UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
Commission File Number: 0-18201
EQUIVEST FINANCE, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Florida 59-2346270
- ------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2 CLINTON SQUARE, SYRACUSE, NEW YORK 13202
- ------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (315) 422-9088
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act Of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
As of October 31, 1998, 25,105,706 shares of common stock of Equivest Finance,
Inc. were outstanding.
Transitional Small Business Disclosure Format. Yes |_| No |X|
1
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EQUIVEST FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements 3
Consolidated Financial Information:
Consolidated Balance Sheets - September 30, 1998 (unaudited) 3
and December 31, 1997
Unaudited Consolidated Income Statements - Three Months Ended 4
September 30, 1998 and 1997
Unaudited Consolidated Income Statements - Nine Months Ended 5
September 30, 1998 and 1997
Unaudited Consolidated Statement of Equity Accounts - Nine 6
Months Ended September 30, 1998
Unaudited Consolidated Statements of Cash Flows - Nine Months 7
Ended September 30, 1998 and 1997
Notes to Interim Consolidated Financial Information 8
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EQUIVEST FINANCE, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
ASSETS 30, 1998 31, 1997
- --------------------------------------------------- ------------- -------------
(Unaudited)
<S> <C> <C>
Cash $ 3,263,035 $ 4,620,479
Total Receivables 139,847,803 122,229,365
Inventory 9,598,952 -0-
Deferred financing costs, net 3,867,659 4,125,972
Cash - restricted 908,823 855,138
Accrued interest receivable 936,488 341,107
Deferred taxes -0- 1,141,536
Property and equipment, net 2,968,643 26,990
Goodwill 26,950,417 -0-
Other Assets 399,711 143,380
------------- -------------
Total Assets $ 188,741,531 $ 133,483,967
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------
Liabilities:
Accounts Payable and Other Liabilities:
Accounts payable $ 1,333,529 $ 434,072
Accounts payable - related parties -0- 11,235
Accrued expenses and other liabilities 5,083,423 519,109
Deferred income taxes 2,157,464 -0-
------------- -------------
Total Accounts Payable and Other
Liabilities 8,574,416 964,416
------------- -------------
Notes payable 128,355,911 99,961,357
------------- -------------
Total Liabilities 136,930,327 100,925,773
------------- -------------
CONTINGENCIES AND COMMITMENTS
12.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
$3 par value; 1,000,000 shares authorized,
-0- shares outstanding in 1998 and 9,915 shares
outstanding in 1997 -0- 29,745
STOCKHOLDERS' EQUITY
Cumulative Redeemable Preferred Stock--Series 2
Class A, $3 par value; 15,000 shares authorized,
10,000 shares Issued and outstanding 30,000 30,000
Common Stock, $.05 par value; 50,000,000
shares authorized, 25,105,706 shares outstanding
in 1998 and 21,834,443 outstanding in 1997 1,255,286 1,091,723
Additional paid-in capital 47,601,421 32,078,721
Retained earnings (deficit) 2,924,497 (671,995)
------------- -------------
51,811,204 32,528,449
------------- -------------
$ 188,741,531 $ 133,483,967
============= =============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
3
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EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
3 Months Ended September 30,
----------------------------
1998 1997
---- ----
Revenues:
Interest $ 5,303,387 $ 3,767,067
Vacation ownership 1,103,256 -0-
Resort operations 1,214,308 -0-
Other income 296,871 117,063
----------- -----------
7,917,822 3,884,130
----------- -----------
Costs and Expenses:
Provision for doubtful receivables 199,710 225,000
Interest 1,946,583 2,024,534
Cost of property sold 272,835 -0-
Debt related costs including amortization 626,402 270,566
of financing costs
Goodwill amortization 65,783 -0-
Sales and marketing 567,527 -0-
Resort management 989,549 -0-
General and administrative 1,155,038 731,543
----------- -----------
5,823,427 3,251,643
----------- -----------
Income Before Provision for Income Taxes 2,094,395 632,487
Provision for Income Taxes
Current 956,000 90,000
Deferred credit (96,000) (90,000)
----------- -----------
Total Provision for Income Taxes 860,000 -0-
----------- -----------
Net Income $ 1,234,395 $ 632,487
=========== ===========
Basic earnings per common share $ 0.05 $ 0.05
=========== ===========
Diluted earnings per common share $ 0.05 $ 0.03
=========== ===========
See Accompanying Notes To Consolidated Financial Statements.
4
<PAGE>
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
9 Months Ended September 30,
----------------------------
1998 1997
---- ----
Revenues:
Interest $ 15,010,759 $ 11,328,952
Gains on Sales of Contracts -0- 29,689
Vacation ownership 1,103,256 -0-
Resort operations 1,214,308 -0-
Other Income 867,982 175,640
------------ ------------
18,196,305 11,534,281
------------ ------------
Costs and Expenses:
Provision for doubtful receivables 649,710 225,000
Interest 5,318,413 6,301,626
Debt related costs including amortization 1,336,769 768,977
of financing costs
Cost of property sold 272,835 -0-
Goodwill amortization 65,783 -0-
Sales and marketing 567,524 -0-
Resort management 989,549 -0-
General and administrative 2,786,078 1,825,663
------------ ------------
11,986,661 9,121,266
------------ ------------
Income Before Provision for Income Taxes 6,209,644 2,413,015
Provision for Income Taxes
Current 2,476,000 270,000
Deferred credit (176,000) (90,000)
------------ ------------
Total Provision for Income Taxes 2,300,000 180,000
------------ ------------
Net Income $ 3,909,644 $ 2,233,015
============ ============
Basic earnings per common share $ 0.16 $ 0.18
============ ============
Diluted earnings per common share $ 0.15 $ 0.10
============ ============
See Accompanying Notes To Consolidated Financial Statements.
5
<PAGE>
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENT OF EQUITY ACCOUNTS
<TABLE>
<CAPTION>
Redeemable
Common Stock Additional Preferred Retained
Total Shares Amount Paid in Stock-Series Earnings
Capital 2 Class A (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $ 32,528,449 21,834,443 $ 1,091,723 $ 32,078,721 $ 30,000 $ (671,995)
Dividends on
12.5% Redeemable Convertible (8,819) (8,819)
Preferred Stock
Convert 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 -0- 50,722 2,536 301,797 (304,333)
Common stock issued for
acquisition of Eastern Resorts
(see Note C) 15,360,000 3,200,000 160,000 15,200,000
Net Income 3,909,644 3,909,644
------------ ------------ ------------ ------------ ------------ ------------
Balances at September 30, 1998 $ 51,811,204 25,105,706 $ 1,255,286 $ 47,601,421 $ 30,000 $ 2,924,497
============ ============ ============ ============ ============ ============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
6
<PAGE>
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOW
9 Months Ended September 30,
----------------------------
1998 1997
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES
Net Income $ 3,909,644 $ 2,233,015
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,392,101 753,925
Provision for doubtful receivables 649,710 225,000
Provision for deferred taxes (176,000) (90,000)
Gains on sales of contracts -0- 29,689
Changes in assets and liabilities:
Increase in other assets (1,534,452) (885,804)
Decrease in inventory 402,374 -0-
Increase in accounts receivable -
related parties -0- (66,334)
Increase in restricted cash (53,685) (52,335)
Increase (decrease) in accounts
payable and accrued expenses 2,516,665 (245,390)
Increase (decrease) in accounts
payable--related parties (11,235) 1,532
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,095,122 1,903,298
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in receivables, net (15,992,901) (12,849,468)
Property and equipment additions (46,987) -0-
Inventory additions (766,237) -0-
Purchase of Eastern Resorts, net of cash -0-
acquired of $908,031 (14,091,968) -0-
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (30,898,093) (12,849,468)
CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES
Payments on notes receivable - related party 3,129,580 8,791,239
Advances on notes receivable - related party (355,976) -0-
Proceeds on loans payable - related party -0- 1,452,861
Proceeds from recourse notes payable 59,767,842 7,334,812
Payments on recourse notes payable (38,269,151) (9,266,832)
Payments on redemption of preferred stock (7,815) -0-
Payments on preferred stock dividends (8,819) -0-
Proceeds from non-recourse notes payable 2,498,753 16,258,116
Payments on non-recourse notes payable (4,308,887) (15,208,551)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,445,527 9,361,645
------------ ------------
DECREASE IN CASH (1,357,444) (1,584,525)
------------ ------------
Cash at beginning of period 4,620,479 4,037,201
------------ ------------
CASH AT END OF PERIOD $ 3,263,035 $ 2,452,676
============ ============
See Accompanying Notes To Consolidated Financial Statements.
7
<PAGE>
EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated interim financial statements as of September
30, 1998 and 1997 and for the three-month and nine-month periods ended September
30, 1998 and 1997 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal accruals) considered
necessary for fair presentation have been included. Operating results for the
three-month and nine-month periods ended September 30, 1998 are not necessarily
indicative of the results expected for the year ended December 31, 1998. For
further information, please refer to the consolidated financial statements and
footnotes thereto included in Equivest Finance, Inc.'s (the "Company") Form
10-KSB for the year ended December 31, 1997.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, Equivest Capital Funding, Inc. (inactive),
Resort Funding, Inc. ("Resort Funding") and its subsidiary BFICP Corporation,
and, as of August 28, 1998 (see Note C), Eastern Resorts Corporation and its
subsidiary, Long Wharf Marina Restaurant, Inc. (collectively, "Eastern Resorts")
All significant intercompany balances and transactions have been eliminated in
consolidation.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and costs and expenses during
the reporting period. Actual results could differ from the Company's estimates.
Interest Income
The Company recognizes interest income on consumer financing contracts
using the interest method over the term of the contract. The Company recognizes
interest income on outstanding resort acquisition and development loans when
earned, based on the terms of the loan agreements. The accrual of interest on an
impaired loan is discontinued when accrued and unpaid interest, together with
the loan principal outstanding, exceeds the loan's projected cash flow or the
loan's net collateral value.
Gains on Sales of Contracts
Gains on sales of contracts result from periodic non-recourse sales of
consumer receivables. A gain is recorded to the extent the net proceeds exceed
the net investment in the consumer receivables sold.
8
<PAGE>
Vacation Ownership
Vacation ownership revenue represents sales of timeshare intervals on the
accrual basis. Revenue is recognized after a binding sales contract has been
executed, a 10% minimum down payment has been received, and the statutory
rescission period has expired. If all other criteria are met but construction of
the unit to which the timeshare interval relates is not substantially complete,
revenue is recognized on the percentage of completion basis.
Resort Operations
Resort operations income represents income received by the Company for
management services provided to several homeowners associations at various
resort properties. These revenues are recognized on the accrual basis in the
period in which the services are provided.
Other Income
Other income primarily represents fees, which are recognized as income
when the Company performs the related service. These services include billing
services for developers, and loan commitment, chargeback and collection fees
charged to resorts.
Allowance for Doubtful Receivables
Receivables have been reduced by an allowance for doubtful receivables.
The allowance is an amount which management believes will be adequate to absorb
possible losses on existing receivables. The evaluation incorporates past loss
experience, known and inherent risks in the portfolio, adverse conditions that
may affect the borrower's ability to repay, the estimated value of underlying
collateral, and current economic conditions. Receivables are charged against the
allowance when management believes that collectibility is unlikely. Because of
uncertainties in the estimation process, it is at least reasonably possible that
management's estimate of loan losses inherent in the loan portfolio and the
related allowance will change in the near term.
The Company follows Statement of Financial Accounting Standards No. 114
(SFAS 114) "Accounting by Creditors for Impairment of a Loan". Under SFAS 114,
the allowance for doubtful receivables for loans identified as impaired is
specifically determined using the loan's projected discounted cash flow or its
net collateral value.
Inventory and Cost of Property Sold
Inventory is stated at the lower of cost or market and consists of
timeshare intervals held for sale and construction in progress of new timeshare
units. These costs are charged to cost of property sold based upon the relative
sales values of the intervals sold. Intervals reacquired are placed back into
inventory at the lower of their original historical cost basis or market value.
Deferred Financing Costs
Deferred financing costs represent unamortized expenses associated with
issuing certain debt and fees payable pursuant to certain bank settlement
transactions and debt associated with the acquisition of Eastern Resorts.
Amortization of these costs is computed on a straight-line basis over the term
of the associated debt and does not differ materially from that computed using
the effective interest method.
9
<PAGE>
Goodwill Amortization
Goodwill related to the acquisition of Eastern Resorts is being amortized
on a straight-line method over a 40-year period.
Property and equipment
Property and equipment (including equipment under capital lease) net of
accumulated depreciation, are stated at cost. The Company computes depreciation
using the straight-line method over the estimated useful lives of the assets
which have been estimated as follows:
Restaurant condominiums/office building/warehouse 39 years
Computers 5 years
Marina 7-10 years
Furniture and fixtures 7 years
Motor vehicles 5 years
Equipment 7 years
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109
is an asset and liability approach to accounting for deferred income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in tax laws or rates. A valuation allowance reduces
deferred tax assets when it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Earnings Per Share
The Company computes earnings per share under Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 requires
the presentation of earnings per share by all entities that have common stock or
potential common stock (such as options, warrants or convertible securities)
outstanding that trade in a public market. Those entities that have only common
stock outstanding present basic earnings per share amounts. All other entities
present basic and diluted per share amounts. Diluted per share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations.
C. Acquisition of Eastern Resorts
On August 28, 1998, the Company completed the previously announced
acquisition of Eastern Resorts of Newport, Rhode Island, one of the largest
developers of timeshare resorts based in New England. The purchase price was $15
million in cash and 3.2 million shares of the Company's common stock, together
with the assumption of approximately $25.5 million in liabilities. The Company
obtained the cash portion of the purchase price in large part through the
proceeds of a $12.2 million short-term bridge loan (the "Bridge Loan") from
Credit Suisse First Boston Mortgage Capital LLC ("CSFB"). Of the original amount
of the Bridge Loan, approximately $8 million remained outstanding at November
13, 1998. The Bridge Loan is collateralized in part by the assets of Eastern
Resorts. Also in connection with the Eastern
10
<PAGE>
Resorts acquisition, approximately $11 million in acquisition and development
loans and consumer receivable loans previously extended by Resort Funding to the
predecessor corporation of Eastern Resorts were transferred out of the Company's
existing revolving credit facilities into a new short-term facility established
by CSFB (the "Affiliate Paper Facility"). The Affiliate Paper Facility, which is
oversecured, and the Bridge Loan both mature on December 11, 1998. The
transaction has been accounted for as a purchase and, accordingly, the
accompanying statements of income and cash flows include Eastern Resorts'
operations and cash flows from August 28, 1998. The purchase price and its
allocation to assets acquired follows:
Purchase price
Cash $15,000,000
3,200,000 shares of common stock at $4.80 per share 15,360,000
Liabilities assumed 25,548,676
Other acquisition costs 1,670,101
===========
$57,578,777
===========
Estimated fair value of identifiable
assets including cash of $908,031 $30,562,576
===========
Goodwill $27,016,201
===========
The following pro forma data presents the results of the combined entities
as if the purchase occurred at the beginning of each year presented. The pro
forma data is not indicative of the results of operations of the Company had the
purchase occurred on these dates, or of the results of future operations. It
does not include any adjustments for cost savings and other benefits which
management anticipates from the acquisition, and it assumes that the same price
would have been paid at an earlier time. Rather, the data reflects only the
direct effects of purchase accounting, interest expense on indebtedness
incurred, and necessary income tax adjustments.
Period
--------------------------
1998 1997
---- ----
3 months ended September 30,
Revenue $ 13,481,000 $ 9,301,000
============== ===========
Net Income $ 1,759,000 $ 740,000
============== ===========
Basic earnings per common share $ 0.06 $ 0.04
============== ===========
Diluted earnings per common share $ 0.06 $ 0.03
============== ===========
9 months ended September 30,
Revenue $ 35,024,000 $25,934,000
============== ===========
Net Income $ 4,444,000 $ 2,224,000
============== ===========
Basic earnings per common share $ 0.16 $ 0.13
============== ===========
Diluted earnings per common share $ 0.16 $ 0.09
============== ===========
11
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D. Contingencies, Commitments and Liquidity
In July 1997, a Las Vegas, Nevada developer and customer of Resort Funding
filed for bankruptcy court protection. As of July 31, 1998, the developer had
outstanding indebtedness on its acquisition and development loans of
approximately $6.2 million, secured by first and third mortgages on a hotel and
casino located in Las Vegas. This amount owed includes principal, accrued
interest, and certain other fees relating to such loans. On August 5, 1998, the
hotel and casino were sold at auction. Under the terms of the auction, the
Company's loans, together with accrued interest and costs, were fully repaid out
of the proceeds of the sale.
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 timely
received, Resort Funding shall have the right to have a receiver appointed to
operate the resort. As of October 31, 1998, the principal balance owed to Resort
Funding under the referenced loan was approximately $3.4 million and the escrow
account had a balance of $308,273. Resort Funding's acquisition and development
loan agreement provides that principal will be repaid through release fees on
interval units sold. As of October 31, 1998, the developer had not sold any
interval units. There can be no assurance Resort Funding will receive principal
payments relating to this obligation in the short term, or that it will not
incur a loss on this loan.
When the Company acquired Eastern Resorts, it anticipated repaying the
Bridge Loan through a public offering, and replacing the Affiliate Paper
Facility with one or more alternative lenders. In the interim, the Company has
been paying both facilities down through payments received on the notes pledged
as collateral for the Bridge Loan and Affiliate Paper Facility.
As of November 12, 1998, the balance on the Bridge Loan was approximately
$7.8 million, down from the original borrowing of $12.2 million. As of the same
date, the balance on the Affiliate Paper Facility was approximately $8.8
million, down from the original borrowing of $9.6 million. The Affiliate Paper
Facility is fully collateralized with performing notes receivable, while the
Bridge Loan is collateralized in part with notes receivable and in part with a
general lien on unpledged assets of Eastern Resorts.
Because of a change in market conditions, the Company delayed the original
schedule of its proposed public offering. Though the Company is discussing
replacing both facilities with other lenders, it currently anticipates that it
will complete repayment of the Bridge Loan substantially out of internal cash
flow. The Company continues to plan on refinancing the Affiliate Paper Facility
with one or more alternate lenders, and expects that it will be able to obtain
replacement funding for this facility. However, there can be no assurance that
the Company will be successful in obtaining new sources of financing on terms
acceptable to it, or that modifications of the current terms of such
indebtedness will not result in materially less favorable terms. Both the Bridge
Loan and the Affiliate Paper Facility contain cross default provisions linked to
the Company's pre-existing CSFB debt facilities.
Resort Funding also has approximately $3.4 million of 8% unsecured notes
that mature in December, 1998. Resort Funding is currently offering to exchange
the 1998 notes for one of two new series of notes with maturities of two and
three years, which notes would be convertible at the option of the holder into
common stock of the Company.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
Certain matters discussed or incorporated herein by reference
contain forward-looking statements. These statements may be identified by the
use of words or phrases such as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential." Forward-looking statements are based on
the Company's current expectations. The Private Securities Litigation Reform Act
of 1995 provides a "safe harbor" for such forward-looking statements. In order
to comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause actual results and experience to differ materially from the
anticipated results or other expectations expressed in such forward-looking
statements. These factors include, among others, general economic and business
conditions, industry trends, changes in business strategy or development plans,
availability and quality of management, a downturn in the real estate cycle or
other factors which result in lower sales of vacation ownership interests,
possible financial difficulties of one or more of the developers with whom the
Company does business (such as the risk of carrying non-performing assets or
losses if defaulted loans prove to have insufficient collateral backing),
fluctuations in interest rates, prepayments by consumers of indebtedness,
prepayments by developers, inability of developers to honor replacement
obligations for defaulted consumer notes, and competition from organizations
with greater financial resources.
THREE MONTHS ENDED SEPTEMBER 30, 1998
On August 28, 1998, the Company completed the acquisition of Eastern
Resorts, which became a wholly-owned subsidiary of the Company. Statements for
the three months ended September 30, 1998 include 33 days of operating results
for Eastern Resorts.
Net Income
Income before provision for income taxes increased 231.1% to $2,094,400
for the three months ended September 30, 1998, from $632,500 for the same period
in 1997. Net income increased 95.2% to $1,234,400 for the three months ended
September 30, 1998 compared to $632,500 for the same period in 1997. The
increase in net income was due primarily to an increase in interest income as a
result of portfolio growth, an increase in commitment fees, and a decrease in
interest expense. These increases were partially reduced by an increased
provision for income taxes, higher selling, general and administrative costs,
and an increase in debt-related costs and amortization. Due to the short period
of time that the Company owned Eastern Resorts, and the costs associated with
acquiring Eastern Resorts, Eastern Resorts did not significantly contribute to
the Company's net income for the third quarter. The Company booked a provision
for income taxes of $860,000 for the three months ended September 30, 1998.
There was no provision for income taxes during the same period in 1997.
Total revenues increased 103.8% to $7,917,800 for the three months ended
September 30, 1998, from $3,884,100 for the same period in 1997. The increase
was due primarily to the inclusion of Eastern Resorts' revenue from sales of
vacation ownership intervals, interest income and revenue from resort operations
as well as an increase in interest income as a result of portfolio growth in
both consumer receivables financing and acquisition and development loans, and
higher fee income. Total loan originations rose 18.5% to $22.4 million for the
three months ended September 30, 1998, compared to $18.9 million for the same
period in 1997.
13
<PAGE>
Interest Income
Interest on loans increased 40.8% to $5,303,400 for the three months ended
September 30, 1998, from $3,767,100 for the same period in 1997, primarily due
to growth in the portfolio held for investment. Interest on consumer notes
increased 34.5% to $3,441,700 for the three months ended September 30, 1998 from
$2,559,200 for the same period in 1997, as a result of growth in the portfolio
held for investment. The average amount outstanding on the consumer receivable
portfolio for the three months ended September 30, 1998 was approximately $25
million higher than during the same period in 1997, though the average interest
rate dropped approximately 0.5%. The average interest rate on consumer
receivable loans declined during the third quarter of 1998 compared to the third
quarter of 1997 due to an increase in the outstanding balance of hypothecation
loans, which generally bear lower interest rates than purchased consumer
receivables, and a decrease in the average interest rates received on the
outstanding balance of purchased consumer receivables. Interest on acquisition
and development loans increased 54.2% to $1,518,400 for the three months ended
September 30, 1998 from $985,000 for the same period in 1997, primarily as a
result of higher average outstanding balances. The average outstanding balances
for acquisition and development loans during the three months ended September
30, 1998 were approximately $15 million higher than during the same period in
1997, although average interest rates dropped 0.8%. Eastern Resorts' total
interest income was $262,500 for the quarter ended September 30, 1998 and there
was no corresponding amount for the same period in 1997. The reduction in
average outstanding balances on notes receivable from a related party resulted
in a decrease of approximately $120,000 in interest income for the three months
ended September 30, 1998, as compared to the same period in 1997, although such
amounts were offset by corresponding increases in interest on consumer notes and
acquisition and development loans.
Vacation Ownership
Vacation ownership income represents sales of timeshare intervals on the
accrual basis. For the three months ended September 30, 1998, vacation ownership
revenue totaled $1,103,300. All revenue from vacation ownership is a result of
the acquisition of Eastern Resorts. Therefore, there is no corresponding amount
for the same time period in 1997.
Resort Operations
Resort operations for the three months ended September 30, 1998 totaled
$1,214,300, generated entirely through the acquisition of Eastern Resorts.
Therefore, there is no corresponding amount for the same time period in 1997.
Other Income
Other income increased 153.6% to $296,900 for the three months ended
September 30, 1998, from $117,100 for the same period in 1997. The increase was
primarily due to an increase in fee income generated by new hypothecation loans
and new acquisition and development loans.
Provision for Doubtful Receivables
The provision for doubtful receivables decreased 11.2% to $199,700 for the
three months ended September 30, 1998, compared to $225,000 for the same period
in 1997, attributable mainly to the payment and satisfaction of a $6.5 million
outstanding loan balance from a bankrupt developer customer of Resort Funding in
the third quarter of 1998. Because of the reduced loan balances, the provision
for doubtful receivables increased as a percentage of the overall portfolio
despite the slightly lower quarterly provision in the previous year.
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Interest Expense
Interest expense decreased 3.9% to $1,946,600 for the three months ended
September 30, 1998, from $2,024,500 for the same period in 1997, primarily due
to lower interest rates. The Company's consumer receivables facility had higher
average outstanding balances of almost $12 million for the three months ending
September 30, 1998, compared to the same period in 1997, but interest rates were
approximately 290 basis points lower. As a result, overall interest expense on
the Company's consumer receivable facility decreased 0.7% to $883,600 for the
three months ending September 30, 1998 from $889,900 for the same period in
1997.
Interest expense on other bank notes increased 52.8% to $920,700 for the
three months ended September 30, 1998, from $602,300 for the same period in
1997, due to higher average outstanding balances. The average outstanding
balance on other bank notes during the three months ended September 30, 1998 was
approximately $17 million, or approximately 41%, higher than the balance during
the same period in 1997. The average interest rate on other bank notes increased
to 6.5% for the three months ending September 30, 1998, from 5.8% for the same
period in 1997. The Bridge Loan and the Affiliate Paper Facility, both of which
bear interest at LIBOR+3%, are included in other bank notes. The interest
expense on the Bridge Loan was approximately $75,000 for the post-acquisition
period ending September 30, 1998. Since the Affiliate Paper Facility replaced
existing debt, though at slightly higher interest rates, there was no
significant increase to interest expense.
The satisfaction of $25 million of intercompany debt through the issuance
of common stock of the Company as of October 30, 1997 resulted in further
reduction of interest expense during the three months ended September 30, 1998,
as compared to the same period in 1997. For the three months ended September 30,
1997, approximately $470,000 of interest expense was charged to operations in
connection with this intercompany debt. Eastern Resorts added $74,500 of
interest expense for the post-acquisition period in 1998, with no corresponding
amount for the same period in 1997.
Cost of Property Sold
The cost of property sold for the three months ended September 30, 1998
totaled $272,800. The inclusion of cost of property sold is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding amount for
the same time period in 1997.
Debt-Related Costs Including Amortization of Financing Costs
Debt-related costs including amortization of financing costs increased
131.5% to $626,400 for the three months ended September 30, 1998, from $270,600
for the same period in 1997. The increase is primarily due to several factors:
(i) the amortization of approximately $148,000 of costs incurred to obtain court
approval to clear title to certain assets of the Company; (ii) the amortization
of approximately $105,000 in costs associated with the short term bridge
financing obtained to acquire Eastern Resorts; and (iii) the amortization of
$77,000 relating to fees and common stock warrants for a credit facility the
Company obtained in the fourth quarter of 1997. The court order, which has
become final and non-appealable, cleared title to approximately $27 million in
receivables for the Company. The value of the warrants is being accounted for as
a discount in consideration for making the loan and will be amortized as
interest expense over the term of the agreement. The remainder of the costs
related to the Bridge Loan will be amortized in the fourth quarter of 1998.
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Goodwill Amortization
Goodwill amortization totaled $65,800 for the three months ended September
30, 1998. Total goodwill that resulted from the acquisition of Eastern Resorts
was approximately $27 million and is being amortized over 40 years.
Sales and Marketing
Sales and marketing expense for the three months ended September 30, 1998
totaled $567,500. The inclusion of sales and marketing expense is a result of
the acquisition of Eastern Resorts. Therefore, there is no corresponding amount
for the same time period in 1997.
Resort Management
Resort management expenses for the three months ended September 30, 1998
totaled $989,500. The inclusion of resort management expenses is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding amount for
the same time period in 1997.
Selling, General and Administrative Costs
Selling, general and administrative costs increased 57.9% to $1,155,000
for the three months ended September 30, 1998, from $731,600 for the same period
in 1997. The increased costs are mainly due to $172,500 in administrative costs
incurred by Eastern Resorts during the post-acquisition period, and an increase
in payroll, servicing, legal, insurance, advertising, and travel costs. The
increase in payroll-related costs was mainly due to a reduction in costs
allocated to the estate in the bankruptcy case of Bennett Funding Group, Inc.
and its affiliates (collectively, the "Debtors") for certain of the Company's
employees, and slightly increased payroll costs during the third quarter of
1998, compared to the same period in 1997.
Provision for Income Taxes
The provision for income taxes for the three months ended September 30,
1998 increased to $860,000. The current portion of the provision relates to
currently payable federal and state income taxes. The provision for income taxes
for the three months ended September 30, 1997 reflects utilization of net
operating loss carryforwards and the deferred tax provision relating to the
provision for doubtful receivables. As of September 30, 1998, the Company had no
further net operating loss carryforwards available to offset its federal income
tax liability.
NINE MONTHS ENDED SEPTEMBER 30, 1998
On August 28, 1998, the Company completed the acquisition of Eastern
Resorts, which became a wholly-owned subsidiary of the Company. Statements for
the nine months ended September 30, 1998 include 33 days of operating results
for Eastern Resorts.
Net Income
Income before provision for income taxes increased 157.3% to $6,209,600
for the nine months ended September 30, 1998, from $2,413,000 for the same
period in 1997. Net income increased 75.9% to $3,909,600 for the nine months
ended September 30, 1998 compared to $2,233,000 for the same
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period in 1997. The increase in net income was due primarily to an increase in
interest income as a result of portfolio growth, an increase in commitment fee
income, and a decrease in interest expense. The increases were partially reduced
by an increased provision for income taxes, higher selling, general and
administrative costs, a higher provision for doubtful accounts, and an increase
in debt-related costs and amortization. Due to the short period of time that the
Company owned Eastern Resorts, and the costs associated with the acquisition,
Eastern Resorts did not significantly contribute to the Company's net income for
the third quarter or the nine months ended September 30, 1998. The Company
booked a provision for income taxes of $2,300,000 for the first nine months of
1998, a 1,177.8% increase over the $180,000 provision for income taxes during
the same period in 1997, when the Company benefited from net operating loss
carryforwards, which have now been fully utilized.
Total revenues increased 57.8% to $18,196,300 for the nine months ended
September 30, 1998, from $11,534,300 for the same period in 1997. The increase
was due primarily to an increase in interest income as a result of portfolio
growth in both consumer receivables financing and acquisition and development
loans, higher fees, and the inclusion of interest, vacation ownership and resort
operations income of Eastern Resorts. Total originations rose 60.9% to $71.9
million for the first nine months of 1998, compared to $44.7 million for the
same period in 1997.
Interest Income
Interest on loans increased 32.5% to $15,010,800 for the nine months ended
September 30, 1998, from $11,329,000 for the same period in 1997, primarily due
to growth in the portfolio held for investment. Interest on consumer notes
increased 31.1% to $10,080,300 for the nine months ended September 30, 1998,
from $7,691,100 for the same period in 1997, as a result of growth in the
portfolio held for investment. The average amount outstanding on the consumer
receivable portfolio for the nine months ended September 30, 1998 was
approximately $22 million higher than during the same period in 1997, although
the average interest rate dropped 0.3%. The interest rates on consumer
receivable loans declined during the first nine months of 1998 compared to the
first nine months of 1997 due to an increase in the outstanding balance of
hypothecation loans and a decrease in the average interest rates received on the
outstanding balance of purchased consumer receivables. Hypothecation loans
generally bear lower interest rates than purchased consumer receivables.
Interest on acquisition and development loans increased 51.6% to $4,342,400 for
the nine months ended September 30, 1998, from $2,864,800 for the same period in
1997, primarily as a result of higher average outstanding balances. The average
outstanding balances for acquisition and development loans during the nine
months ended September 30, 1998 was approximately $15 million higher than during
the same period in 1997, though average interest rates dropped 0.6%. Interest
income also increased through the post-acquisition contributions of Eastern
Resorts. The total interest income contributed by Eastern Resorts was $262,500
for the nine months ended September 30, 1998 and there was no corresponding
interest income for the same period in 1997. The reduction in average
outstanding balances on notes receivable from a related party resulted in a
decrease of $325,500 in interest income for the nine months ended September 30,
1998, as compared to the same period in 1997, although such amounts were offset
by corresponding increases in interest on consumer receivables and acquisition
and development loans.
Gains on Sales of Contracts
For the nine months ended September 30, 1998, the Company did not sell
consumer contracts. For the same period in 1997, gains on sales of the contracts
amounted to $29,700.
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Vacation Ownership
For the nine months ended September 30, 1998, vacation ownership revenue
totaled $1,103,300. The revenue from vacation ownership is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding account for
the same time period in 1997.
Resort Operations
Resort operations for the nine months ended September 30, 1998 totaled
$1,214,300. The revenue from resort operations is a result of the acquisition of
Eastern Resorts. Therefore, there is no corresponding account for the same time
period in 1997.
Other Income
Other income increased 394.2% to $868,000 for the nine months ended
September 30, 1998, from $176,000 for the same period in 1997. The increase was
primarily due to an increase in fee income generated by new hypothecation loans
and new acquisition and development loans. Through the first nine months of
1998, the Company funded approximately $22.1 million of new acquisition and
development loans, compared to approximately $11.6 million during the same
period in 1997. Also, the company funded eleven hypothecation loans for the nine
months ended September 30, 1998, compared to one during the same period in 1997.
The increase in other income for the nine months ended September 30, 1998,
compared to the same period in 1997 can also be attributed to a one-time
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 188.8% to $649,700 for
the nine months ended September 30, 1998, compared to $225,000 for the same time
period in 1997,primarily due to the growth of its portfolio of loans held for
investment. The Company's portfolio increased approximately $15 million during
the nine month period ended September 30, 1998, compared to the increase
achieved during the same period in 1997.
Interest Expense
Interest expense decreased 15.6% to $5,318,400 for the nine months ended
September 30, 1998, from $6,301,600 for the same period in 1997, primarily due
to lower interest rates. The Company's consumer receivables facility had higher
average outstanding balances of almost $12 million for the nine months ending
September 30, 1998, compared to the same period in 1997, but interest rates were
approximately 290 basis points lower. As a result, overall interest expense on
the Company's consumer receivables facility decreased 2.5% to $2,597,500 for the
nine months ending September 30, 1998, from $2,662,800 for the same period in
1997.
Interest expense on other bank notes increased 23.1% to $2,445,000 for the
nine months ended September 30, 1998, from $1,985,700 for the same period in
1997, due to higher average outstanding balances. The average outstanding
balance on other bank notes during the nine months ended September 30, 1998 was
approximately $12 million, or approximately 28%, higher than the balance during
the same period in 1997. The average interest rate on other bank notes decreased
to 6.3% for the nine months ending September 30, 1998, from 6.4% for the same
period in 1997. The Bridge Loan and the Affiliate Paper Facility, both of which
bear interest at LIBOR+3%, are included in other bank notes. The interest
expense
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<PAGE>
on the Bridge Loan was approximately $75,000 for the post-acquisition period
ending September 30, 1998. Since the Affiliate Paper Facility replaced existing
debt, though at slightly higher interest rates, there was no significant
increase to interest expense.
The satisfaction of $25 million of intercompany debt through the issuance
of common stock of the Company as of October 30, 1997 resulted in further
reduction of interest expense during the first nine months of 1998. For the nine
months ended September 30, 1997, approximately $1,445,600 of interest expense
was charged to operations in connection with this intercompany debt, compared to
$0 for the same period in 1998. Eastern Resorts added $74,500 of interest
expense for the post-acquisition period in 1998, compared to $0 for the same
period in 1997.
Cost of Property Sold
The cost of property sold for the three months ended September 30, 1998
totaled $272,800. The inclusion of cost of property sold is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding amount for
the same time period in 1997.
Debt-related Costs Including Amortization of Financing Costs
Debt-related costs including amortization of financing costs increased
73.8% to $1,336,800 for the nine months ended September 30, 1998, from $769,000
for the same period in 1997. The increase is primarily due to the amortization
of approximately $225,000 for fees and common stock warrants associated with a
credit facility the company obtained in the fourth quarter of 1997. The increase
was also attributable to the amortization of approximately $148,000 of costs
incurred in obtaining court approval to clear title to certain assets of the
Company, the amortization of approximately $105,000 of costs attributable to the
short-term bridge financing obtained to acquire Eastern Resorts, and the
amortization of $67,000 relating to an increase in the 3% per annum arrangement
fee charged by the Debtors in the BFG bankruptcy case relating to certain loans
made to Resort Funding. The remainder of the costs related to the Bridge Loan
will be amortized in the fourth quarter of 1998. The value of the warrants is
being accounted for as a discount in consideration for making the loan and will
be amortized as interest expense over the term of the agreement.
Goodwill Amortization
Goodwill amortization totaled $65,800 for the nine months ended September
30, 1998. Total goodwill for the acquisition of Eastern Resorts was
approximately $27 million and is being amortized over 40 years.
Sales and Marketing
Sales and marketing expense for the nine months ended September 30, 1998
totaled $567,500. The inclusion of sales and marketing expense is a result of
the acquisition of Eastern Resorts. Therefore, there is no corresponding amount
for the same time period in 1997.
Resort Management
Resort management expenses for the nine months ended September 30, 1998
totaled $989,500. The inclusion of resort management expenses is a result of the
acquisition of Eastern Resorts. Therefore, there is no corresponding amount for
the same time period in 1997.
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Selling, General and Administrative Costs
Selling, general and administrative costs increased 52.6% to $2,786,100
for the nine months ended September 30, 1998, from $1,825,700 for the same
period in 1997. The increased costs are mainly due to an increase in payroll,
servicing, legal, advertising, insurance, travel costs, and the acquisition of
Eastern Resorts. The increase in payroll-related costs was mainly due to a
reduction in payroll costs that were allocated to the Debtors for certain of the
Company's employees and slightly increased payroll costs during the third
quarter of 1998, compared to the same period in 1997. The administrative costs
incurred by Eastern Resorts during the post-acquisition period ended September
30, 1998 were $172,500.
Provision for Income Taxes
The provision for income taxes for the nine months ended September 30,
1998 increased 1,178.8% to $2,300,000 from $180,000 for the same period in 1997.
The current portion of the provision relates to currently payable federal and
state income taxes. The current-period tax provision reflects the benefit of the
availability of net operating loss carryforwards of approximately $675,000 in
1998, which will decrease the Company's federal income tax liability for 1998.
The provision for income taxes for the nine months ended September 30, 1997
reflects utilization of net operating loss carryforwards and the deferred tax
provision relating to the provision for doubtful receivables. As of March 31,
1998, the Company had no further net operating loss carryforwards available to
offset its federal income tax liability.
Acquisition of Eastern Resorts
On August 28, 1998, the Company completed the previously announced
acquisition of Eastern Resorts of Newport, Rhode Island, one of the largest
developers of timeshare resorts based in New England. The purchase price was $15
million in cash and 3.2 million shares of the Company's common stock, together
with the assumption of certain liabilities. The Company obtained the cash
portion of the purchase price in large part through the proceeds of a $12.2
million short-term bridge loan (the "Bridge Loan") from Credit Suisse First
Boston Mortgage Capital LLC ("CSFB"). Of the original amount of the Bridge Loan,
approximately $8 million remained outstanding at November 13, 1998. The Bridge
Loan is collateralized in part by the assets of Eastern Resorts. Also in
connection with the Eastern Resorts acquisition, approximately $11 million in
acquisition and development loans and consumer receivable loans previously
extended by Resort Funding to the predecessor corporation of Eastern Resorts
were transferred out of the Company's existing revolving credit facilities into
a new short-term facility established by CSFB (the "Affiliate Paper Facility").
The Affiliate Paper Facility, which is oversecured, and the Bridge Loan both
mature on December 11, 1998. CSFB also received 180,000 warrants at $8.00 per
share of the Company's common stock as part of its consideration.
Year 2000 Update
1. General
The software and embedded microchips in certain computer systems identify
dates only by the last two digits of a year. For example, 1999 would be coded as
"99", 1998 as "98" and so on. The Year 2000 problem arises from the inability of
certain software programs and microchips to distinguish between dates in the
year 2000 and dates in the year 1900. As a result, a date entered "00" may be
read as 1900 instead of 2000. If uncorrected, functions using these systems
would not work properly in the
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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.
2. Risks
Resort Funding
Resort Funding relies more on information systems for servicing its loans
than for any other individual function.
The computer software and hardware platform for Resort Funding's loan
servicing program is owned by The Processing Center, Inc. ("TPC"), a bankrupt
affiliate of the Bennett Funding Group, Inc. 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. As of October 31, 1998, the Company understands that TPC's
remediation efforts are 25% complete, and that approximately 20% of the platform
has been satisfactorily tested. The Company is advised that TPC anticipates
completing its remediation program and testing all systems by March 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, 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. Any such replacements will be Year 2000
compliant.
Eastern Resorts' existing computer systems, used primarily for accounting
and word processing, are not Year 2000 compliant. However, Eastern Resorts is
currently making arrangements to acquire certain software tools which will scan
hardware and software systems to identify Year 2000 issues. The cost of such
tools is expected to be immaterial. Once any Year 2000 issues have been
identified, Eastern Resorts
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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.
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 issue may have a significant,
adverse impact on the operations or financial performance of the Company. The
Company has initiated contact with such third parties in order to determine
whether their systems are Year 2000 compliant and, if not, what steps they have
taken to address the problem. The Company has not yet received sufficient
confirmation from all of these parties in order to assess the likelihood that
all such parties will achieve Year 2000 compliance. If the Company determines
that a response to an inquiry is either insufficient or otherwise indicates that
the third-party will not achieve Year 2000 compliance, the Company may follow up
with personal contact with the third party and, if necessary, an on-site audit
or testing of such party's systems. The Company anticipates finalizing its
assessment of third-parties' Year 2000 readiness by the 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 operations and financial position.
3. Costs
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 position 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 financial position and results.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 29, 1998, Resort Funding filed a motion (the "Motion") in the
Bankruptcy Court for the Northern District of New York (the "Bankruptcy Court")
to obtain court approval for certain corrections to the terms of a November 1997
order of the Bankruptcy Court. Under that order, Resort Funding satisfied all of
its outstanding debt under certain notes to BFG through an exchange of debt for
common stock of the Company. The Motion sought to authorize BFG to accept an
additional 67,113 shares of the Company's common stock at the price of the
original issuance ($5.375 per share) to correct an error in the computation of
the amount of the outstanding intercompany debt at the time the debt-equity swap
was approved in November 1997. Additionally, the Motion sought to authorize the
BFG bankruptcy trustee (the "BFG Trustee") to provide appropriate legal
documentation to Resort Funding confirming Resort Funding's title in
approximately $27 million in receivables and development loans which were
recorded in the name of BFG-related entities as nominees, even though such loans
were either paid for or advanced directly by Resort Funding. The Bankruptcy
Court held evidentiary hearings on the Motion and., on September 8, 1998
(corrected on September 11, 1998), entered an order authorizing the BFG Trustee
to convey to Resort Funding all of the Debtors' right, title and interest in the
timeshare receivables and acquisition and development loans that were the
subject of the Motion. The order directed the BFG Trustee to execute any and all
documents reasonably necessary to transfer such assets to Resort Funding. The
order also authorized the BFG Trustee to adjust the amount of the debt exchanged
in November 1997 to correct the computation error and to accept an additional
67,113 shares of the Company's common stock on a nunc pro tunc basis.
For other information regarding certain litigation involving the Company,
its subsidiaries and affiliates, reference is made to the Company's Form 10-KSB
for the year-ended December 31, 1997, which is incorporated herein by reference.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On July 10, 1998, the trustee in the BFG Bankruptcy Case filed a motion on
behalf of BFG and other debtors in the Bankruptcy Case (the "Estate") in the
Bankruptcy Court seeking (i) to sell all of the Estate's shares of common stock
in the Company to a syndicate of underwriters, of which Credit Suisse First
Boston Corporation will be the lead or co-lead manager, in connection with a
public offering of such common stock and (ii) to exchange all of the Estate's
Series 2 Preferred Stock in the Company for 1,860,465 shares of the Company's
common stock. The Bankruptcy Court entered an order on September 24, 1998,
approving the bankruptcy trustee's motion to sell all of the Estate's common
stock in the Company. The order also authorized the trustee to either (i)
exchange the 10,000 shares of Series 2 Preferred Stock into 1,860,465 shares of
common stock, or (ii) sell the 10,000 shares of Series 2
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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 order also approves an undertaking by the U.S. Trustee in
bankruptcy not to object to any future role by the BFG Trustee as a director or
chief executive officer of the Company after the proposed public offering, or to
raise any past service as part of any challenge to the continued incumbency of
the BFG Trustee in that capacity.
The Company's annual general meeting of shareholders will take place on
December 8, 1998. Richard C. Breeden, as BFG Trustee, has filed a motion with
the Bankruptcy Court seeking its approval to vote the Estate's shares at the
annual meeting.
Item 6. (a) Exhibits
The following exhibits are filed herewith:
10.1 Agreement and Plan of Merger dated as of July 17, 1998, by and
among the Company, ERC Acquisition Corp. and Eastern Resorts
(incorporated herein by reference to the Company's Form
10-QSB, as filed with the Securities and Exchange Commission
on August 14, 1998).*
10.2 Stockholders' Agreement between the Company and R. Perry
Harris and Karen Harris, dated as of August 24, 1998.*
10.3 Employment Agreement dated as of August 24, 1998, between
Eastern Resorts and R. Perry Harris.*
10.4 $15,000,000 Loan and Security Agreement dated August 25, 1998,
between CSFB and the Company, Resort Funding, Eastern Resorts
Company LLC and Eastern Resorts.*
10.5 $11,500,000 Loan and Security Agreement dated August 25, 1998,
between CSFB and Eastern Resorts Company LLC, the Company and
Eastern Resorts.*
10.6 Warrant Agreement dated July 17, 1998, entitling CSFB to
purchase 180,000 shares of the Company's common stock.*
10.7 Registration Rights Agreement dated as of July 17, 1998, by
and between the Company and CSFB.*
10.8 Amended and Restated Warrant Agreement dated as of November
14, 1997, entitling CSFB to purchase 250,000 shares of the
Company's common stock.*
10.9 Registration Rights Agreement dated as of November 14, 1997,
by and between the Company and CSFB.*
11.1 Statement re: computation of earnings per share
- ----------
* Incorporated herein by reference to the Company's Form 8-K filed on September
11, 1998
24
<PAGE>
(b) Reports on Form 8-K.
(i) On August 14, 1998, the Company filed a Report on Form 8-K
with a financial statement announcing the Company's financial
results for the second quarter of 1998.
(ii) On September 1, 1998, the Company filed a Report on Form 8-K
for a press release regarding the Company's acquisition of
Eastern Resorts Corporation.
(iii) On September 11, 1998, the Company filed a Report on Form 8-K
announcing the completion of the Company's acquisition of
Eastern Resorts Corporation.
(iv) On September 16, 1998, the Company filed a Report on Form 8-K
announcing that the annual meeting of the Company for 1998
will be held October 29, 1998.
(v) On September 16, 1998, the Company filed a Report on Form 8-K
announcing that the Bankruptcy Court had granted Resort
Funding's motion to correct an order entered November 5, 1997
in the BFG Bankruptcy Case.
(vi) On October 27, 1998, the Company filed a Report on Form 8-K
announcing that the 1998 annual meeting scheduled for October
29, 1998, was postponed until December 8, 1998.
(vii) On November 6, 1998, the Company filed a Report on Form 8-K
with a financial statement announcing the Company's financial
results for the third quarter of 1998.
(viii) On November 12, 1998, the Company filed a Report on Form
8-K/A with financial statement of business acquired and pro
forma financial information for the Company.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, there unto duly authorized.
EQUIVEST FINANCE, INC.
By: /s/ Gerald L. Klaben, Jr.
-------------------------
Gerald L. Klaben, Jr.
Senior Vice President and Chief Financial Officer
Dated: November 16, 1998
26
<PAGE>
INDEX TO EXHIBITS
Exhibit No.: Exhibit
------------ -------
10.1 Agreement and Plan of Merger dated as of July 17, 1998, by and
among the Company, ERC Acquisition Corp. and Eastern Resorts
(incorporated herein by reference to the Company's Form
10-QSB, as filed with the Securities and Exchange Commission
on August 14, 1998).*
10.2 Stockholders' Agreement between the Company and R. Perry
Harris and Karen Harris, dated as of August 24, 1998.*
10.3 Employment Agreement dated as of August 24, 1998, between
Eastern Resorts and R. Perry Harris.*
10.4 $15,000,000 Loan and Security Agreement dated August 25, 1998,
between CSFB and the Company, Resort Funding, Eastern Resorts
Company LLC and Eastern Resorts.*
10.5 $11,500,000 Loan and Security Agreement dated August 25, 1998,
between CSFB and Eastern Resorts Company LLC, the Company and
Eastern Resorts.*
10.6 Warrant Agreement dated July 17, 1998, entitling CSFB to
purchase 180,000 shares of the Company's common stock.*
10.7 Registration Rights Agreement dated as of July 17, 1998, by
and between the Company and CSFB.*
10.8 Amended and Restated Warrant Agreement dated as of November
14, 1997, entitling CSFB to purchase 250,000 shares of the
Company's common stock.*
10.9 Registration Rights Agreement dated as of November 14, 1997,
by and between the Company and CSFB.*
- ----------
* Incorporated herein by reference to the Company's Form 8-K filed on September
11, 1998
27
EQUIVEST FINANCE, INC.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1998
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Income $ 1,234,395
Less: Preferred Stock dividends (150,000)
-----------
Basic earnings per share:
Income available to common stockholders 1,084,395 23,053,532 $.05
====
Effect of dilutive securities:
Warrants 95,246
Stock options 393,485
----------- -------------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $ 1,084,395 23,542,263 $.05
=========== =========== ====
<CAPTION>
For the Quarter Ended September 30, 1997
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Income $ 632,487
Less: Preferred Stock dividends (195,930)
-----------
Basic earnings per share:
Income available to common stockholders 436,557 9,484,847 $.05
Effect of dilutive securities: ====
Cumulative Convertible--Series 2 preferred stock 45,000 7,500,000
Stock Options 69,404
12.5% Redeemable Convertible preferred stock 930 27,861
----------- -------------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $ 482,487 17,082,112 $.03
=========== =========== ====
</TABLE>
28
<PAGE>
EQUIVEST FINANCE, INC.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- - ---------- ----------
<S> <C> <C> <C>
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:
Warrants 91,005
Stock options 380,751
12.5% Redeemable Convertible preferred stock 454 4,490
----------- ----------
Diluted earnings per share:
Income available to common stockholders
plus assumed conversions $ 3,459,644 22,748,919 $.15
=========== =========== ====
<CAPTION>
For the Nine Months Ended September 30, 1997
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- - ---------- ----------
<S> <C> <C> <C>
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
=========== =========== ====
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from EQUIVEST
FINANCE, INC. and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,263,035
<SECURITIES> 0
<RECEIVABLES> 143,729,180
<ALLOWANCES> (3,881,377)
<INVENTORY> 9,598,952
<CURRENT-ASSETS> 0
<PP&E> 2,968,643
<DEPRECIATION> 0
<TOTAL-ASSETS> 188,741,531
<CURRENT-LIABILITIES> 8,574,416
<BONDS> 128,355,911
30,000
0
<COMMON> 1,255,286
<OTHER-SE> 50,525,918
<TOTAL-LIABILITY-AND-EQUITY> 188,741,531
<SALES> 0
<TOTAL-REVENUES> 18,196,305
<CGS> 0
<TOTAL-COSTS> 4,681,769
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 649,710
<INTEREST-EXPENSE> 6,655,182
<INCOME-PRETAX> 6,209,644
<INCOME-TAX> 2,300,000
<INCOME-CONTINUING> 3,909,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,909,644
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
