts receivable from timeshare
interval owners less holdbacks on funds advanced under certain contracts, (2)
loans to resorts for acquisition and development of resort properties, (3)
hypothecation loans to resorts secured by the resort's loans from timeshare
interval owners, and (4) retained interests in receivables sold under
securitization agreements. Interest rates on these receivables range from 10.5%
to 18% per annum.
The following are the components of notes and advance receivable as of:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------- -------------
1996 1997 1998
------------------ ----------------- -------------
<S> <C> <C> <C>
Timeshare receivables $ 66,201,329 $ 91,101,627 $ 107,289,448
Less holdbacks (12,385,961) (17,320,018) (17,475,637)
------------- ------------- -------------
53,815,368 73,781,609 89,813,811
Resort receivables:
Acquisition and development 31,475,174 39,390,360 37,257,736
Hypothecation loans 1,569,968 5,275,456 9,049,950
Other loans -- 762,825 3,046,219
------------- ------------- -------------
33,045,142 45,428,641 49,353,905
Retained interest in securitized receivables 3,446,990 -- --
------------- ------------- -------------
$ 90,307,500 $ 119,210,250 $ 139,167,716
============= ============== =============
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information
Pertaining to the Nine Months Ended September 30, 1997 and
1998 is Unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE B--RECEIVABLES--Continued
Substantially all timeshare receivables purchased by the Company are
collateralized by security interests in timeshare intervals and are with full
recourse to the resort developers. Also, the Company's practice is to withhold
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 promissory note receivable is due as a result of a recession 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 five
equal annual installments of $150,000 and will mature on February 2002.
Retained interests in securitized receivables at December 31, 1996 represent the
discounted amount of collections from securitized receivables over the amounts
due to investors in the securitizations. Realization of the carrying value
amount is based on the declines during the period in the present value of the
projected collections using the same discount rate as was appropriate at the
time of securitization. The Company repurchased these receivables in 1997.
Accounts receivable--related parties of $671,411 at December 31, 1996 represents
noninterest bearing advances made to affiliated entities prior to their
bankruptcy. In 1997, the bankruptcy court ruled that the bankrupt entities would
be consolidated for claims settlement purposes. As a result, these receivables
were offset against amounts due to BFG as part of a recapitalization (see Note
C).
Notes receivable--related party is comprised of the following as of December 31,
1996 and 1997 and September 30, 1998:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------- -------------
1996 1997 1998
------------------ ----------------- -------------
<S> <C> <C> <C>
Due from the bankruptcy Trustee $ 7,437,968 $ 4,023,431 $ 1,249,827
Due from BMDC 100,000 -- --
------------- ------------- -------------
$ 7,537,968 $ 4,023,431 $ 1,249,827
============= ============= =============
</TABLE>
The notes due from the bankruptcy Trustee bear interest at 10% per annum and are
collateralized by third-party leases. These notes arose in 1996, 1997 and 1998
in connection with financing transactions renegotiated by the Trustee which are
described in Note F. In the event of default, the Company can apply unpaid
amounts to a fee payable to the Trustee in connection with these financing
transactions.
The amount due from BMDC at December 31, 1996 was offset against amounts due to
BFG as part of a recapitalization (see Note C).
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information
Pertaining to the Nine Months Ended September 30, 1997 and
1998 is Unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE B--RECEIVABLES--Continued
The Company has classified certain resort loans as impaired under SFAS 114 at
December 31, 1996, 1997 and September 30, 1998. The determination of impairment
was made because the debtors had not made principal payments in accordance with
their contractual agreements. The outstanding balance of impaired loans amounted
to $5,315,117 and $10,132,607 at December 31, 1996 and 1997, respectively, and
$3,435,001 at September 30, 1998. The average outstanding amounts during 1996,
1997 and 1998 were $5,147,591, $9,765,342 and $3,435,001, respectively. 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 1996 and 1997 and the nine months ended September 30, 1997 and 1998, the
Company recorded interest income on these loans of $666,850, $1,276,856,
$943,156 and $338,635, respectively. Interest on the impaired loan is current
through September 30, 1998.
Pursuant to an agreement between the Company and a debtor, interest on the
impaired loan at September 30, 1998 is being deposited into an escrow account.
As of September 30, 1998, the account balance was $301,422.
The activity in the allowance for doubtful receivables for the periods ended
December 31, 1995, 1996, 1997 and September 30, 1997 and 1998 follows:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,295,977 $ 1,850,724 $ 1,979,182 $1,979,182 $2,442,244
Allowance related to the acqui-
sition of Eastern Resort -- -- -- -- 792,631
Provision for doubtful receivables 1,396,496 178,543 925,000 225,000 649,710
Charge-offs and recoveries, net (841,749) (50,085) (461,938) -- (3,208)
----------- ----------- ---------- -----------
Balance at end of period $ 1,850,724 $ 1,979,182 $ 2,442,244 $2,204,182 $ 3,881,377
=========== =========== =========== ========== ===========
</TABLE>
The Company's concentration of credit risk in its accounts and notes receivable
is believed to be substantially mitigated by credit and evaluation procedures.
The Company generally requires collateral and holdbacks on certain receivables
and has set up reserves for potential credit losses which have been within
management's expectations.
At September 30, 1998, the Company had agreements for resort development
financing with 12 developers covering 22 timeshare resort complexes. As of
September 30, 1998, one developer accounted for approximately 16% of the
Company's receivable balance. The Company's consumer contract and hypothecation
lending arises from these resorts and a limited number of other resort
developments. At September 30, 1998, the Company was committed to lend
approximately $16 million in funds for resort construction or renovation. The
Company has also agreed to make hypothecation loans to, or purchase consumer
timeshare interval contracts from, 60 resorts, subject to satisfactory
underwriting approval of each individual consumer.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information
Pertaining to the Nine Months Ended September 30, 1997 and
1998 is Unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
NOTE B--RECEIVABLES--Continued
Based on their maturity dates as of December 31, 1997, the notes and advance
receivables are due during the years ending December 31, as follows:
1998--$25,310,490; 1999--$25,085,923; 2000--$28,149,408; 2001--$23,509,481; and
thereafter--$17,154,948.
Based on their maturity dates as of September 30, 1998, the notes and advance
receivables are due during the three months ending December 31, 1998 and years
ending December 31, as follows: 1998 (3 months) -- $6,984,602; 1999 --
$26,823,978; 2000 -- $20,425,536; 2001 -- $35,563,078; 2002 -- $22,272,131; 2003
- -- $11,171,560; and thereafter -- $15,926,831.
NOTE C--RELATED PARTY TRANSACTIONS
Acquisition of Resort Funding: Equivest was in the business of financing auto
insurance premiums primarily in Florida. In mid 1995, Equivest discontinued
operating as an insurance premium finance company.
On February 16, 1996, Equivest entered into an Agreement and Plan of Exchange
with BFG. In this transaction, Equivest acquired all of the capital stock of
Resort Funding from BFG in exchange for $10,000,000 liquidation amount of
Equivest Redeemable Preferred Stock and $3,000,000 liquidation amount of
Equivest Convertible Preferred Stock. The Convertible Preferred Stock is
convertible into 7,500,000 shares (approximately 44% of the outstanding shares
after giving effect to the transaction) of Common Stock of Equivest. Another
affiliated entity, BMDC also owned approximately 42% of the Common Stock of
Equivest. Prior to the exchange transaction, BFG and BMDC owned approximately
75% of the Company's voting stock. Subsequently, they owned approximately 86% of
the Company's voting stock. Because of the relationships among the parties, the
Company accounted for the transaction as if it were a pooling of interest. The
accompanying consolidated financial statements for the years ended December 1995
and 1996 include Resort Funding and subsidiary as if the transaction occurred on
January 1, 1995.
Recapitalization: At December 31, 1996, the Company owed its parent company,
BFG, a net total of $23,803,257 of which $23,712,688 was payable under unsecured
demand notes bearing interest at 10 1/2% per annum.
Effective October 30, 1997, the Company increased its number of authorized
shares of Common Stock from 10,000,000 to 50,000,000. The Company then issued
4,645,596 shares to BFG in full satisfaction of its indebtedness to BFG at
November 24, 1997. The net liabilities which were satisfied totaled $24,970,079
and included the demand notes described above and accrued interest. The
conversion price of $5.375 per share was determined using the average closing
price of the Company's Common Stock for ten days preceding Board of Directors'
approval of the transaction.
Concurrently, the Company issued 7,500,000 shares of Common Stock to BFG in
exchange for the 3,000 outstanding shares of Cumulative Convertible--Series 2
Preferred Stock. The Preferred Stock was mandatorily convertible at the rate of
2,500 common shares to 1 preferred share when the Company had a sufficient
number of authorized shares of Common Stock. As part of this transaction, the
Company issued 23,721 shares of Common Stock to BFG in payment of cumulative
dividends of $127,500 through October 31, 1997.
F-15
<PAGE>
NOTE C--RELATED PARTY TRANSACTIONS--Continued
The $24,970,079 net liability was subsequently corrected by an increase of
$360,732 which had been recorded as an accrued liability as of December 31,
1997. After final resolution with the Bankruptcy Court, and Board of Director
approval, in December 1998 the Company issued an additional 67,113 shares of its
Common Stock to BFG in payment of this liability.
Income and Expense: Interest income earned on the notes receivable from the
bankruptcy Trustee amounted to $-0- in 1995, $61,467 in 1996, $625,511 in 1997,
and $518,672 and $193,210 for the nine months ended September 30, 1997 and 1998,
respectively.
Interest expense incurred on the related party debt amounted to $4,004,211 in
1995, $2,050,773 in 1996, $1,475,609 in 1997, and $1,452,862 and $-0- for the
nine months ended September 30, 1997 and 1998, respectively.
Other: The Company leases its office facilities from BFG. In 1997 its five year
lease was terminated without penalty when the Company relocated within the same
property. Currently rent is paid on a month-to-month basis ($6,782 per month)
until a new lease agreement is finalized. Rent expense for the office facilities
amounted to $136,422 in 1995, $161,213 in 1996, $146,399 in 1997 and $119,781
and $54,770 for the nine months ended September 30, 1997 and 1998, respectively.
The Company's Chief Executive Officer is the bankruptcy Trustee for BFG and BMDC
(see Note H). He has received no compensation from the Company or the bankruptcy
Estate for his duties at the Company.
Under an agreement which expired March 31, 1996, the Company paid BFG $1,335,020
in 1995 and $422,115 in 1996 for various administrative services including
billing, collection, legal and management services. Subsequent to March 31,
1996, the Company receives administrative services from BFG related to billing
consumer amounts due under timeshare interval contracts. This expense amounted
to $85,871 in 1996, $63,500 in 1997 and $46,342 and $131,865 for the nine months
ended September 30, 1997 and 1998, respectively.
NOTE D--RESTRICTED CASH
Restricted cash primarily consists of: (1) amounts on deposit at financial
institutions as security under lending agreements, (2) deposits in accounts
required under its financing and credit facilities, and (3) amounts in escrow
required by a promissory note held by the Company.
F-16
<PAGE>
NOTE E--PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996 and 1997
and September 30, 1998:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Land $ -0- $ -0- $ 81,489
Building and improvements -0- -0- 2,672,575
Furniture and equipment 2,665 28,895 336,218
--------------------- -------------------- -------------------
2,665 28,895 3,090,282
Less accumulated depreciation 370 1,905 29,451
--------------------- -------------------- -------------------
Property and equipment, net $ 2,29$ $ 26,990 $ 3,060,831
===================== ==================== ===================
</TABLE>
Depreciation expense amounted to $-0- in 1995, $370 in 1996, $1,535 in 1997, and
$1,064 and $27,546 for the nine months ended September 30, 1997 and 1998,
respectively.
NOTE F--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
$75,000,000 receivables financing facility $33,323,221 $43,956,667 $45,283,254
$30,000,000 resort acquisition and development
financing facility, less unamortized discount of
$289,666 at December 31, 1997, and $208,197 at
September 30, 1998 -- 10,312,017 15,099,010
Acquisition indebtedness:
$15,000,000 bridge loan -- -- 8,671,807
$11,500,000 mortgage and timeshare
receivable loan -- -- 9,247,077
$7,500,000 revolving line of credit used to
finance resort acquisition and development; due
October 2001, payable in monthly installments at
a variable interest rate (10.25% at September 30,
1998) -- -- 5,055,830
------------------- ------------------- ------------
Subtotal $33,323,221 $54,268,684 $83,356,978
</TABLE>
F-17
<PAGE>
NOTE F--NOTES PAYABLE--Continued
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Balances brought forward $33,323,221 $54,268,684 $83,356,978
Revolving line of credit facilities with aggregate
maximum borrowing of $7,635,645; used to
finance timeshare receivables; payable in monthly
installments through February 2000, with variable
interest rates ranging from 10.5% to 10.75% at
September 30, 1998 -- -- 3,006,639
Collateralized notes payable to banks in monthly
installments through 2008 with interest ranging
from 8.82% to 11% per annum 20,902,915 10,176,221 7,994,199
Nonrecourse collateralized notes payable to banks
in monthly installments through 2001 with
interest ranging from 10.5% to 11% per annum 6,441,959 6,154,357 4,344,223
Collateralized notes payable to banks and others
in monthly installments through 2004 with
interest from 1/2% to 4% per annum 16,130,521 22,571,318 22,847,907
Fee payable to bankruptcy Trustee in connection
with arrangement of 1/2% to 4% notes payable
above, due in varying annual amounts 2,627,440 3,387,066 3,411,308
Unsecured promissory notes payable maturing
December 1, 1998; interest at 8% per annum 3,516,140 3,403,711 3,403,711
------------- ------------- ---------------
$82,942,196 $99,961,357 $128,364,965
============= ============= ===============
</TABLE>
The receivables financing and credit facilities and the collateralized notes
payable are collateralized by security agreements and assignment of payments due
on timeshare contract notes receivable, notes receivable from resorts and, as
further described below, third-party leases.
Receivable and Resort Acquisition and Development Financing Facilities: In
November 1997 the Company obtained a $75 million credit facility from a bank to
be used to fund the financing of timeshare receivables. The facility has a
two-year revolving period ending in November 1999 and a one-year payment period
ending in November 2000. Outstanding balances bear interest at a floating rate
(7.275% at September 30, 1998). In this transaction, the bank took an assignment
of the Company's previous $50 million purchase/pledge financing facility. This
facility provides that qualifying contract notes receivable can be either
securitized and sold to the bank without recourse or used as collateral for
borrowings. In connection with the assignment, the Company repurchased
receivables previously sold to the predecessor bank at the outstanding principal
balance of $6,404,619. Currently, no securitization and sale transactions have
taken place. The Company and the bank intend that the additional $25 million
provided by the facility will be used to fund hypothecation loans to resorts.
F-18
<PAGE>
NOTE F--NOTES PAYABLE--Continued
The Company also obtained a $30 million credit facility from the bank to be used
to fund acquisition and development loans to resorts. It has a two-year
revolving term ending in November 1999 and a one-year payment period ending in
November 2000. Outstanding balances bear interest at a floating rate (8.275% at
September 30, 1998). In connection with this transaction, the bank received
warrants for the purchase of 250,000 shares of the Company's Common Stock as
described in Note L. The warrants were valued at $289,666. This has been
accounted for as a discount in consideration for making the loan and is being
amortized as interest expense over the loan term.
The agreements contain both specific and general covenants including maintenance
of specific collateralization and default rates with respect to pledged
receivables and tangible and overall net worth requirements.
Acquisition Indebtedness: In August 1998 the Company borrowed approximately
$12,100,000 under a $15,000,000 loan agreement. The proceeds were used for the
purchase of 100% of the outstanding capital stock and interest of Eastern
Resorts. In connection with this transaction, the bank received warrants for the
purchase of 180,000 shares of the Company's Common Stock as described in Note L.
It was determined that the warrants had no value for accounting purposes at the
date of grant. The loan is collateralized by a first priority lien on any and
all unencumbered assets of Eastern Resorts and Resort Funding, Inc.'s equity in
certain notes receivable totaling $9.4 million.
Additionally, the Company borrowed approximately $9,700,000 under an $11,500,000
loan agreement. The proceeds enabled Eastern Resorts to pay off amounts it owed
to Resort Funding for timeshare and acquisition and development financing. The
loan is collateralized by a first priority mortgage lien on real property, liens
on personal property and assignment liens on certain timeshare notes receivable
and their proceeds.
The loans had an initial maturity date of December 11, 1998 but were extended to
June 11, 1999. Outstanding balances bear interest at a floating rate (8.375% at
September 30, 1998). The agreements contain affirmative covenants including, but
not limited to, submission of financial statements, maintenance of minimum net
worth and quarterly net income. The agreement also contains negative covenants
which restrict the Company, including its subsidiaries, from incurring debt,
disposing of collateral and declaring or paying dividends.
1/2% to 4% Collateralized Notes Payable: Beginning in November 1996, the Company
has obtained financing at favorable interest rates from banks and others who
were creditors of affiliates which had filed for bankruptcy protection as
described in Note H. 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. The notes receivable from the related
bankrupts are collateralized by third-party leases owned by the affiliated
entities and timeshare contracts. As part of these financing arrangements, the
Company assigned its collateral interest in the third-party leases to these
lenders. As consideration for the financing, the Company will pay a fee to the
bankrupt Trustee based on an annual rate of approximately 3% of the unpaid
principal balance of the loans. The Company is recognizing this fee as interest
over the various loan terms.
Unsecured Promissory Notes Payable: The unsecured promissory notes payable
matured on December 1, 1998. The Company is paying $1,583,904 of these notes and
holders of the remaining notes totalling $1,819,807 agreed to extend the
maturity of their notes for periods of three months to two years.
Subsequent maturities of notes payable as of December 31, 1997 for the years
ending December 31 are: 1998-- $9,613,674; 1999--$6,841,613; 2000--$61,965,122;
2001--$6,460,492; 2002--$5,674,112; and thereafter -- $9,406,344.
F-19
<PAGE>
Subsequent maturities of notes payable as of September 30, 1998 for the three
months ending December 31, 1998 and years ending December 31 are: 1998 (3
months) -- $3,269,619; 1999 -- $27,937,703; 2000 -- $70,535,668; 2001 --
$8,615,832; 2002 -- $11,141,633; 2003 --$5,642,462; and thereafter $1,222,048.
F-20
<PAGE>
NOTE G--INCOME TAXES
The consolidated provisions for income taxes included in the accompanying
Statements of Operations consist of the following for the years ended December
31, 1995, 1996, and 1997 and for the nine months ended September 30, 1997 and
1998:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current provision:
Federal $ 852,508 $ -- $ 72,000 $ -- $ 1,691,000
State 280,484 195,000 438,000 270,000 581,000
----------- --------- --------- ----------- -----------
1,132,992 195,000 510,000 270,000 2,272,000
Deferred provision (benefit):
Federal (537,602) 31,000 (280,000) (37,000) 44,000
State -0 (197,000) (37,000) (53,000) (16,000)
----------- --------- --------- ----------- -----------
(537,602) (166,000) (317,000) (90,000) 28,000
----------- --------- --------- ----------- -----------
$ 595,390 $ 29,000 $ 193,000 $ 180,000 $ 2,300,000
=========== ========= ========= =========== ===========
</TABLE>
The provisions for income taxes are less than amounts computed by applying the
statutory rate (34%) to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income taxes at statutory
rates $ 720,000 $ 589,000 $ 1,164,000 $ 820,000 $ 2,111,000
State income taxes, net of
federal income tax benefit 185,000 129,000 264,000 178,000 373,000
Reduction of valuation
allowance (268,000) (714,000) (1,307,000) (807,000) (233,000)
Alternative minimum tax -- -- 72,000 -- --
Other items (41,610) 25,000 -- (11,000) 49,000
--------- --------- ----------- --------- -----------
Provision for income taxes $ 595,390 $ 29,000 $ 193,000 $ 180,000 $ 2,300,000
========= ========= =========== ========= ===========
</TABLE>
The Company had valuation allowances for its net operating loss carryforwards
because there was no assurance that the Company would generate sufficient
taxable earnings to utilize the unrestricted loss carryforwards before they
expired. Management believes that all other net deductible temporary differences
will reverse during periods in which the Company generates net taxable income.
F-21
<PAGE>
NOTE G--INCOME TAXES - continued
The changes in the valuation allowance for 1995, 1996, 1997, and the nine months
ended September 30, 1997 and 1998 were attributed to:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Increase in (reduction of)
operating loss carryforwards $ 740,000 $(534,000) $(1,306,096) $(807,000) $(232,615)
Revaluation of allowance for
deferred state income taxes -- (180,000) -- -- --
Revaluation of recovery of other
temporary differences (268,000) -- -- -- --
--------- --------- ----------- --------- --------
Net increase (decrease) in
valuation allowance $ 472,000 $(714,000) $(1,306,096) $(807,000) $(232,615)
========= ========= =========== ========= =========
</TABLE>
Net deferred tax assets (liabilities) included in the accompanying balance
sheets are comprised of the following at December 31, 1996 and 1997 and
September 30, 1998:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Receivable allowance $ 694,408 $ 888,822 $ 1,059,243
Net operating loss carryforwards 1,539,521 232,615 --
AMT credit -- 97,438 --
State income taxes, net of federal benefit 130,128 155,276 --
------------ ---------- -------------
2,364,057 1,374,151 1,059,243
Valuation allowance (1,539,521) (232,615) --
------------ ---------- -------------
Deferred tax assets 824,536 1,141,536 1,059,243
Deferred tax liabilities:
Installment sale receivables -- -- 2,335,993
Deferred financing costs -- -- 155,026
State income taxes, net of federal benefit -- -- 250,140
Other -- -- 4,548
---------- ----------- -------------
Deferred tax liabilities -- -- 2,745,707
---------- ----------- -------------
Net Deferred Tax Asset (Liability) $ 824,536 $1,141,536 $ (1,686,464)
========== ========== =============
</TABLE>
As described in Note Q, Equivest entered into an Agreement and Plan of Merger
with Eastern Resorts as of August 28, 1998. Prior to that time Eastern Resorts
was a Subchapter S corporation. As a result of the merger, the Subchapter S
status of Eastern Resorts was terminated. Consequently, Equivest recorded a
$2,800,000 deferred tax liability as part of the purchase accounting to reflect
the difference between the tax basis and book basis of acquired installment
receivables.
The Company has federal net operating loss carryforwards of approximately
$684,000 at December 31, 1997 which will be fully used in 1998.
F-22
<PAGE>
NOTE H--CONTINGENCIES AND COMMITMENTS
On March 28, 1996, the Company's majority owners (BFG and BMDC) were named in a
series of suits filed by the Securities and Exchange Commission. On March 29,
1996, both entities and several other of their affiliates filed for bankruptcy
protection 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. The ultimate impact of these events on the
Company's business and operations is not presently determinable.
The Company has been named with BFG and its affiliates in two class action type
claims brought in connection with investments made by the claimants through BFG
or its other affiliates. The complaints have not yet been answered and it is too
early to assess the likelihood of an unfavorable outcome. One action has been
stayed by an order of the Bankruptcy Court and the other will likely be stayed.
The Company is a defendant in a legal action filed by a former officer and
director of the Company against the Company and other parties containing
numerous allegations and claiming compensatory damages in excess of $1,100,000,
interest and costs. The Company believes that it has meritorious defenses to the
allegations and intends to vigorously defend the lawsuit.
The Company is a defendant in a claim for payment of unclaimed property under
Florida abandoned property law of approximately $402,000. It arose in connection
with a premium finance business previously carried on by Equivest. The Company
does not dispute the amount but approximately $325,000 of the claim had been
held by the Company before enactment of the law in 1990. The Company intends to
contest the claim for that portion and has recorded a liability of $77,000 for
the balance. No assessment of the Company's position can be made at this time.
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 $1,033,000 at December 31, 1997 and
$2,220,000 at September 30, 1998.
The Company has management agreements with homeowners' associations at several
of its timeshare resorts. Under these agreements the Company is required to
provide administrative, accounting, maintenance, security, utilities and
professional services; provide 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 January 2001.
NOTE I--12.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 1,000,000 shares of 12.5% Redeemable Convertible
Preferred Stock with a par value of $3 per share. Each share of this issue of
preferred stock was convertible into 2.81 shares of Common Stock at any time
until August 26, 2006. The Company had an option to redeem the shares at $4 per
share at any time prior to that date. At December 31, 1996 and 1997, 9,915
shares were outstanding. The Company redeemed this preferred stock effective
February 13, 1998 and all cumulative undeclared and unpaid dividends ($8,819)
were paid.
F-23
<PAGE>
NOTE J--CUMULATIVE REDEEMABLE PREFERRED STOCK
The parent company (BFG) is the holder of this issue. It is entitled to the
number of votes which equals 20% of the total number of voting shares of the
Company's stock after taking into account both Common and Convertible Preferred
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. Dividends on this issue are cumulative and payable quarterly when
declared by the Company at the rate of $60 per annum per share. The Company
issued 180,279 shares of Common Stock in payment of cumulative dividends of
$969,000 through September 30, 1997. On March 31, 1998 the Company issued 50,722
shares of Common Stock in payment of cumulative dividends of $304,333 through
March 31, 1998. At September 30, 1998, the cumulative unpaid dividends amounted
to $300,000 of which $150,000 was paid in October 1998 by issuing 25,532 shares
of Common Stock.
NOTE K--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 judgement 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.
F-24
<PAGE>
NOTE K--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
Cash and Restricted Cash: The carrying amounts reported in the balance sheets
are their estimated fair values since the amounts are payable on demand.
Accounts and Notes Receivable: The estimated fair value of accounts and notes
receivable were 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 Company's carrying amount and
fair value of accounts and notes receivables are summarized as follows:
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
Carrying amount $94,562,809 $118,205,934 $137,321,087
Fair Value $94,562,809 $121,071,554 $139,563,377
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 September 30, 1998 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, 1996 and 1997 and September 30, 1998
for similar debt and remaining maturities. The carrying amount and fair value of
notes payable were summarized as follows:
December 31, September 30,
------------ -------------
1996 1997 1998
---- ---- ----
Carrying amount $82,942,196 $99,961,357 $128,364,965
Fair Value $77,229,196 $96,363,881 $125,162,849
Notes Payable--Related Party: It was not practicable to estimate the fair value
of these notes outstanding at December 31, 1996 because of the nature of the
indebtedness and resultant excessive cost to estimate their fair values.
12.5% Redeemable Convertible Preferred Stock: It is not practicable, because of
cost, to determine the estimated fair value of this relatively small amount
outstanding.
F-25
<PAGE>
NOTE L--STOCK OPTIONS AND WARRANTS
Stock Options: At September 30, 1998, the Company has two stock-based
compensation plans which are described in greater detail below. The Company
applied APB Opinion No. 25 and related interpretations in accounting for its
plans. Using these criteria, no compensation cost has been recognized for the
stock option portion of the plans. Had compensation cost been determined for the
Company's stock option portion of the plans, based on the fair value at the
grant dates for awards under those plans consistent with the alternative method
set forth under SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 31,
------------ -------------
1997 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $3,231,423 $2,233,015 $3,909,644
Pro forma 3,213,423 2,224,923 3,774,644
Net income (loss) per common share:
As reported .22 .18 .16
Pro forma .21 .18 .15
Weighted average fair value of
options granted under the 1997
Incentive Long-Term Plan .68 .68 .68
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Sholes option pricing model with the following weighted average
assumptions used for grants in 1997-- dividend yield of -0-%, expected
volatility of 2.96%, risk-free interest rates of 6.26%, and an expected life of
4 years.
An August 24, 1998 employment agreement with an officer provided for annual
option grants if the Company reaches certain pretax income as defined in the
agreement. The agreement has a five-year term with 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.
1988 Stock Option Plan: The Company has a stock option plan which reserves
100,000 shares of Common Stock. The Plan provides that no options may be granted
after September 1, 1999. There were no options granted, cancelled or exercised
during 1996, 1997 or 1998 and there were no options outstanding at December 31,
1996 and 1997 or September 30, 1998.
1997 Long-Term Incentive Plan: The 1997 long-term incentive plan (1997 Plan)
became effective September 1, 1997. Under the Plan, nonqualified and incentive
stock options may be granted to employees and directors as detailed in the Plan.
The exercise price for the options shall be determined by the compensation
committee of the Board of Directors. At September 30, 1998 the maximum number of
shares of Common Stock which may be issued under the 1997 Plan is 1,600,000.
However, in December 1998 the Company increased the maximum to 3,500,000 shares.
The term of the Plan is ten years; however, the Board of Directors may
discontinue the plan at its discretion.
F-26
<PAGE>
NOTE L--STOCK OPTIONS AND WARRANTS--Continued
The following table summarizes information concerning outstanding and
exercisable options:
<TABLE>
<CAPTION>
Shares of Weighted
Common Stock average
Available Under exercise
for option option price
---------- ------ -----
<S> <C> <C> <C>
Balance at January 1, 1996 and
December 31, 1996 100,000 -- $ --
Shares reserved under 1997 Plan 1,600,000 -- --
Granted (858,100) 858,100 3.28
----------- -------- ------------
Balances at December 31, 1997
and September 30, 1998 841,900 858,100 $3.28
=========== ======== ===========
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options:
Exercise Prices
---------------
$1.00 $5.05
----- -----
Number outstanding 375,000 483,100
Remaining contractual life, in years 3.7 9.3
Number exercisable -- --
Common Stock Warrants: In November 1997, the Company issued warrants to purchase
250,000 shares of Common Stock to a bank in connection with the credit facility
as described in Note F. 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. None of these
warrants were exercised in 1997 or in the nine months ended September 30, 1998.
In August 1998 the Company issued Warrants to purchase 180,000 shares of Common
Stock to a bank in connection with the acquisition indebtedness Note F. The
Warrants 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. These Warrants
were outstanding at September 30, 1998.
F-27
<PAGE>
NOTE M--EARNINGS PER COMMON SHARE
Pursuant to SFAS 128, a reconciliation of the numerators and the denominators of
the basic and diluted per-share computations for income from continuing
operations follows:
<TABLE>
<CAPTION>
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
For the Year Ended December 31, 1995:
Income from continuing operations $ 1,525,958
Less: preferred stock dividends (603,718)
--------------
Basic earnings per share:
Income from continuing operations
available to common stockholders 922,240 9,484,847 $ .10
============
Loss from operations of discontinued segment (2,186,065) 9,484,847 (.23)
-------------- ============ ---------
Net loss available to common stockholders $ (1,263,825) 9,484,847 $ (.13)
============== ============ ---------
Diluted earnings per share:
Income from continuing operations
available to common stockholders $ 922,240 9,484,847
Effect of dilutive securities:
Cumulative Convertible--Series 2
preferred stock -- 7,500,000
------------- ------------
Income from continuing operations available
to common stockholders plus assumed
conversions 922,240 16,984,847 $ .05
============
Loss from discontinued operations (2,186,065) 16,984,847 (.13)
--------------- ============ ---------
Net loss available to common stockholders plus $ (1,263,825) 16,984,847 $ (.08)
assumed conversions =============== ============ =========
</TABLE>
The 12.5% Redeemable Convertible preferred stock was not included in the
computation of diluted earnings per share for 1995 since it would have resulted
in an anti-dilutive effect.
F-28
<PAGE>
<TABLE>
<CAPTION>
NOTE M--EARNINGS PER COMMON SHARE--Continued
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
For the Year Ended December 31, 1996:
Net Income $ 1,660,245
Less: preferred stock dividends (527,051)
-----------
Basic earnings per share:
Income available to common stockholders 1,133,194 9,484,847 $ .12
----------- =======
Effect of dilutive securities:
Cumulative Convertible--Series 2 preferred stock 7,500,000
12.5% Redeemable Convertible preferred stock 3,718 27,861
----------- ---------
Diluted earnings per share:
Income available to common stockholders plus
assumed conversions $ 1,136,912 17,012,708 $ .07
=========== ========== =======
For the Year Ended December 31, 1997:
Net Income $ 3,231,423
Less: preferred stock dividends (731,218)
-----------
Basic earnings per share:
Income available to common stockholders 2,500,205 11,582,587 $ .22
=======
Effect of dilutive securities:
Cumulative Convertible--Series 2 preferred stock 127,500 6,226,027
12.5% Redeemable Convertible preferred stock 3,718 27,861
Warrants 9,154
Stock options 68,273
----------- ----------
Diluted earnings per share:
Income available to common stockholders plus
assumed conversions $ 2,631,423 17,913,902 $ .15
=========== ========== =======
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
NOTE M--EARNINGS PER COMMON SHARE--Continued
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
For the Nine Months Ended September 30, 1997:
Net Income $ 2,233,015
Less: preferred stock dividends (560,956)
-----------
Basic earnings per share:
Income available to common stockholders 1,672,059 9,484,847 $ .18
=======
Effect of dilutive securities:
Cumulative Convertible--Series 2 preferred stock 112,500 7,500,000
Stock options 69,404
12.5% Redeemable Convertible preferred stock 2,789 27,861
----------- ----------
Diluted earnings per share:
Income available to common stockholders plus assumed
conversions $ 1,787,348 17,082,112 $ .10
=========== ========== =======
For the Nine Months Ended September 30, 1998:
Net Income $ 3,909,644
Less: preferred stock dividends (450,454)
-----------
Basic earnings per share:
Income available to common stockholders 3,459,190 22,272,673 $ .16
=======
Effect of dilutive securities:
12.5% Redeemable Convertible preferred stock 4,490
Warrants 91,005
Stock options 380,751
----------- ----------
Diluted earnings per share:
Income available to common stockholders plus
assumed conversions $ 3,459,190 22,748,919 $ .15
=========== ========== =======
</TABLE>
The Company granted options to purchase 483,100 shares of Common Stock at $5.05
per share during the year ended December 31, 1997. These options were not
included in computing the diluted per share data because to do so would have
resulted in increasing the earnings per share data as compared to the amounts
reported for the basic per share data.
In August 1998, the Company issued Warrants to purchase 180,000 shares of Common
Stock at an exercise price of $8.00 per share. 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.
F-30
<PAGE>
NOTE N--SUPPLEMENTAL CASH FLOWS INFORMATION
The following supplemental cash flow information is provided for interest and
income taxes paid and for noncash transactions during the years ended December
31, 1995, 1996 and 1997 and for the nine months ended September 30, 1997 and
1998:
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------------------------------------------------
1995 1996 1997 1997 1998
------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest paid $ 4,581,982 $ 6,223,101 $ 6,779,790 $ 6,257,046 $ 4,896,215
Income taxes paid 290,256 124,682 338,000 338,000 617,000
Noncash transactions:
Conversion of debentures in 1995
and related party debt in 1997 to
Common Stock 162,050 -- 24,970,079 -- --
Payment of dividends on Series 2
Preferred Stock with shares of
Common Stock -- -- 1,096,500 -- --
Issuance of Common Stock
warrants in consideration of credit
agreement -- -- 289,666 -- --
Conversion of preferred stock to
Common Stock 53,167 -- 9,000 -- 21,930
Common Stock issued as part of
Eastern Resort's purchase $ -- $ -- $ -- $ -- $15,360,000
</TABLE>
NOTE O--DISCONTINUED SEGMENT
In May 1995 Equivest discontinued its insurance premium finance business. Total
1995 revenues from the premium finance business have been included in the
caption "Net Loss From Operations of Discontinued Segment" and amounted to
$1,842,551. No income tax benefit resulted from the loss because it occurred
prior to the actual date of the exchange described in Note C. Equivest and
Resort were members of different consolidated groups for federal income tax
filing purposes, and Equivest had no prior year income available for operating
loss carryback purposes.
NOTE P--PROPOSED SALE OF COMMON STOCK
Shares of Common Stock held by certain stockholders, including the shares held
by BFG and BMDC, and additional shares of previously unissued Common Stock are
in the process of registration for proposed sale to the public. Depending upon
the success of the Company's Offering, the Company intends to use its net
proceeds to repurchase its Series 2 Class A Redeemable Preferred Stock, to repay
certain existing indebtedness, for working capital and other corporate purposes.
F-31
<PAGE>
NOTE Q--PURCHASE OF EASTERN RESORTS
On August 28, 1998, the Company acquired Eastern Resorts Corporation (Eastern)
which is a developer of timeshare resorts in the New England area. The
transaction was accounted for as a purchase and, accordingly, the operating
results of Eastern have been included in the Company's consolidated financial
statements since the date of acquisition. The purchase price of $57.6 million
was comprised of cash of $15 million, 3.2 million shares of the Company's Common
Stock, assumption of certain liabilities of $25.8 million and $1.4 million of
costs of the acquisition. The funds used were mostly provided by a short-term
bridge loan from a bank (see Note F). The purchase price exceeded the fair value
of net assets acquired by approximately $27 million, which is being amortized on
a straight line basis over 40 years.
The following unaudited pro forma consolidated results of operations for the
year ended December 31, 1997 and for the nine months ended September 31, 1998
assumes the Eastern Resorts acquisition occurred as of January 1, 1997 and 1998,
respectively:
December 31, September 30,
1997 1998
---- ----
Net revenue $34,685,000 35,024,000
Net income 3,190,000 4,446,000
Earnings per share:
Basic $.17 $.16
==== ====
Diluted $.12 $.16
==== ====
The pro forma amounts reflect the results of operations for the Company, the
acquired business and the elimination of revenues and costs and expenses between
the Company and Eastern Resorts. The pro forma results do not necessarily
represent results which would have occurred if the acquisition had actually
taken place on the basis assumed above, nor are they indicative of the results
of future combined operations.
NOTE R -- SEGMENT INFORMATION
As a result of the acquisition of Eastern Resorts on August 28, 1998 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 Company provides financing to resorts which includes consumer
lending for timeshare intervals, hypothecation loans to resort developers and
resort acquisition and development loans. The resort development segment
acquires, develops and operates resort properties and markets and sells
timeshare intervals in its own resorts.
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.
F-32
<PAGE>
Financial information with respect to each reportable segment follows for the
nine months ended September 30, 1998:
<TABLE>
<CAPTION>
NOTE R--SEGMENT INFORMATION--Continued
Financing Resort Development Total
--------- ------------------ -----
<S> <C> <C> <C>
Revenues from external
customers $ 867,982 $ 2,317,564 $ 3,185,546
Intersegment revenues 111,802 -- 111,802
Interest revenues 15,010,759 -- 15,010,759
Interest expense 5,168,944 186,290 5,355,234
Depreciation and 1,314,109 12,209 1,326,318
amortization
Segment profit 6,402,678 326,635 6,729,313
Segment assets 154,058,055 41,558,956 195,617,011
Expenditures for segment
assets -- 46,987 46,987
Other significant non-cash
items:
Provision for doubtful
receivables 649,710 -- 649,710
</TABLE>
The following schedules are presented to reconcile amounts in the foregoing
segment information to the amounts reported in the Company's consolidated
financial statements:
Revenue
Total revenue of reportable segments $ 18,308,107
Intersegment revenue (111,802)
---------------
Consolidated revenue $ 18,196,305
=============
Profit
Total profit of reportable segments $ 6,729,313
Unallocated corporate expenses (519,669)
---------------
Consolidated income from continuing operations
before provision for income taxes $ 6,209,644
==============
Assets
Total assets of reportable segments $195,617,011
Segment accounts receivable eliminated in consolidation (7,940,769)
Other unallocated amounts 1,055,571
--------------
$188,731,813
F-33
<PAGE>
<TABLE>
<CAPTION>
NOTE R--SEGMENT INFORMATION--Continued
Reconciliation of Other Significant Items
- -----------------------------------------
Reportable Segments Reconciling Items Consolidated Amounts
------------------- ----------------- --------------------
<S> <C> <C> <C>
Interest Revenue $15,010,759 -- $15,010,759
Interest Expense 5,355,234 $(36,821) 5,318,413
Expenditures for assets 46,987 -- 46,987
Depreciation and
amortization 1,326,318 -- 3,326,318
Provision for doubtful
receivables 649,710 -- 649,710
</TABLE>
The reconciling item to adjust interest expense is the amount of interest
incurred on the 12,100,000 business acquisition loan, which is not included in
segment information.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Members
Eastern Resorts Company, LLC
Newport, Rhode Island
We have audited the accompanying consolidated balance sheets of Eastern Resorts
Company, LLC and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income and members' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Eastern
Resorts Company, LLC and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ DONOVAN, SULLIVAN & RYAN
Westwood, Massachusetts
March 5, 1998
F-35
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
--------------------------
ASSETS
- ------
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
ASSETS
<S> <C> <C>
Cash $ 998,142 $ 888,447
Mortgage notes receivable, net 13,804,065 12,145,417
Promissory note receivable 750,000 702,549
Receivable - other 497,633 715,050
Inventory and construction-in-progress 8,942,301 2,270,862
Property and equipment, net 1,661,678 1,437,780
Deposits 55,480 43,300
Other assets 264,604 274,858
-------------- --------------
$26,973,903 $18,478,263
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
- -------------------------------
LIABILITIES
Notes payable $18,954,301 $13,031,132
Accounts payable 744,124 476,608
Accrued expenses and withholdings 559,374 416,354
Customer deposits 41,846 51,157
--------------- ---------------
TOTAL LIABILITIES 20,299,645 13,975,251
------------ ------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY 6,674,258 4,503,012
------------- -------------
$26,973,903 $18,478,263
=========== ===========
</TABLE>
See accompanying notes.
F-36
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- ------------
REVENUES
<S> <C> <C>
Sales of time intervals $ 8,635,564 $ 7,062,085
Resort operations 6,701,503 6,106,539
Food and beverage sales 1,354,579 1,295,168
Interest 2,602,250 2,346,984
Miscellaneous 82,515 110,073
----------- ------------
19,376,411 16,920,849
------------ ----------
COSTS AND EXPENSES
Cost of time intervals 1,927,672 1,491,636
Selling 3,868,349 3,507,181
Resort operations 6,046,060 5,367,481
Cost of food and beverage sales 1,301,349 1,245,234
General and administrative 1,782,221 1,617,777
Interest 1,395,310 1,274,641
Bad debt expense 353,204 532,701
----------- ------------
16,674,165 15,036,651
----------- ------------
INCOME FROM OPERATIONS
2,702,246 1,884,198
OTHER INCOME
Gain on sale of development rights - 1,618,659
------------ ------------
NET INCOME 2,702,246 3,502,857
MEMBERS' EQUITY, BEGINNING OF YEAR 4,503,012 1,302,155
MEMBERS' DRAWINGS (531,000) (302,000)
----------- ------------
MEMBERS' EQUITY, END OF YEAR $ 6,674,258 $ 4,503,012
=========== ============
</TABLE>
See accompanying notes.
F-37
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,702,246 $ 3,502,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of development rights - (1,618,659)
Promissory note receivable increase - imputed interest (47,451) (22,406)
Receivable - other, increase - imputed interest (32,583) (26,534)
Depreciation 83,922 43,342
Changes in operating assets and liabilities:
Increase in mortgage notes receivable, net (1,658,648) (1,181,614)
Decrease in inventory 1,301,230 1,128,434
(Increase) decrease in deposits (12,180) 94,238
Decrease (increase) in other assets 10,254 (124,700)
Increase (decrease) in accounts payable 267,516 (351,164)
Increase in accrued expenses and withholdings 143,020 14,422
(Decrease) increase in customer deposits (9,311) 35,612
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,748,015 1,493,828
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to construction-in-progress (1,392,518) (1,849,883)
Purchase of property and equipment (237,820) (133,551)
Proceeds from receivable - other 250,000 250,000
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (1,380,338) (1,733,434)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 6,231,001 6,870,778
Payments of debt (6,957,983) (5,724,781)
Members' drawings (531,000) (302,000)
----------- -----------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (1,257,982) 843,997
----------- -----------
NET INCREASE IN CASH 109,695 604,391
CASH, BEGINNING OF YEAR 888,447 284,056
----------- -----------
CASH, END OF YEAR $ 998,142 $ 888,447
=========== ===========
</TABLE>
See accompanying notes.
F-38
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Nature of Business - Eastern Resorts Company, LLC (the "Company") a limited
liability company was formed on October 4, 1994 and commenced operations as of
February 1, 1995, under the laws of the State of Rhode Island. The latest date
on which the limited liability company is to dissolve is December 31, 2023. The
Company acquires and operates real estate properties in Newport and Jamestown,
Rhode Island, and Hancock, Massachusetts, and sells and finances timeshare
interests in these properties primarily to customers in New England.
Basis of Accounting - The Company presents its financial statements on the
accrual basis of accounting in compliance with generally accepted accounting
principles.
Basis of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, Long Wharf
Marina Restaurant, Inc. Intercompany transactions and balances have been
eliminated in consolidation.
Management believes that it is not meaningful to prepare a consolidated balance
sheet in which current and noncurrent assets and liabilities are displayed. The
unclassified balance sheet utilized by real estate ventures and financial
institutions has been adopted by the Company.
Estimates - The presentation of 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Revenues - Revenues from the sale of timeshare interests are recognized at the
time of closing. Revenues from resort operations and food and beverage sales are
recognized when earned.
Amortization of Discount - Certain mortgage notes receivable were purchased by
the Company at a discount in the acquisition of Inn Group Associates. The
discount is recognized on mortgages which are making payments over the remaining
term of the mortgage. The amortization of discount is included in interest
income. For the years ended December 31, 1997 and 1996, the amount of amortized
discount included in interest income is $116,206 and $138,501, respectively.
Inventory - Inventory consists of timeshare interests and is stated at cost on
the basis of specific identification. Costs associated with the acquisition of
specific timeshare properties are capitalized and charged to cost of time
intervals when the properties are sold. Costs include building costs, furniture
and equipment, legal fees and capitalized construction period interest.
Property and Equipment - Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets.
Restaurant condominiums 39 years
Office building 39 years
Warehouse 39 years
Computers 5 years
Marina 7 -10 years
Furniture and fixtures 7 years
Motor vehicle 5 years
Equipment 7 years
F-39
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
Advertising - The Company expenses advertising as incurred. Advertising expense
was $111,596 and $77,824 for the years ended December 31, 1997 and 1996,
respectively.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Federal Income Taxes - The Company is treated as a partnership for federal
income tax purposes. Consequently, federal income taxes are not payable by, or
provided for, the Company. Members are taxed individually on their shares of the
Company's earnings. The Company's net income is allocated among the members in
accordance with the Company's operating agreement. The financial statements do
not reflect a provision for income taxes.
Fair Value of Financial Instruments - The carrying value of cash, mortgage notes
receivable, promissory note receivable and notes payable, none of which are held
for trading purposes, is a reasonable estimate of the fair value based on
instruments with similar terms and maturities.
Reclassifications - Certain amounts in the prior year financial statements have
been reclassified to conform with current year presentation.
NOTE 2 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 1997 and 1996, the Company incurred
compensation expense of $322,000 and $352,000, respectively, for R. Perry
Harris, and $49,000 and $20,000, respectively, for Karen G. Harris,
stockholders' of Eastern Resorts Corporation.
As of December 31, 1997, R. Perry Harris owes the Company $15,337.
NOTE 3 - CASH
Cash consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Cash in banks $ 609,252 $ 655,145
Petty cash 6,850 6,250
Restricted balances - notes payable (see Note 7) 247,007 227,052
Restricted cash - construction-in-progress 135,033 -
------------- --------------
$ 998,142 $ 888,447
============= =============
</TABLE>
NOTE 4 - MORTGAGE NOTES RECEIVABLE, NET
The Company's mortgage notes receivable are due from purchasers of timeshare
intervals. These notes, which are for five, seven, or ten years, bear interest
at 16.5 percent and require monthly installments of principal and interest. An
allowance for losses on uncollectible notes receivable of $731,906 and $651,126
and the discount on purchased mortgage notes receivable, net of amortization, of
$192,772 and $308,977 have been established at December 31, 1997 and 1996,
respectively, based on management's estimates. A majority of these notes have
been pledged as collateral on notes payable (see Note 7).
F-40
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
NOTE 5 - PROMISSORY NOTE RECEIVABLE
<TABLE>
<CAPTION>
Promissory note receivable consists of the following at December 31, 1997 and
1996:
<S> <C> <C>
1997 1996
---------- ----------
Promissory note receivable from a corporation, interest payable monthly
commencing February 1998 at a rate equal to the lesser of LIBOR plus One
Hundred Fifty basis points or "The Wall Street Journal" prime rate, principal
payable in five equal annual installments of $150,000 effective February
1998, unsecured, due February 2002. Under certain conditions, the note
payments may be accelerated under the agreement. An imputed interest rate of
6.5% has been established for the period July 1996 to December 1997.
At December 31, 1997, the promissory note receivable
was pledged as collateral for promissory note
payable to Jiminy Peak, Inc. (see Note 7).
$ 750,000 $ 702,549
========== ==========
NOTE 6 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at December 31, 1997 and 1996:
1997 1996
---------- ----------
Restaurant condominiums $ 664,852 $ 664,852
Office building 527,390 527,390
Warehouse 184,071 -
Computers 149,026 133,552
Marina 98,813 37,831
Land 81,489 61,037
Furniture and fixtures 79,825 69,913
Motor vehicle 16,929 -
Equipment 7,546 7,546
---------- ----------
1,809,941 1,502,121
Less accumulated depreciation 148,263 64,341
---------- ----------
$1,661,678 $1,437,780
========== ==========
</TABLE>
F-41
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
<TABLE>
<CAPTION>
NOTE 7 - NOTES PAYABLE
Notes payable consists of the following at December 31, 1997 and 1996:
<S> <C> <C>
1997 1996
---------- ----------
Promissory note payable to Resort Funding, Inc. with interest at 11.25%, payable
in monthly installments of interest only, secured by a mortgage in real property
and a security agreement in personal property relating to the mortgage premises
This note will convert to an amortized note due April 2002 if certain interval
release fees and or principal payment are not timely paid. $5,092,051 $ -
Note payable to Textron Financial Corporation with interest at 2.5% over prime,
payable in monthly installments equal to the proceeds from installment mortgage
notes that collateralize this note, due October 2001. 4,046,681 3,492,893
Revolving promissory note payable to Resort Funding, Inc. with interest at 2.5%
over prime, payable in monthly installments equal to the proceeds from
installment mortgage notes that collateralize this note, due 60 months
after last advance. 3,916,638 -
Revolving credit note payable to Liberty Bank with interest at 2.25% over prime,
but not less than 10% or in excess of 15%, payable in monthly installments equal
to the proceeds from installment mortgage notes that collateralize this note and
also secured by a security interest in certain restaurant equipment, furniture,
furnishings and inventory, due February 2000. 2,000,004 3,276,155
Revolving credit facility with Textron Financial Corporation. The note is
payable with interest at 2% over prime, payable in monthly installments of
interest and a timeshare sale payment of $2,600 for each sale of timeshare
interest, secured by a first mortgage on two parcels, personal property, and a
second mortgage on the third parcel which is subject to a Fleet National Bank
lien of $200,000, due December 2000, with an option to renew for an additional year. 881,800 -
</TABLE>
F-42
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
<TABLE>
<CAPTION>
NOTE 7 - NOTES PAYABLE - continued
<S> <C> <C>
1997 1996
------- ---------
Note payable to Textron Financial Corporation with interest at 3% over prime,
but not less than 9.25% or in excess of 14.5%, payable in monthly installments
equal to the proceeds from installment mortgage notes that collateralize
this note, due October 2000. 838,024 1,178,339
Note payable to Textron Financial Corporation with interest at 3.25% over prime,
but not less than 9.25% or in excess of 14.5%, payable in monthly installments
equal to the proceeds from installment mortgage notes that collateralize
this note, due October 2000. 694,889 1,201,077
Promissory note payable to Fleet National Bank with interest at 8.82%, payable
in monthly installments of principal and interest of $5,168, based upon a
fifteen year amortization schedule, secured by a mortgage and security agreement
on Unit C-1 of the Long Wharf Resort Condominium, due June 2007. 507,062 -
Promissory note payable to Jiminy Peak, Inc. without
interest, promissory note receivable pledged as
collateral, subject to a ski lift agreement, due June 1998. 400,000 -
Adjustable rate note payable to Citizens Bank of Massachusetts in monthly
installments of $1,129, based upon a twenty-year amortization schedule, plus
interest at the bank's prime rate plus 1.25%, due November 2004, collateralized
by a condominium unit and certain timeshare intervals. This note is adjustable
in November, and every 12 months thereafter based on the bank's prime
rate plus 1.25%. 236,742 250,292
Revolving credit note payable to Fleet National Bank with interest at .5% over
prime, payable in monthly installments of interest only, unsecured,
due June 1999. 200,000 -
Note payable to Citizens Bank of Massachusetts with interest at 8%, payable in
monthly installments of principal and interest of $6,958, due February 1999,
secured by a mortgage in real property, and certain unsold time share intervals. 70,410 146,875
</TABLE>
F-43
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
<TABLE>
<CAPTION>
NOTE 7 - NOTES PAYABLE - continued
<S> <C> <C>
1997 1996
----------- -----------
Promissory note payable to Stephen A. Kirby with interest at 7%,
payable in monthly installments of interest only, unsecured, due April 1998. 25,133 -
Promissory note payable to West's Automotive Services, Inc. with interest at 8%,
payable in monthly installments of interest only, $20,000 paid on August 15,
1997, secured by a purchase money mortgage in real property, due April 1998. 24,867 -
Promissory note payable to John K. Irwin without interest, payable in monthly
installments of $1,000, unsecured, due August 1999. 20,000 32,000
Revolving promissory note payable to Resort Funding, Inc. with interest at 4%
over prime, payable in monthly installments equal to the proceeds from
installment mortgage notes that collateralize this note, due October 1997. - 1,569,968
Promissory note payable to Resort Funding, Inc. with interest at 13%,
payable in monthly installments of interest only, secured by a first
mortgage in real property, due November 2000. - 1,562,799
Mortgage promissory note payable to NOS Real Estate, Inc. with interest at 7.5%,
payable in monthly installments of principal and interest of $19,694, based upon
a five-year amortization schedule, due January 1998, secured by a mortgage in
real property. - 196,201
Adjustable rate note payable to Citizens Bank of Massachusetts with interest at
10.125%, payable in monthly installments of principal and interest of $8,473,
collateralized by a mortgage and security agreement on the Company's Bay
Voyage property, due October 2016. - 120,119
Note payable to Ford Motor Credit Corporation with interest at 7.75%, payable in
monthly installments of principal and interest of $360, collateralized by
a motor vehicle, due January 1998. - 4,414
----------- -----------
$18,954,301 $13,031,132
=========== ===========
</TABLE>
F-44
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
NOTE 7 - NOTES PAYABLE - continued
The following is a summary of estimated maturities due on notes payable as of
December 31, 1997:
Year ending December 31, Principal
------------------------ ----------------
1998 $ 7,255,519
1999 7,378,500
2000 3,359,868
2001 353,640
2002 39,221
Thereafter 567,553
$18,954,301
The estimated maturities due on notes payable as of December 31, 1997 are based
upon payments made on notes payable in 1997.
Cash payments of interest during the years ended December 31, 1997 and 1996 were
approximately $1,535,000 and $1,391,000, respectively. For the year ended
December 31, 1997 and 1996, $150,871 and $95,089 of interest was capitalized
into inventory, construction-in-progress and office building, respectively.
NOTE 8 - MEMBERS' EQUITY
On December 12, 1997, Eastern Resorts Corporation issued 9,400 and 500 shares of
its no par value common stock to R. Perry Harris and Karen G. Harris, in
exchange for the transfer and assignment to the Corporation of their entire 94%
and 5% percentage interests in Eastern Resorts Company, LLC, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Lease Commitments - Eastern Resorts Company, LLC leases office space in Newport,
Rhode Island as a tenant-at-will at $1,500 per month. The Company is also
required to pay certain utilities.
The Company leases telemarketing space in Middletown, Rhode Island under a
one-year operating lease, which expires November 1998, at $900 per month. The
terms of the lease also require that the Company pay certain common area
maintenance expenses. The Company has an option to renew the lease for an
additional two years. If the Company chooses not to exercise their option to
extend the term of the lease, the Company will reimburse the landlord $3,000 as
partial payment for improvements to the leased premises.
The Company leased office space under an operating lease that expired June 1996.
The lease for office space was assumed by the Company on March 28, 1995 for the
period February 1, 1995 to December 31, 1995, payable in monthly installments of
$4,562. The lease was renewed for an additional six months expiring June 1996,
payable in monthly installments of $4,653. The terms of the lease also required
that the Company pay certain utilities, insurance and maintenance fees.
Total rental expense under the operating lease for the years ended December 31,
1997 and 1996, was $900 and $32,570, respectively.
F-45
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES - continued
The Company leases equipment under operating leases that expire at various dates
through April 2001.
The Company also leases an automobile under an operating lease that expires
October 1999. The amount charged to office equipment rental expense during the
years ended December 31, 1997 and 1996 was $13,156 and $9,719, respectively.
Future minimum lease payments as of December 31, 1997 are:
Operating
Year ending December 31, Leases
------------------------ ----------------
1998 $ 47,028
1999 25,659
2000 11,067
2001 2,501
----------------
$ 86,255
================
Use and Occupancy Agreement - Eastern Resorts Company, LLC also occupies sales
space in Hancock, Massachusetts under a two-year use and occupancy agreement,
which expires October 1999. The Company has an option to extend the agreement
for an additional two years. The Company also has the right to terminate the
agreement at any time. The Company pays an occupancy charge of $1,500 and a
cleaning fee of $200 per month.
Acquisition and Development Loan Agreement - In October 1995, the Company
entered into an "Acquisition and Development Loan Agreement" with Resort
Funding, Inc. with respect to a loan in the amount of $4,500,000 for the
acquisition and development of a project on Washington Street and Long Wharf
in Newport, Rhode Island. In April 1997, the "Acquisition and Development Loan
Agreement" was increased to $9,500,000. As of December 31, 1997 and 1996,
advances on the loan amounted to $7,513,351 and $2,249,199, respectively.
Hypothecation Loan Agreement - In October 1995, the Company entered into a
"Hypothecation Loan Agreement" whereby the Company shall offer Resort Funding,
Inc., on an exclusive basis, the right of first refusal to finance all
receivables representing installment obligations of consumers for timeshare
intervals at the Long Wharf Resort property.
Management Agreements - The Company has management agreements with seven
associations of timeshare interval owners (the Associations). The Company is
required to provide and incur expenses necessary for the operation and
maintenance of the timeshares for which they receive a management fee from the
Associations. One management agreement expired December 31, 1997 and the other
six management agreements expire at various dates through December 2002.
NOTE 10 - TAX DEFERRED SAVINGS
The Company has a tax deferred savings plan, whereby the employees may elect to
make contributions pursuant to a salary reduction agreement upon meeting age and
length-of-service requirements. Employees may elect to defer up to 15 percent of
their yearly compensation, up to statutory limits. The Company makes a matching
contribution of 10 percent for every dollar the employee contributes from 5
percent up to 10 percent of employees pay. The Company's contribution to the
plan for the years ended December 31, 1997 and 1996 was $30,313 and $19,716,
respectively.
F-46
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
--------------------------
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
As of December 31, 1997, the Company has more than $100,000 in one bank that
exceeds FDIC insurance coverage.
NOTE 12 - SUPPLEMENTARY CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31,
1997 and 1996 consist of the following:
1997 1996
--------------- ------------
Additions to construction-in-progress $ 6,580,151 $ -
Additions to property and equipment $ 70,000 $ -
F-47
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 28, 1998 AND 1997
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Cash $ 908,031 $ 945,716
Mortgage notes receivable, net 16,266,871 13,414,211
Promissory notes receivable 600,000 702,549
Receivables other - 465,050
Inventory and construction in progress 9,142,185 3,867,819
Property and equipment, net 3,014,398 1,666,412
Other assets 507,025 315,872
----------- -----------
TOTAL ASSETS $30,438,510 $21,377,629
=========== ===========
LIABILITIES AND MEMBER'S EQUITY
-------------------------------
LIABILITIES
Notes payable $20,796,671 $14,321,666
Accounts payable and accrued expenses 1,276,975 964,022
----------- -----------
TOTAL LIABILITIES 22,073,646 15,285,688
MEMBER'S EQUITY 8,364,864 6,091,941
----------- -----------
TOTAL LIABILITIES AND MEMBERS' EQUITY $30,438,510 $21,377,629
=========== ===========
</TABLE>
See notes to financial statements.
F-48
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND MEMBER'S
EQUITY FOR THE PERIODS JANUARY 1, TO AUGUST 28, 1998 AND 1997
-------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
REVENUES
<S> <C> <C>
Sales of time intervals $ 8,727,042 $ 5,933,633
Resort operations 6,052,407 4,482,275
Food and beverage sales 964,959 901,689
Interest 1,830,758 1,659,145
Miscellaneous 62,338 44,903
------------ ------------
17,637,504 13,021,645
------------ ------------
COST AND EXPENSES
Cost of time intervals 2,094,796 1,365,054
Selling 3,706,140 2,466,010
Resort operations 5,140,893 3,939,800
Cost of food and beverages sales 918,651 860,572
General and administrative 1,313,492 1,223,065
Interest 1,312,636 946,570
Bad debt expense 466,290 355,645
------------ ------------
14,952,898 11,156,716
NET INCOME 2,684,606 1,864,929
MEMBERS' EQUITY, BEGINNING OF YEAR 6,674,258 4,503,012
MEMBERS' DRAWINGS (994,000) (276,000)
------------ ------------
MEMBERS' EQUITY, END OF YEAR $ 8,364,864 $ 6,091,941
============ ============
</TABLE>
See notes to financial statements.
F-49
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS JANUARY 1, TO AUGUST 28, 1998 AND 1997
-------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,684,606 $ 1,864,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Receivable - other, increase - imputed interest (2,367) -
Depreciation 86,571 53,894
Changes in operating assets and liabilities:
(Increase) in mortgage notes receivable, net (2,462,806) (1,268,794)
(Increase) decrease in inventory (659,824) 3,864
Decrease (increase) in other assets (186,941) 2,286
Increase (decrease) in accounts payable and
accrued expenses (68,369) 19,903
----------- -----------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (609,130) 676,082
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to construction-in-progress (689,077) (1,600,821)
Purchase of property and equipment (202,365) (282,526)
Proceeds from note receivable 150,000 250,000
Proceeds from receivable - other 500,000 -
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (241,442) (1,633,347)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 8,831,785 6,062,327
Payments of debt (7,077,324) (4,771,793)
Member drawings (994,000) (276,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 760,461 1,014,534
NET (DECREASE) INCREASE IN PERIOD (90,111) 57,269
CASH, BEGINNING OF PERIOD 998,142 888,447
----------- -----------
CASH, END OF PERIOD $ 908,031 $ 945,716
=========== ===========
</TABLE>
See accountants' report and notes to financial statements.
F-50
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 28, 1998 AND 1997
------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes since the disclosures per the audited
statements of December 31, 1997.
In the opinion of management, the condensed consolidated financial statements
reflect all adjustments which would be necessary for a fair presentation of the
results of operations for the interim periods presented.
NOTE 2 - MORTGAGE NOTES RECEIVABLE, NET
The Company's mortgage notes receivable are due from purchasers of timeshare
intervals. These notes, which are for five, seven, or ten years, bear interest
at 16.5 percent and require monthly installments of principal and interest. An
allowance for losses on uncollectible notes receivable of $755,569 and $647,979
and the discount on purchased mortgage notes receivable, net of amortization, of
$124,066 and $236,378 have been established at August 28, 1998 and 1997,
respectively, based on management's estimates. A majority of these notes have
been pledged as collateral on notes payable.
NOTE 3 - PROMISSORY NOTE RECEIVABLE
Promissory note receivable consists of the following at August 28, 1998 and
1997:
1998 1997
------------ --------------
Promissory note receivable from a
corporation, interest payable monthly
commencing February 1998 at a rate equal
to the lesser of LIBOR plus One Hundred
Fifty basis points or "The Wall Street
Journal" prime rate, principal payable
in five equal annual installments of
$150,000 effective February 1998,
unsecured, due February 2002. Under
certain conditions, the note payments
may be accelerated under the agreement.
An imputed interest rate of 6.5% has
been established for the period July
1996 to December 1997.
At December 31, 1997, the promissory note
receivable was pledged as collateral for
promissorynote payable to Jiminy Peak, Inc. $ 600,000 $ 702,549
============ ===========
NOTE 4 - INVENTORY AND CONSTRUCTION IN PROGRESS
Inventory currently available for sale and construction in progress consists of
the following at August 28, 1998 and 1997:
1998 1997
------------ -------------
Inventory $ 7,978,668 $ 232,703
Construction in progress 1,163,517 3,635,116
--------- ---------
$ 9,142,185 $ 3,867,819
============ =============
F-51
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 28, 1998 AND 1997
------------------------
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at August 28, 1998 and 1997 consists of the following:
1998 1997
------------ --------------
Balance at January 1, 1998 and 1997 $ 1,809,941 $ 1,502,121
Buildings 1,149,017 -
Equipment 290,274 282,526
----------- --------------
3,249,232 1,784,647
Less, accumulated depreciation (234,834) (118,235)
----------- --------------
$ 3,014,398 $ 1,666,412
=========== ==============
NOTE 6 - NOTES PAYABLE
In the normal course of business, the Company procures financing for various
projects including construction of time share units. The following is the
summarization of the additional borrowings and principal payments on the various
notes at August 28, 1998 and 1997:
1998 1997
----------- -----------
Balance of notes payable at January 1, 1998 and 1997 $18,954,301 $13,031,132
Additional borrowings 8,919,694 6,062,327
Payments of debt (7,077,324) (4,771,793)
----------- -----------
Balance $20,796,671 $14,321,666
=========== ===========
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Lease Commitments - Eastern Resorts Company, LLC and Subsidiary leases office
space in Newport, Rhode Island as a tenant-at-will at $1,500 per month. The
Company is also required to pay certain utilities.
The Company leases telemarketing space in Middletown, Rhode Island under a
one-year operating lease, which expires November 1998, at $900 per month. The
terms of the lease also require that the Company pay certain common area
maintenance expenses. The Company has an option to renew the lease for an
additional two years. If the Company chooses not to exercise their option to
extend the term of the lease, the Company will reimburse the landlord $3,000 as
partial payment for improvements to the leased premises.
The Company leases equipment under operating leases that expire at various dates
through April 2001.
Use and Occupancy Agreement - Eastern Resorts Company, LLC and Subsidiary also
occupies sales space in Hancock, Massachusetts under a two-year use and
occupancy agreement, which expires October 1999. The Company has an option to
extend the agreement for an additional two years. The Company also has the right
to terminate the agreement at any time. The Company pays an occupancy charge of
$1,500 and a cleaning fee of $200 per month.
F-52
<PAGE>
EASTERN RESORTS COMPANY, LLC AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 28, 1998 AND 1997
------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - continued
Acquisition and Development Loan Agreement - In October 1995, the Company
entered into an "Acquisition and Development Loan Agreement" with Resort
Funding, Inc. with respect to a loan in the amount of $4,500,000 for the
acquisition and development of a project on Washington Street and Long Wharf in
Newport, Rhode Island. In April 1997, the "Acquisition and Development Loan
Agreement" was increased to $9,500,000.
Hypothecation Loan Agreement - In October 1995, the Company entered into a
"Hypothecation Loan Agreement" whereby the Company shall offer Resort Funding,
Inc., on an exclusive basis, the right of first refusal to finance all
receivables representing installment obligations of consumers for timeshare
intervals at the Long Wharf Resort property.
Management Agreements - The Company has management agreements with seven
associations of timeshare interval owners (the Associations). The Company is
required to provide and incur expenses necessary for the operation and
maintenance of the timeshares for which they receive a management fee from the
Associations. One management agreement expired December 31, 1997 and the other
six management agreements expire at various dates through December 2002.
NOTE 8 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
As of August 28, 1998 the Company has more than $100,000 in one bank that
exceeds FDIC Insurance coverage.
NOTE 9 - SALE OF BUSINESS
On August 28, 1998, Equivest Finance, Inc. completed a transaction pursuant to
which Eastern Resorts Company, LLC and Subsidiary was merged into Eastern
Resorts Acquisition Corp.
F-53
<PAGE>
[ARTWORK]
[Description of Artwork]
F-54
<PAGE>
Equivest Finance, Inc.
[Company Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable in
connection with the offering of the shares being registered hereby, other than
underwriting discounts and commissions. All of such expenses are being borne by
the Company. The Selling Stockholders are not paying any portion of such
expenses.
SEC registration fee................................... $27,800
NASD filing fee........................................ 10,500
Accounting fees and expenses........................... *
Legal fees and expenses................................ *
Blue Sky fees and expenses............................. *
Printing and engraving expenses........................ *
Registrar and transfer agent's fees.................... *
Miscellaneous fees and expenses........................ *
Total.................................................. $______*
======
- --------------------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL ("Section 145"), in summary, empowers a
Delaware corporation, within certain limitations, to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
Article IX of the by-laws of the Company provides for the
indemnification of officers and directors and certain other parties of the
Company to the fullest extent permitted by law.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since September 30, 1995, the Company has issued the following
securities:
(1) In February 1996, the Company issued 10,000 shares of the
Series 2 Class A Redeemable Preferred Stock and 3,000 shares
of the Series 2 Cumulative Convertible Preferred Stock to BFG
in exchange for all of the common stock of Resort Funding.
(2) Between December 1997 and August 1998 the Company granted
858,400 options to purchase shares of Common Stock to certain
directors, officers and employees pursuant to the 1997
Long-Term Incentive Plan. As of September 30, 1998 none of the
granted options have been exercised.
(3) Between October 1997 and September 1998, the Company issued a
total of 280,254 shares of Common Stock in payment of
dividends on its Series 2 Cumulative Convertible Preferred
Stock and Series 2 Class A Redeemable Preferred Stock.
(4) On October 29, 1997, the Company issued 7.5 million shares of
Common Stock to BFG to convert 3,000 shares of Series 2
Cumulative Convertible Preferred Stock into Common Stock.
(5) Pursuant to an Agreement and Plan of Merger dated as of July
17, 1998, the Company issued 3.2 million shares of Common
Stock to R. Perry Harris and Karen Harris on August 28, 1998,
in exchange for all of the outstanding common stock of Eastern
Resorts Corporation.
(6) The Company issued 4,712,709 shares of Common Stock to BFG in
satisfaction of approximately $25 million in principal and
interest on indebtedness to BFG pursuant to a Bankruptcy Court
order dated November 24, 1997, and corrections thereto dated
September 8, 1998 and September 11, 1998.
(7) The Company issued 20,540 shares of Common Stock on February
9, 1998, pursuant to a conversion of shares of Series 1 Class
A 12 1/2% Cumulative Convertible Preferred Stock.
II-2
<PAGE>
The shares of Common Stock issued in the above transactions were
offered and sold in reliance upon the exemption from registration under Section
4(2) of the Securities Act, with respect to sales by an issuer which does not
involve any public offering or were granted as part of a compensatory benefit
plan as described in Rule 701 and promulgated under Section 3(b) of the
Securities Act.
Item 16. Exhibits and Financial Statement Schedule
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
1.1* Form of Underwriting Agreement among the Company, the Selling
Stockholders and Credit Suisse First Boston Corporation.
2.1 Agreement and Plan of Exchange dated February 16, 1996, by and among
The Bennett Funding Group, Inc., Bennett Funding International, Ltd.
and Equivest Finance, Inc. (incorporated by reference to Exhibit 2
contained in the Company's Form 8-K dated February 16, 1996).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 contained in the Company's
Form 8-K/A dated December 16, 1998).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2
contained in the Company's Form 8-K/A dated December 16, 1998).
II-3
<PAGE>
4.1* Form of Certificate of the Company's Common Stock, par value $.01.
5.1* Shearman & Sterling Opinion re legality.
10.1 Form of Indenture (incorporated by reference to Exhibit 4(e) filed
with the Registration Statement on Form S-18, File No. 33-24855-A).
10.2 Short Term Bond Exchange Agreement (incorporated by reference to
Exhibit 10.3 contained in the Company's Form 10-KSB for the fiscal
year ended December 31, 1997).
10.3 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 Exhibit 10.4 contained in
the Company's Form 10-KSB for the fiscal year ended December 31,
1997).
10.4 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 Exhibit 10.5 contained in the Company's Form 10-KSB for
the fiscal year ended December 31, 1997).
10.5 $75,000,000 Receivables Financing Facility extended by Credit Suisse
First Boston Mortgage Capital LLC to Resort Funding, Inc.
(incorporated by reference to Exhibit 10.6 contained in the Company's
Form 10-KSB for the fiscal year ended December 31, 1997).
10.6 $30,000,000 Acquisition and Development Financing Facility extended by
Credit Suisse First Boston Mortgage Capital LLC to Resort Funding,
Inc. (incorporated by reference to Exhibit 10.7 contained in the
Company's Form 10-KSB for the fiscal year ended December 31, 1997).
10.7 Order dated November 24, 1997, of the United States Bankruptcy Court
for the Northern District of New York, authorizing conversion of
Resort Funding,
II-4
<PAGE>
Inc. debt to Bennett Funding Group into shares of Equivest
Finance, Inc. Common Stock (incorporated by reference to
Exhibit 10.8 contained in the Company's Form 10-KSB for the
fiscal year ended December 31, 1997).
10.8 Resort Funding, Inc. Profit Sharing & 401K Plan (incorporated by
reference to Exhibit 10.9 contained in the Company's Form 10-KSB for
the fiscal year ended December 31, 1997).
10.9 Equivest Finance, Inc. 1997 Long Term Incentive Plan (incorporated by
reference to Exhibit 10.10 contained in the Company's Form 10-KSB for
the fiscal year ended December 31, 1997).
10.10 Employment Agreement dated May 29, 1997, by and between Thomas J.
Hamel and Richard C. Breeden, as Trustee (incorporated by reference to
Exhibit 10.11 contained in the Company's Form 10-KSB for the fiscal
year ended December 31, 1997).
10.11 Employment Agreement dated July 26, 1996 by and between Gerald L.
Klaben, Jr. and Richard C. Breeden, as Trustee (incorporated by
reference to Exhibit 10.11 contained in the Company's Form 10-KSB for
the fiscal year ended December 31, 1997).
10.12 Agreement and Plan of Merger dated as of July 17, 1998 by and among
Equivest, Eastern Resorts Acquisition Corp. and Eastern Resorts
Corporation (incorporated by reference to Exhibit 10.1 contained in
the Company's Form 10-QSB for the quarterly period ended June 30,
1998).
10.13 Stockholders' Agreement between Equivest and R. Perry Harris and Karen
Harris, dated as of July 16, 1998 (incorporated by reference to
Exhibit 10.2 contained in the Company's Form 8-K dated September 11,
1998).
10.14 Employment Agreement dated as of August 24, 1998, between Eastern
Resorts and R. Perry Harris (incorporated by reference to Exhibit 10.3
contained in the Company's Form 8-K dated September 11, 1998).
10.15 Loan and Security Agreement by and among Eastern Resorts LLC,
Equivest, Eastern Resorts and CSFB dated as of August 25, 1998,
relating to a loan in the amount of $11.5 million (incorporated by
reference to Exhibit 10.4 contained in the Company's Form 8-K dated
September 11, 1998).
10.16 Loan and Security Agreement by and among Resort Funding, Equivest,
Eastern Resorts LLC, Eastern Resorts and CSFB, dated as of August 25,
1998, relating to a loan in the amount of $15 million (incorporated by
reference to
II-5
<PAGE>
Exhibit 10.5 contained in the Company's Form 8-K dated
September 11, 1998).
10.17 Warrant Agreement entitling Credit Suisse First Boston Mortgage
Capital LLC to purchase 180,000 shares of the Common Stock of Equivest
(incorporated by reference to Exhibit 10.6 contained in the Company's
Form 8-K dated September 11, 1998).
10.18 Amended and Restated Warrant Agreement dated as of November 14, 1997,
entitling CSFB to purchase 250,000 shares of the Common Stock of
Equivest (incorporated by reference to Exhibit 10.8 contained in the
Company's Form 8-K dated September 11, 1998).
10.19 Registration Rights Agreement dated as of the 17th day of July, 1998,
by and between Equivest and Credit Suisse First Boston Mortgage
Capital LLC (incorporated by reference to Exhibit 10.7 contained in
the Company's Form 8-K dated September 11, 1998).
10.20 Registration Rights Agreement dated as of November 14, 1997, by and
between Equivest and CSFB (incorporated by reference to Exhibit 10.9
contained in the Company's Form 8-K dated September 11, 1998).
10.21 Agreement and Plan of Merger between Equivest Finance, Inc. and
Equivest Reincorporation, Inc. dated as of December 3, 1998
(incorporated by reference to Exhibit 10.1 contained in the Company's
Form 8-K/A dated December 16, 1998).
21.1 List of subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 contained in the Company's Form 8-K dated September 11,
1998).
23.1* Consent of Shearman & Sterling (included as part of its opinion to
be filed as Exhibit 5.1).
23.2 Consent of Firley, Moran, Freer & Eassa, P.C.
23.3 Consent of Donovan, Sullivan & Ryan
27.1 Financial data schedule extracted from 12/31/97 audited financial
statements (incorporated by reference to the corresponding exhibit
to the Company's Form 10-KSB for the fiscal year ended December 31,
1997).
27.2 Financial Data Schedule extracted from 9/30/98 unaudited financial
statements (incorporated by reference to the corresponding exhibit
to the Company's Form 10-QSB for the quarterly period ended
September 30, 1998).
99.1 Letter from Mahoney Cohen to BFG, dated March 29, 1996, resigning as
BFG's auditors (incorporated by reference to Exhibit 99.1 contained in
the Company's Form 10-KSB for the fiscal year ended December 31, 1997).
II-6
<PAGE>
99.2 Letter from Puritz and Weintraub to the Company, dated April 5, 1996,
resigning as the Company's auditors (incorporated by reference to
Exhibit 99.2 contained in the Company's Form 10-KSB for the fiscal year
ended December 31, 1997).
- ----------------
* To be filed by amendment.
(b) Financial Statement Schedule
No schedules are included because they are not required, not applicable
or the required information is included in the financial statements or notes
thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part
of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
Registration Statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenwich,
State of Connecticut, on the 31st day of December, 1998.
EQUIVEST FINANCE, INC.
By: /s/ Richard C. Breeden
--------------------------
Name: Richard C. Breeden
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on December 31, 1998. Each of the directors or officers of
Equivest Finance, Inc. whose signature appears below hereby appoints Richard C.
Breeden as his attorney-in-fact to sign in his name and behalf, in any and all
capacities stated below and to file with the Commission any and all amendments,
including post-effective amendments, to this registration statement, making such
changes in the registration statement as appropriate, and generally to do all
such things in their behalf in their capacities as officers and directors to
enable Equivest Finance, Inc. to comply with the provisions of the Securities
Act of 1933, and all requirements of the Securities and Exchange Commission.
Name Title
---- -----
/s/ Richard C. Breeden
----------------------
Richard C. Breeden President, Chief Executive Officer and
Chairman of the Board of Directors
/s/ Thomas J. Hamel
-------------------
Thomas J. Hamel Executive Vice-President, Chief
Operating Officer and Director
/s/ R. Perry Harris
-------------------
R. Perry Harris Executive Vice-President and Director
/s/ John R. Petty
-----------------
John R. Petty Director
II-8
<PAGE>
/s/ George W. Carmany III
-------------------------
George W. Carmany III Director
/s/ Gerald L. Klaben, Jr.
-------------------------
Gerald L. Klaben, Jr. Chief Financial Officer and
Senior Vice-President
/s/ James R. Petrie
-------------------
James R. Petrie Controller
II-9
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the captions "Withdrawal of
Audited Reports," "Resignation of Accountants," "Experts" and to the use of our
report dated February 20, 1998 in the Registration Statement on Form S-1 and
related Prospectus of Equivest Finance, Inc. for the proposed public offering of
___________ shares of common stock, par value $.01 per share.
Firley, Moran, Freer & Eassa, P.C.
Syracuse, New York
December 30, 1998
EXHIBIT 23.3
DONOVAN SULLIVAN & RYAN
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
To the Members
Eastern Resorts Company, LLC
Newport, Rhode Island
We have audited the accompanying consolidated balance sheets of Eastern Resorts
Company, LLC and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income and members' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Eastern
Resorts Company, LLC and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
DONOVAN, SULLIVAN & RYAN
Westwood, Massachusetts
March 5, 1998
