SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT TO APPLICATION OR REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 1, 1999
EQUIVEST FINANCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 333-29015 59-2346270
(State or other (Commission (I.R.S. Employer
Jurisdiction File Number) Identification No.)
of incorporation)
100 NORTHFIELD STREET
GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 422-9088
<PAGE>
The registrant hereby amends the following items, financial
statements, exhibits or other portions of its current report dated April 1,
1999, on Form 8-K as set forth in the pages attached hereto:
Item 7. Financial Statements and Exhibits
Listed below are the financial statements, pro forma financial information
and exhibits filed as part of this report:
a. Financial Statements of Business Acquired
The financial statements for the Acquired Companies listed in the
accompanying Index to Financial Statements and Pro Forma Financial
Information are filed as part of this Report on Form 8-K/A.
b. Pro Forma Financial Information
The pro forma financial information of Equivest Finance, Inc. listed
in the accompanying Index to Financial Statements and Pro Forma
Financial Information are filed as part of this Report on Form
8-K/A.
c. Exhibits
None.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EQUIVEST FINANCE, INC.
Date: June 8, 1999 By: /s/
----------------------------------------
Name: Gerald L. Klaben, Jr.
Title: Senior Vice President
and Chief Financial Officer
3
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
PRO FORMA FINANCIAL INFORMATION
The following financial statements and pro forma financial statements are
included in Item 7 of this Current Report on Form 8-K:
Avenue Plaza, LLC, Ocean City Coconut Malorie Resort, Inc., St. Augustine
Resort Development Group, Inc., Capital City Suites, Inc., Bluebeard's
Castle, Inc., and Castle Acquisition, Inc.
Independent Auditor's Report - Firley, Moran, Freer & Eassa, P.C.
Independent Auditor's Report - Horwath, Velez, Semprit & Co. PSC
Combined Balance Sheet as of December 31, 1998
Combined Statement of Operations for the Year Ended December 31, 1998
Combined Statement of Changes in Stockholder's and Member's Equity for the
Year Ended December 31, 1998
Combined Statement of Cash Flows for the Year Ended December 31, 1998
Notes to Combined Financial Statements for the Year Ended December 31, 1998
Avenue Plaza, LLC
Report of Independent Accountants
Balance Sheets as of December 31, 1997 and 1996
Statements of Operations and Changes in Members' Equity for the Years Ended
December 31, 1997 and 1996
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996
Notes to Financial Statements for the Years Ended December 31, 1997 and 1996
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Report of Independent Accountants
Balance Sheet as of December 31, 1997
Statement of Operations for the Period from August 14, 1997 (Date of Inception)
through December 31, 1997
Statement of Capital Deficiency for the Period from August 14, 1997 (Date of
Inception) through December 31, 1997
Statement of Cash Flows for the Period from August 14, 1997 (Date of Inception)
through December 31, 1997
Notes to Financial Statements for the Period from August 14, 1997 (Date of
Inception) through December 31, 1997
Equivest Finance, Inc. and Subsidiaries Pro Forma Financial Information
Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 1998
Unaudited Pro Forma Condensed Combined Income Statement for the Year Ended
December 31, 1998
Notes to Unaudited Pro Forma Condensed Financial Statements for the Year Ended
December 31, 1998
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Member and Stockholder of
Avenue Plaza, LLC, Ocean City Coconut Malorie Resort, Inc.,
St. Augustine Resort Development Group, Inc., Capital City
Suites, Inc., Bluebeard's Castle, Inc., and Castle Acquisition, Inc.
New Smyrna Beach, Florida
We have audited the accompanying combined balance sheet of Avenue Plaza, LLC,
Ocean City Coconut Malorie Resort, Inc., St. Augustine Resort Development Group,
Inc., Capital City Suites, Inc., Bluebeard's Castle, Inc. and Castle
Acquisition, Inc., as of December 31, 1998, and the related combined statements
of operations, changes in stockholder's equity and cash flows for the year then
ended. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of Bluebeard's Castle, Inc. or Castle Acquisition, Inc., which
statements reflect total assets and revenue constituting 46% and 44%,
respectively, of the related combined totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included in the combined financial statements, is
based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined 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 audit and the report of the other auditors
provide a reasonable basis for our opinion.
<PAGE>
The other auditors indicated in their report that they were unable to obtain
written representations from management of Bluebeard's Castle, Inc. or Castle
Acquisition, Inc. concerning transactions of those companies prior to July 31,
1998, which took place under substantially different management.
In our opinion, based on our audit and the report of the other auditors, except
for the effects of such adjustments, if any, as might have been determined to be
necessary had the written representations referred to in the preceding paragraph
been furnished by management, the combined financial statements referred to
above present fairly, in all material respects, the financial position of Avenue
Plaza, LLC, Ocean City Coconut Malorie Resort, Inc., St. Augustine Resort
Development Group, Inc., Capital City Suites, Inc., Bluebeard's Castle, Inc. and
Castle Acquisition, Inc., as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
FIRLEY, MORAN, FREER & EASSA, P.C.
Syracuse, New York
March 31, 1999 except with respect to the
report of the other auditors, as to which
the date is May 17, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bluebeard's Castle, Inc. and
Castle Acquisition, Inc.
Syracuse, New York
We have audited the accompanying combined balance sheet of Bluebeard's Castle,
Inc. and Castle Acquisition, Inc. as of September 30, 1998, and the combined
related statements of operations, stockholder's equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Companies management. Our responsibility is to express an opinion on these
financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit 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
audit provides a reasonable basis for our opinion.
We were unable to obtain written representations from the management of the
Companies concerning transactions prior to the July 31, 1998 merger with Kosmas
Group International, Inc. (Note 2), which took place under substantially
different management.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had the written representations referred to
in the preceding paragraph been furnished to us by the prior management, the
combined financial statements referred to in the first paragraph present fairly,
in all material respects, the combined financial position of Bluebeard's Castle,
Inc. and Castle Acquisition, Inc. as of September 30, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ HORWATH VELEZ SEMPRIT & Co. PSC
San Juan, Puerto Rico
May 17, 1999
2
<PAGE>
Combined Financial Statements
AVENUE PLAZA, LLC,
OCEAN CITY COCONUT MALORIE
RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT
GROUP, INC.,
CAPITAL CITY SUITES, INC.,
BLUEBEARD'S CASTLE, INC.,
AND
CASTLE ACQUISITION, INC.
December 31, 1998
<PAGE>
Combined Financial Statements
Avenue Plaza, LLC, Ocean City Coconut Malorie Resort, Inc.,
St. Augustine Resort Development Group, Inc., Capital City
Suites, Inc., Bluebeard's Castle, Inc., and Castle Acquisition, Inc.
December 31, 1998
Combined Financial Statements
Independent Auditor's Report--Firley, Moran, Freer & Eassa, P.C............. 1
Independent Auditor's Report--Horwath, Velez, Semprit & Co. PSC............. 3
Combined Balance Sheet...................................................... 4
Combined Statement of Operations ........................................... 5
Combined Statement of Changes in Stockholder's and Member's Equity.......... 6
Combined Statement of Cash Flows............................................ 7
Notes to Combined Financial Statements...................................... 9
<PAGE>
COMBINED BALANCE SHEET
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
December 31, 1998
ASSETS
Cash and cash equivalents $ 334,750
Cash in escrow from timeshare interval sales 155,819
Receivables, net 16,844,135
Other receivables 465,000
Inventory 39,258,367
Deferred financing costs, net 1,273,236
Cash--restricted 2,617,557
Accrued interest receivable 118,632
Property and equipment, net 6,344,218
Goodwill, net 16,586,287
Other assets 1,035,773
------------
TOTAL ASSETS $ 85,033,774
============
LIABILITIES AND STOCKHOLDER'S AND MEMBER'S EQUITY
LIABILITIES
Bank overdraft $ 545,000
Accounts payable 1,503,093
Accrued expenses and other liabilities 5,388,351
Deferred revenues 2,371,167
Provision for losses on notes receivable sold with recourse 855,000
Deferred income taxes 3,783,000
Notes and mortgages payable 55,467,615
------------
TOTAL LIABILITIES 69,913,226
CONTINGENCIES
STOCKHOLDER'S AND MEMBER'S EQUITY
Common stock 2,510
Additional paid-in capital 15,000,500
Stockholder's advances, net (2,900,152)
Accumulated deficit (1,659,055)
Member's equity 4,676,745
------------
STOCKHOLDER'S EQUITY 15,120,548
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 85,033,774
============
See Notes to Combined Financial Statements.
<PAGE>
COMBINED STATEMENT OF OPERATIONS
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
Year ended December 31, 1998
REVENUE
Timeshare interval sales $ 20,653,094
Resort management 14,584,071
Interest 2,389,915
Other income 700,476
------------
38,327,556
COSTS AND EXPENSES
Costs of timeshare intervals sold 3,501,094
Sales and marketing 12,655,881
Resort management 11,551,053
Interest 4,751,613
Depreciation and amortization 2,255,723
Provision for doubtful receivables 2,031,160
Provision for losses on notes receivable sold with recourse 855,000
General and administrative 6,516,281
------------
44,117,805
------------
LOSS BEFORE INCOME TAX BENEFIT (5,790,249)
INCOME TAX BENEFIT
Currently payable 44,000
Deferred credit (1,418,000)
------------
(1,374,000)
------------
NET LOSS $ (4,416,249)
============
See Notes to Combined Financial Statements.
<PAGE>
COMBINED STATEMENT OF CHANGES IN STOCKHOLDER'S AND MEMBER'S EQUITY
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
Year ended December 31, 1998
<TABLE>
<CAPTION>
Member's
Additional Equity
Paid-in Stockholder's Accumulated (Limited
Common Stock (Corporations) Capital /Member's deficit Liability
Shares Amount (Corporations) Advances (Corporations) Company) Total
------------ -------------- -------------- ------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1997 1,111 $12,010 $(761,073) $(3,409,062) $5,844,001 $1,685,876
Stockholder/Member
advances, net (2,139,079) (2,139,079)
Shares issued 500 500 $500 1,000
Adjustments related to
merger of Bluebeard's
Castle and Castle
Acquisition, Inc.:
Elimination of pre-
merger accumulated
deficit 4,999,000 4,999,000
Merger liabilities
assumed by Parent 15,000,000 15,000,000
Cancellation of Common
Stock (99) (10,000) (10,000)
Net loss (3,248,993) (1,167,256) (4,416,249)
-------- --------- ----------- ----------- ----------- ---------- -----------
Balances, December 31,
1998 1,512 $2,510 $15,000,500 $(2,900,152) $(1,659,055) $4,676,745 $15,120,548
======== ========= =========== =========== =========== ========== ===========
</TABLE>
<PAGE>
COMBINED STATEMENT OF CASH FLOWS
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
Year ended December 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,416,249)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,255,723
Provision for doubtful receivables 2,273,907
Provision for losses on notes receivable sold with recourse 855,000
Deferred income taxes (1,418,000)
Changes in assets and liabilities:
Inventory (180,694)
Other assets (340,480)
Cash in escrow 77,160
Cash--restricted (535,557)
Accounts payable, accrued expenses and other liabilities 123,898
Deferred revenues 1,497,643
-----------
CASH PROVIDED BY OPERATING ACTIVITIES 192,351
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in receivables, net (9,044,697)
Proceeds from sale of timeshare notes receivable 1,650,000
Goodwill acquired through purchase of minority members (544,369)
Purchase of business (7,000,000)
Purchases of property and equipment (604,355)
------------
CASH USED IN INVESTING ACTIVITIES (15,543,421)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 545,000
Release of cash restricted for 1997 extinguishment of debt 15,514,176
Proceeds from notes and mortgages payable 27,461,193
Payments on notes and mortgages payable (24,579,332)
Increase in due from uncombined affiliates, net (5,080,159)
Advance from related party 850,000
-----------
CASH PROVIDED BY FINANCING ACTIVITIES 14,710,878
-----------
DECREASE IN CASH AND CASH EQUIVALENTS (640,192)
Cash and cash equivalents at beginning of year 974,942
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 334,750
===========
<PAGE>
COMBINED STATEMENT OF CASH FLOWS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
Year ended December 31, 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid, net of capitalized interest $ 4,620,274
===========
Income taxes paid $ 20,000
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Financed purchases of hotel resort and equipment
and vacation ownership interests held for sale $13,068,000
===========
Financed loan costs $ 202,410
===========
Related party debt settled by surrendering timeshare notes $ 3,650,000
===========
Capital contribution for the unpaid portion of the
purchase of business $ 7,000,000
===========
See Notes to Combined Financial Statements.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation of Combined Financial Statements: The combined financial
statements include the financial statements of Avenue Plaza, LLC, Ocean City
Coconut Malorie Resort, Inc., St. Augustine Resort Development Group, Inc.,
Capital City Suites, Inc., Bluebeard's Castle, Inc. and Castle Acquisition, Inc.
The Companies are related through common ownership and management by Kosmas
Group International, Inc. Intercompany accounts and transactions between the
combined affiliates have been eliminated.
On July 31, 1998 Kosmas Group International, Inc. (Kosmas) acquired Bluebeard's
Castle, Inc. (Bluebeard) and Castle Acquisition, Inc. (Castle) whose fiscal
years end September 30. The accompanying combined statements of operations and
cash flows include Bluebeard's and Castle's amounts under Kosmas' ownership for
the two months ended September 30, 1998; and their amounts under the
predecessor's ownership for the ten months ended July 31, 1998. The accompanying
combined balance sheet includes the balance sheets of Bluebeard and Castle as of
September 30, 1998. Notes C and Q to the combined financial statements contain
additional information concerning these acquisitions and unaudited financial
information through December 31, 1998.
Companies' Activities: The Companies engage in the following principal
operations: (i) acquiring, developing and operating timeshare resorts; (ii)
marketing and selling timeshare intervals in its resorts, which typically
entitle the buyer to use a fully-furnished unit for a one-week period on either
an annual or an alternate-year basis, and (iii) providing financing for the
purchase of timeshare intervals.
In 1998, St. Augustine Resort Development Group, Inc. purchased a resort and
undeveloped land in St. Augustine, Florida. The property is to be used in its
timeshare resort operations.
Also in 1998, Capital City Suites, Inc. (incorporated in April 1998) purchased
property in Washington, D.C. Renovations required to make the property suitable
for hotel operations or for sale of timeshare intervals have not been completed
at December 31, 1998.
Use of Estimates: The preparation of these combined 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 combined financial statements and the reported amounts of revenues and costs
and expenses during the reporting period. Actual results could differ from the
Companies' estimates.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Allowance for Doubtful Receivables: The Companies record a provision for
doubtful notes receivable at the time revenue is recognized. Such provision is
recorded in an amount sufficient to maintain the allowance at a level considered
adequate to provide for anticipated losses resulting from customers' failure to
fulfill their obligations under the terms of their notes. The allowance for
doubtful notes takes into consideration both notes held by the Companies and
those sold with recourse. Such allowance for doubtful notes is adjusted based
upon periodic analysis of the portfolio, historical credit loss experience, and
current economic factors. The allowance for uncollectible notes is reduced by
actual cancellations and losses experienced, including losses related to
previously sold notes receivable which were a requirement pursuant to the
recourse obligations discussed herein. Recourse to the Companies on sales of
notes receivable is governed by the agreements between the purchasers and the
Companies.
Because of uncertainties in the estimation process, it is at least reasonably
possible that management's estimate of loan losses inherent in the loan
portfolio and the related allowance will change in the near term.
Inventory: Inventory is stated principally at the lower of cost, less
depreciation, or market. It consists of unsold timeshare intervals available for
sale, the cost of timeshare resorts under construction and land for future
timeshare resort development. Upon a sale of a timeshare interval, inventory is
charged to cost of sales using the specific cost allocated to the interval less
depreciation previously recorded. Timeshare intervals reacquired through
repossession are placed into inventory at a lower of their original historical
cost basis or market value. Timeshare intervals received in trade in are placed
in inventory at the lower of their specific cost, net of depreciation, or market
value.
With the exception of the Bluebeard and Castle properties, the Companies record
depreciation of timeshare intervals available for hotel use. They are
depreciated using the straight line method over the estimated useful lives of
the respective assets which range from 7 to 39 years. Following the accounting
policy of its predecessor owner prior to August 1, 1998, no depreciation is
charged for timeshare hoteling at Bluebeard and Castle.
Financing Costs: Loan origination fees and other costs associated with
acquisition loans and hypothecation of installments receivable are deferred and
amortized over the various terms of the corresponding loans using the
straight-line method, which approximates the effective interest method.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Property and Equipment: Property and equipment is carried at cost, less
accumulated depreciation. Depreciation and amortization of property and
equipment is provided using accelerated and straight-line methods for financial
statement purposes and accelerated methods for tax reporting purposes based on
the estimated useful lives ranging from 5 to 7 years for office furniture and
equipment, telephone equipment and computer equipment, 31.5 years for leasehold
improvements and 20 to 39 years for hotel resort property.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Goodwill: Goodwill represents the excess of costs over net assets arising from
(1) the purchase of minority interests of Avenue Plaza, LLC in 1997 and 1998;
and (2) the purchase of Bluebeard and Castle on July 31, 1998. The goodwill
reflects the use of push down accounting which is required under these
circumstances. It is being amortized using the straight line method over 8 years
and 15 years applied to original goodwill amounts of $6,467,117 and $11,286,000,
respectively.
Timeshare Interval Sales: Timeshare interval sales are made in exchange for cash
and mortgage notes receivable which are secured by a deed for trust on the
timeshare interval sold. The Companies recognize 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
rescission period has expired. If all criteria are met except that construction
is not substantially complete, revenues are recognized on the
percentage-of-completion basis. Under this method, the portion of revenues
applicable to costs incurred, as compared to total estimated acquisition,
construction and direct selling costs, is recognized in the period of sale. The
remaining revenue is deferred and recognized as the remaining costs are
incurred. Sales commissions and direct marketing costs relating to the sales
accounted for under the percentage-of-completion method are deferred until the
associated revenues are recorded.
Resort Management: Revenues from resort management primarily consist of (1) fees
received for management services provided to several homeowners associations,
(2) revenues from renting unoccupied units on a hotel basis, (3) revenues from
restaurant operations, and (4) revenues from renting commercial facilities and
restaurant facilities under concession agreements.
Interest Income: The Companies recognize interest income on its outstanding
notes receivable when earned using the interest method. The interest method
recognizes income at a constant rate of interest when applied to principal
outstanding.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Revenue Recognition--Vacation Packages: Vacation package certificates are sold
to customers who have up to eighteen months to exercise the certificate, at
which time the certificate expires. All revenues, and direct costs incurred
relating to the sale of vacation package certificates, are deferred until either
the vacation is taken or the eighteen-month period has expired and the Company
is no longer contractually obligated to fulfill the vacation. These certificates
give the purchaser a week of stay at the issuing resort and one week to exchange
with another resort.
Advertising: All costs associated with advertising and promoting the sale of
timeshare intervals are expended in the year incurred. Advertising expense was
approximately $216,000 for the year.
Income Taxes: The accounting policies and organizational structure for income
tax purposes follow:
o Taxable entities--Bluebeard and Castle are taxable entities under
U.S. Virgin Islands tax law which is similar to the Untied States
Internal Revenue Code. These Companies account 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 Companies' financial statements or tax returns. In
estimating future tax consequences the Companies generally consider
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 asset will not be realized.
o Nontaxed Entities--Avenue Plaza, LLC is a one member limited
liability company and the remaining companies are qualified S
corporations. As such, their taxable income or loss is reported in
the tax returns of the entity owners who are responsible for any tax
liability or, within certain limitations, benefit from use of
taxable losses.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Income Taxes--Nontaxed Entities--Continued: Certain timing differences and
adjustments for income tax purposes are reflected at the owners' level,
including the election of the installment method of reporting certain sales,
recognition of deferred income and expenses relating to the issuance and use of
vacation certificates, recognition of the allowance for receivable losses for
financial statement purposes, and certain related party transactions with cash
basis taxpayers whereby recognition for tax purposes will occur when payment
occurs in a subsequent period. Additionally, there are differences between book
and tax depreciation.
NOTE B--CONCENTRATIONS OF RISK
Credit Risk: The Companies are exposed to on-balance sheet risk related to its
notes receivable. The Companies are exposed to off-balance sheet credit risk
related to loans sold under recourse provisions.
The Companies offer financing to the buyers of timeshare intervals at the
Companies' resorts. These buyers make a down payment of at least 10 percent of
the purchase price and deliver a promissory note to the Companies for the
balance. The promissory notes generally bear interest at a fixed rate, are
payable over periods up to seven years, and are secured by a first mortgage on
the timeshare interval. The Companies perform credit evaluations on prospective
debtors.
If a buyer of a timeshare interval defaults, the Companies generally must
foreclose on the timeshare interval and attempt to resell it; the associated
marketing, selling, and administrative costs from the original sale are not
recovered; and such costs must be incurred again to resell the timeshare
interval. Although the Companies in many cases may have recourse against a
timeshare interval buyer for the unpaid price, certain states have laws, which
limit the Companies ability to recover personal judgments against customers who
have defaulted on their loans. Accordingly, the Companies have generally not
pursued this remedy.
Interest Rate Risk: The Companies historically derive net interest income from
financing activities because the interest rates they charge customers who
finance the purchase of their timeshare intervals exceed the interest rates the
Companies pay to lenders. Because the Companies' indebtedness bears interest at
variable rates and the Companies' customer receivables bear interest at fixed
rates, increases in interest rates will erode the spread in interest rates that
the Companies historically obtain and could cause the rate on the Companies'
borrowings to exceed the rate at which the Companies provide financing to
customers. The Companies do not engage in interest rate hedging transactions.
Therefore, any increase in interest rates, particularly if sustained, could have
a material adverse effect on the Companies' results of operations, cash flows,
and financial position.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE B--CONCENTRATIONS OF RISK--Continued
Availability of Funding Sources: The Companies fund substantially all of the
notes receivable, timeshare inventory and resort purchases with borrowings
through financing facilities and internally generated funds. These borrowings
are in turn repaid with the proceeds received by the Companies from repayments
of customer notes receivable. To the extent that the Companies are not
successful in maintaining or replacing existing financing, they would have to
curtail their operations or sell assets, thereby having a material adverse
effect on the Companies' results of operations, cash flows, and financial
condition.
Cash: The Companies maintain cash balances at various financial institutions in
several states with balances in excess of $100,000. Accounts at these
institutions are insured by the Federal Deposit Insurance Corporation up to
$100,000 per institution.
NOTE C--BUSINESS ACQUISITIONS
On July 31, 1998, Kosmas Group International, Inc. acquired the common stock of
Bluebeard and Castle from Castle Holding LLC (CH) for $14,000,000. Kosmas paid
$7,000,000 in cash and issued a $7,000,000 note to CH. Additionally, Bluebeard
and Castle indebtedness to CH of $3,000,000 was paid by the transfer with
recourse of timeshare notes receivable in that amount.
Concurrent with this transaction, the parties settled Castle's purchase of the
Elysian and Bluebeard Beach properties from a third party. Kosmas assumed an
$8,000,000 obligation to that party which has been accounted for as a capital
contribution in these financial statements.
The Kosmas acquisition was accounted for as a purchase and these financial
statements reflect "push-down" accounting principles to adjust the net assets of
Bluebeard and Castle to show the cost of Kosmas' investment. In doing so, the
assets and liabilities were adjusted to their estimated fair values based on
independent appraisals, evaluations, estimates and other studies. The Companies
assumed the obligation with respect to the $7,000,000 cash payment. However, the
unpaid portion of the purchase price to seller was assumed by Kosmas, and was
accounted as a capital contribution. As a result of purchase accounting, the
Companies also eliminated the accumulated deficit as of the acquisition date.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE C--BUSINESS ACQUISITIONS--Continued
As a result of using the purchase method of accounting, cost of sales,
depreciation and amortization since the date of the purchase are based on the
pushed down values. Accordingly, the accompanying financial statements of the
Companies are not comparable with prior periods in certain significant respects
since these financial statements report results of operations and cash flows on
two separate accounting bases. See Note Q, for unaudited proforma results of
operations assuming the merger had occurred as of the beginning of their fiscal
years.
The effect of the purchase on the Companies' balance sheet was as follows:
Push down adjustments:
Increase in:
Interval ownership interests $10,704,000
Property and equipment 1,602,000
Elimination of pre-merger accumulated deficit (4,999,000)
Provision for deferred tax liability (4,603,000)
Change in outstanding common stock 10,000
-----------
2,714,000
Excess of costs over net assets acquired 11,286,000
-----------
Total $14,000,000
===========
NOTE D--INSTALLMENTS RECEIVABLE ON TIMESHARE INTERVAL
SALES AND VACATION PACKAGES
Installments receivable are primarily the result of timeshare interval sales.
The terms of the notes vary from one to nine years with an average interest rate
of 18%. The notes are collateralized by mortgages on the units sold and are due
in monthly installments including interest.
Principal balance of timeshare notes outstanding and
installment receivables on vacation packages sold $19,418,381
Less allowance for doubtful receivables (2,574,246)
-----------
$16,844,135
===========
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE D--INSTALLMENTS RECEIVABLE ON TIMESHARE INTERVAL
SALES AND VACATION PACKAGES--Continued
The activity in the allowance for doubtful receivables for the year ended
December 31, 1998 follows:
Balance at beginning of year $ 1,629,000
Provision for doubtful receivables 2,273,907
Charge-offs and recoveries, net (1,328,661)
------------
Balance at end of year $ 2,574,246
============
NOTE E--INVENTORY
Inventory consists of the following:
Timeshare intervals available for sale $ 28,516,360
Construction in progress 3,227,000
Land for future development 9,541,567
------------
41,284,927
Less accumulated depreciation (2,026,560)
------------
$ 39,258,367
============
NOTE F--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
The cost of timeshare supporting facilities including
land, swimming pools, restaurant and concession space,
facilities and equipment, maintenance and administrative
areas and related equipment $ 6,846,274
Less accumulated depreciation (502,056)
------------
$ 6,344,218
============
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE G--NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following at December 31, 1998:
Mortgage, acquisition and development notes payable:
$30,000,000 financing facility with Credit Suisse First
Boston Mortgage Capital, LLC; due December 2000,
payable as time-share intervals are sold; minimum
annual principal payment of $1,550,000; interest
payable monthly at LIBOR plus 3% (8.06% at December 31,
1998) $17,440,000
$17,000,000 financing facility with Credit Suisse First
Boston Mortgage Capital, LLC; due August 2001;
principal payable as time-share intervals are sold;
minimum annual principal payment of $1,690,000;
interest payable at a LIBOR plus 3% (11.50% at
September 30, 1998); $2,082,000 held by bank as an
escrow deposit 17,000,000
$5,500,000 financing facility with Resort Funding,
Inc.; due December 2001; payable as timeshare intervals
are sold; interest payable monthly at prime plus 2.5%
(10.25% at December 31, 1998) 5,345,200
$2,400,000 financing facility with Resort Funding,
Inc.; due March 2000; payable as timeshare intervals
are sold; interest payable monthly at prime plus 3%
(10.75% at December 31, 1998) 1,097,500
Mortgage payable to Credit Suisse First Boston Mortgage
Capital, LLC, entire principal balance due January
2000; interest payable monthly at 14% (prime plus 2%
after March 1999) 3,000,000
Other 950,250
Hypothecation notes payable:
$15,000,000 receivable financing facility with Finova
Capital Corporation; due March 2004; interest payable
monthly at prime plus 2.5% (10.25% at December 31, 1998) 9,510,613
$22,000,000 receivable financing facility with Resort
Funding, Inc.; due October 2001; interest payable
monthly at prime plus 2% but in no event less than
10.5% 394,335
$7,500,000 receivable financing facility with Resort
Funding, Inc.; due October 2001; interest payable
monthly at prime plus 2% but in no event less than
10.75% 662,660
Other installment loans; payable in variable monthly
installments; collateralized by personal property 67,057
-----------
$55,467,615
===========
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE G--NOTES AND MORTGAGES PAYABLE--Continued
The mortgage, acquisition and development notes payable are collateralized by
all personal and real property including inventory and receivables. The notes
are guaranteed by Kosmas Group International, Inc. and personally guaranteed by
its stockholders.
The hypothecation note payable to Finova is collateralized by all personal and
real property including inventory and receivables. The hypothecation notes
payable to Resort Funding, Inc. are collateralized by eligible installment
receivables on timeshare interval sales and are guaranteed by Kosmas Group
International, Inc. and its stockholders. The notes are payable in monthly
installments based on the collections from the collateralized receivables.
Estimated maturities on the notes and mortgages payable are as follows:
Year ending December 31,
1999 $ 9,964,165
2000 22,432,438
2001 22,366,350
2002 42,002
2003 -0-
Thereafter 662,660
-----------
$55,467,615
===========
Interest expense during the year on all indebtedness, net of $334,834 interest
capitalized, amounted to $4,655,613.
The loan agreements contain restrictive covenants which vary among the
agreements. These covenants include, but are not limited to, limited
distributions to the stockholder, limited payment of fees to any affiliate,
maintenance of defined minimum net worth, frequency and minimum amounts of
advances on eligible collateral, limitations on general and administrative
expenses, certain nonmonetary restrictive covenants, minimum cash and cash
equivalent balance requirements, minimum annual net sales of timeshare
intervals, and limitations on total indebtedness.
The borrowers have not been in compliance with certain of these covenants;
nevertheless, the lenders have not demanded payment. As described in Note N,
Equivest Finance, Inc. purchased the companies in March 1999 and either assumed
or signed separate agreements with the borrowers. The terms are the same or
similar to those described above except that the $3,000,000 mortgage previously
due June 1999 is now due January 15, 2000 and bears interest at prime plus 2%;
and Kosmas and its stockholders were released from their guarantees.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE H--RELATED-PARTY TRANSACTIONS
Related-party transactions for the year consist of transactions with entities
owned by Kosmas Group International, Inc. (the Affiliated Entities) and certain
stockholders of Kosmas as follows:
Amount due
(to) from at
Expenses December 31,
incurred 1998
--------- -----------
The Avenue Plaza operation has a referral
agreement with an affiliated entity at a
specified dollar cost per referral $ 580,393 --
At December 31, 1998, there were outstanding
demand notes owed to stockholders of Kosmas;
with interest at 8% per annum; the balance
includes accrued interest of $373,333 75,760 $(1,325,330)
A stockholder of Kosmas is to be paid 2% of net
sales of timeshare intervals for overseeing
local operations as stated in the articles of
organization at Avenue Plaza; in addition, the
two resident project managers and the overall
project manager, (each stockholders of Kosmas),
are to be paid 2% and 3% each, respectively, of
the net timeshare interval sales; included in
the amount due at December 31, 1998, is
interest of $14,777 638,315 (374,314)
The attorney that provides legal services with
regard to the sales of timeshare intervals is a
stockholder of Kosmas; the expenses incurred
included associated closing costs on vacation
ownership interests sales 22,500 --
--------- ----------
Subtotals 1,316,968 (1,699,644)
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE H--RELATED-PARTY TRANSACTIONS--Continued
Amount due
(to) from at
Expenses December 31,
incurred 1998
---------- -----------
Balances brought forward $1,316,968 $(1,699,644)
Prepayment of management fees by a company
which is owned by a stockholder of Kosmas -- 70,640
Prepayments to an affiliated entity for
back office agreements. The Companies have
administrative service agreements with an
affiliated entity; the entity provides
services including contract processing,
collections, administrative and accounting 807,836 544,619
The Companies received advances from
several affiliates; these advances are
non-interest bearing and have no stated
repayment terms -- (3,210,729)
D and J Marketing, a corporation owned by
a stockholder of Kosmas, provides
marketing services for Avenue Plaza 123,659 --
Ocean City Coconut Malorie is a party to a
verbal marketing agreement with an
affiliated entity to provide tours of
vacation ownership interests 134,900 --
The Companies advanced funds to affiliated
entities of Kosmas; these advances are
non-interest bearing and have no stated
repayment terms -- 9,593,643
---------- -----------
$2,383,363 $ 5,298,529
========== ===========
Additionally during the year indebtedness to an affiliate was settled by
transfer with recourse of timeshare notes of $3,650,000. Also, an affiliate
retained $342,000 of bank loan proceeds to settle advances and payments made on
behalf of the Companies.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE I--CONTINGENCIES
Avenue Plaza has an obligation to provide timeshare use to approximately 920
"right to use owners" which it assumed from prior developers. The prior
developers of Avenue Plaza leased intervals, in which the lessee was never
deeded title to the property. The majority of the leases began in 1984 and are
for terms of thirty years. Avenue Plaza will not offer these right to use or
lease timeshare intervals for sale. Upon expiration and/or cancellation of such
right to use or lease timeshare intervals, Avenue Plaza intends to sell these
unit weeks in fee simple ownership. Avenue Plaza has encouraged these owners to
convert to full ownership interest status by offering them conversion
privileges.
Certain of the Companies are contingently liable for the outstanding balance of
timeshare notes sold with recourse. The outstanding balance is approximately
$8,530,000 of which $6,730,000 is being serviced by those Companies. The
accompanying balance sheet includes a reserve for losses of $855,000; net of
$221,000 of debtors' funds held in escrow.
Bluebeard is a defendant in several separate civil actions brought by former
employees and an employee of an independent contractor. The actions with
disclosed amounts claim aggregate damages of $600,000 while one claim is for an
undisclosed amount. Subsequently one claim was settled for $195,000, of which
$165,000 was paid by Bluebeard. At the date of these financial statements, the
Companies have recorded a provision of $365,000 to cover the estimated losses on
these cases.
On March 11, 1999, the Cowpet Beach Resort Condominium Owners Association, the
association of homeowners at the condominium where the Elysian Hotel is located
(the Association), issued, through their legal counsel, a letter disputing the
conversion of the units owned by Castle into timeshare intervals. The
Association is disputing the legality of Castle to sell its units in timeshare
intervals. Both Castle and the Association are seeking an amicable solution to
this matter; however, the outcome of this matter cannot be determined at the
present time. In the event that Castle is prevented from selling the existing
units in timeshare intervals, the value of Castle's inventory at this property,
of $7,000,000 at September 30, 1998, may change. Such value represents the
estimated fair value of the inventory at July 31, 1998, date of the Kosmas
transaction, more fully disclosed in Note C. However, fair value was predicated
on the potential sales of said inventory through a timeshare operation.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE J--OPERATING LEASES
Avenue Plaza leases a parking garage under a noncancellable lease agreement
expiring August 31, 2048. The monthly lease payment inclusive of applicable
taxes during the year is $3,729. The monthly lease payment shall be adjusted by
the average percentage of the change in the Consumer Price Index on January 1,
2000 and every five years thereafter.
As a marketing effort for timeshare interval sales, Avenue Plaza leases various
locations in downtown New Orleans. Lease periods range from three months to five
years. Monthly lease payments range from $700 to $10,000.
At December 31, 1998, the future minimum lease payments due under those leases
with a term greater than one year are as follows:
Year ending December 31,
1999 $87,494
2000 53,144
2001 48,944
2002 44,744
2003 44,744
Rent expense under all operating leases totalled $341,885 for the year.
NOTE K--PENSION PLAN
The Companies are required to contribute $0.20 per hour, per union employee to a
multiemployer pension plan maintained by the labor union. Actuarial present
values of the plan are not separately determinable; therefore, they are not
presented. Pension expense charged to operations was approximately $25,000 in
1998. As required by the Employee Retirement Income Security Act (ERISA), in
case the Companies' employees stop participating in the union's pension plan,
the Companies may be liable for their proportional share of any actuarially
determined unfunded liability at the time of separation.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE L--MANAGEMENT OF THE ASSOCIATION AND DEVELOPER SUBSIDY
Avenue Plaza, LLC, as developer of the Avenue Plaza condominiums, established a
managing entity, the Avenue Plaza Owners Association, Inc., a Louisiana
nonprofit corporation.
All unit week owners automatically become members of the Association which is
governed by a Board of Directors appointed by the Company to govern the
Association until Avenue Plaza has sold at least eight-five percent of the unit
weeks. Thereafter, the Board of the Association is elected by the members of the
Association. The Association has entered into a management agreement with Plaza
Management Company, Inc., a Louisiana corporation. The management company is
owned by stockholders of Kosmas. The initial contract is for three years and is
automatically renewable for consecutive one-year periods depending upon certain
conditions.
Each unit week owner is required to remit an annual maintenance fee to the
Association as set forth in an estimated annual operating budget. Any unit
remaining unsold will not be fully liable for the payment of the common expenses
normally accruing to a unit week until Avenue Plaza has sold at least eight-five
percent of the units included in the condominium property. During this period,
Avenue Plaza assumes responsibility for payment of the deficiency, if any, in
the amount of funds available to meet actual operating expenses.
NOTE M--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, other receivables, amounts due
from or to uncombined affiliates, and accounts payable and accrued expenses
approximates fair value due to the relatively short term nature of the financial
instruments. The carrying value of the notes receivable approximates fair value
because the weighted average interest rate on the portfolio of notes receivable
approximates current interest rates to be received on similar current notes
receivable. The carrying amount reported on the balance sheet of notes payable
approximates their fair value because the interest rates on these instruments
are adjustable or approximate current interest rates charged on similar current
borrowings.
NOTE N--SUBSEQUENT EVENTS
On March 26, 1999, Kosmas Group International sold the Companies to Equivest
Finance, Inc. for $4 million in cash and assumption of notes payable and certain
other liabilities.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE O--RESTRICTED CASH
In addition to the escrow deposit of $2,082,000 at Credit Suisse First Boston
Mortgage Capital, LLC, at December 31, 1998, $467,804 of cash was pledged as
collateral on a promissory note of an uncombined entity, The Club La Pension,
Inc. In March 1999 the cash pledged as collateral was released back to the
Companies. Also, $67,753 of cash is restricted in its use for construction
advances on property being developed in Washington, D.C.
NOTE P--INCOME AND OTHER TAXES
The combined income tax benefit included in the accompanying statement of
operations consists of the following:
Current provision assuming no operating loss carryforwards $ 377,000
Benefit from the use of available operating loss carryforwards (333,000)
Deferred credit (1,418,000)
-----------
$(1,374,000)
===========
The provision for income taxes is different than amounts computed by applying
the statutory rate (37.4%) to income before income taxes for the following
reasons:
Income tax benefit at statutory rates $(1,385,000)
Reduction of valuation allowance (255,000)
Amortization of goodwill and other permanent differences 91,000
Other 175,000
-----------
Income tax benefit $(1,374,000)
===========
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE P--INCOME AND OTHER TAXES--continued
Net deferred tax liability included in the accompanying balance sheet is
comprised of the following:
Deferred tax assets:
Income deferred for financial statement purposes $ 120,000
Allowance for doubtful accounts 524,000
Income collected in advance 185,000
Net operating loss carryforwards 250,000
Other 93,000
-----------
1,172,000
Less allowance for operating loss carryforwards (250,000)
-----------
922,000
-----------
Deferred tax liabilities:
Installment sale receivables 102,000
Difference in bases of assets, as a result of using
the push down method of accounting 4,603,000
-----------
Deferred tax liabilities 4,705,000
-----------
Net deferred tax liability $ 3,783,000
===========
The Companies have net operating loss carryforwards of approximately $675,000,
expiring 2017. However, because the use of those losses was significantly
limited by the July 31, 1998 change of ownership, a valuation allowance has been
provided for the resulting deferred tax asset.
Bluebeard has an Industrial Development Certificate from the U.S. Virgin
Islands. The certificate grants tax exemptions and subsidies to its hotel
operations, but excluding real estate operations, for 90% of income taxes and
custom duties, and 100% of property, gross receipts and excise taxes. The
certificate expires March 15, 2000. There were no income tax benefits from this
certificate in fiscal 1998.
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE Q--UNAUDITED OTHER FINANCIAL INFORMATION
Pro Forma Combined Condensed Summary of Operations: The following unaudited pro
forma combined condensed summary of operations for the year assumes the purchase
of Bluebeard and Castle, and resulting push down accounting treatment, occurred
as of the beginning of their fiscal years:
Revenue $38,042,566
===========
Loss before income tax benefit $(6,438,249)
===========
Net loss $(5,172,249)
===========
The pro forma information is not indicative of the results of operations of the
Companies had the purchase occurred at the beginning of the year. It assumes
that the same price would have been paid at an earlier time and reflects only
the direct effects of the push down accounting, interest expense, and income tax
adjustments. The pro forma amounts are not intended to be indicative of the
results of future operations.
Other Financial Information of Bluebeard and Castle: The accompanying combined
financial statements include Bluebeard and Castle as of and for their fiscal
year ended September 30, 1998. The following unaudited combined information of
those companies as of and for the three months ended December 31, 1998 is
presented in comparison to the amounts included in the audited combined
financial statements:
Condensed balance sheets (000's omitted):
December 31, September 30,
1998 1998
----------- ------------
(Unaudited)
Assets:
Notes and other receivables, net $ 3,952 $ 3,406
Inventory 19,596 20,049
Goodwill, net 10,975 11,163
Property and equipment, net 5,083 5,061
Other 2,983 3,317
------- -------
Total assets $42,589 $42,996
======= =======
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
AVENUE PLAZA, LLC, OCEAN CITY COCONUT MALORIE RESORT, INC.,
ST. AUGUSTINE RESORT DEVELOPMENT GROUP, INC., CAPITAL CITY
SUITES, INC., BLUEBEARD'S CASTLE, INC., AND CASTLE ACQUISITION, INC.
NOTE Q--UNAUDITED OTHER FINANCIAL INFORMATION--Continued
December 31, September 30,
1998 1998
----------- ------------
(Unaudited)
Liabilities:
Notes and mortgages payable $18,889 $17,000
Accounts payable, accrued expenses and
other liabilities 5,758 6,389
Deferred revenue 681 1,323
Deferred income taxes 3,587 3,783
------- -------
28,915 28,495
Stockholder's and member's equity 13,674 14,501
------- -------
$42,589 $42,996
======= =======
Condensed statement of operations (unaudited):
Three months ended
December 31,
1998 1997
---- ----
(Note 1)
Revenue $6,245 $4,774
Costs and expenses 7,072 5,323
------ ------
Loss before income tax benefit (827) (549)
Income tax benefit -0- -0-
------ ------
Net loss $ (827) $ (549)
====== ======
Note 1--Amounts are prior to the acquisition by Kosmas Group International, Inc.
Accordingly, they do not include any effects of this purchase.
<PAGE>
Avenue Plaza LLC
FINANCIAL STATEMENTS
Years Ended December 31,1997 and 1996
<PAGE>
Avenue Plaza LLC
Contents
Page
Report of Independent Accountants 1
Financial Statements:
Balance Sheets 2
Statements of Operations and Changes in Members' Equity 3
Statements of Cash Flows 4
Notes to Financial Statements 6
<PAGE>
PRICEWATERHOUSECOOPERS
Pricewaterhouse Coopers LLP
Citrus Center
Suite 1200
255 S. Orange Avenue
Orlando FL 32801
Report of Independent Accountants Telephone (407) 843-1190
Facsimile (407) 244-7601
To the Members of
Avenue Plaza LLC
In our opinion, the accompanying balance sheets and the related statements of
operations and changes in members' equity and of cash flows present fairly, in
all material respects, the financial position of Avenue Plaza LLC at December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/________________________________
April 2, 1998, except for Note 5,
as to which the date is October 9, 1998
1
<PAGE>
Avenue Plaza LLC
Balance Sheets
December 31,
Assets 1997 1996
----------- -----------
Cash:
Cash and cash equivalents ....................... $ 611,640 $ 867,262
Cash in escrow from vacation ownership
interests sales ................................. 232,979 282,505
----------- -----------
Total cash ............................. 844,619 1,149,767
----------- -----------
Receivables:
Hotel resort guests ............................. 53,624 118,272
Installments receivable on vacation
ownership interests sales and vacation
packages, net ................................... 11,119,689 9,331,790
Related parties ................................. 31,850 61,991
Other ........................................... 693,945 423,769
----------- -----------
Total receivables ...................... 11,899,108 9,935,822
----------- -----------
Hotel Resort Property and Equipment and
Vacation Ownership
Interests Held for Sale, net of accumulated
depreciation .................................... 11,444,782 12,470,207
----------- -----------
Other Assets:
Restricted Cash held for the extinguishment
of debt ......................................... 15,514,176 --
Financing costs, net ............................ 618,365 1,277,142
Goodwill, net of accumulated
amortization of $246,781 ........................ 5,675,967 --
Inventories ..................................... 69,983 66,877
Prepaid expenses ................................ 117,555 126,168
Deposits and other, net of accumulated
amortization of $28,258 and $22,474 for 1997
and 1996, respectively .......................... 46,193 38,327
----------- -----------
Total other assets ..................... 22,042,239 1,508,514
Total Assets ....................................... $46,230,748 $25,064,310
=========== ===========
Liabilities and Members' Equity
Liabilities:
Notes and mortgages payable ..................... $34,391,344 $15,474,358
Accounts payable and accrued expenses ........... 655,612 666,120
Deferred revenues - vacation packages ........... 370,524 286,251
Payable to related parties ...................... 2,435,828 3,216,178
Loan fees payable ............................... 3,100,000 2,421,782
----------- -----------
Total liabilities ...................... 40,953,308 22,064,689
Commitments and Contingencies (Notes 7, 9 and 11)
Members' Equity .................................... 5,277,440 2,999,621
----------- -----------
Total Liabilities and Members' Equity .............. $46,230,748 $25,064,310
=========== ===========
See accompanying notes to financial statements.
2
<PAGE>
Avenue Plaza LLC
Statements of Operations and Changes in Members' Equity
Year Ended
December 31,
1997 1996
------------ ------------
Operating Revenues:
Vacation ownership interests ................. $ 7,919,540 $ 9,065,925
Hotel resort operations ...................... 5,007,265 4,548,165
Interest income - installment notes .......... 1,789,995 1,256,245
Vacation packages and other .................. 331,561 496,669
------------ ------------
Total operating revenues ................. 15,048,361 15,367,004
------------ ------------
Costs and Operating Expenses - Vacation
Ownership Interests:
Vacation ownership interests ................. 971,000 1,181,880
Vacation packages ............................ 145,424 157,821
Other direct costs of sales - vacation
ownership interests .......................... 1,906,452 1,917,793
Marketing expenses ........................... 3,047,186 3,081,848
General and administrative ................... 1,473,257 1,108,234
Provision for doubtful accounts .............. 529,741 986,006
------------ ------------
Total costs and operating expenses -
vacation ownership interests .............. 8,073,060 8,433,582
------------ ------------
Costs and Operating Expenses - Hotel Resort:
Cost of operations ........................... 225,447 187,763
Payroll and related expenses ................. 1,586,827 1,888,710
Room expenses ................................ 91,982 71,411
Food expenses ................................ 39,233 29,150
General and administrative ................... 183,372 297,108
Advertising and promotional expenses ......... 106,985 111,839
Repairs and maintenance ...................... 117,986 139,019
Utilities .................................... 219,709 240,724
Garage ....................................... 3,829 46,746
Fixed expenses ............................... 428,771 245,055
------------ ------------
Total costs and operating expenses -
hotel resort .............................. 3,004,141 3,257,525
------------ ------------
Other Expenses - Unallocated:
Interest
Hypothecation note payable ................ 826,191 599,072
Other ..................................... 1,425,077 1,395,941
Related-party management fees ................ 554,368 811,358
Depreciation and amortization ................ 966,198 534,078
------------ ------------
Total other expenses - unallocated ...... 3,771,834 3,340,449
------------ ------------
Income Before Extraordinary Item ................ 199,326 335,448
Extraordinary Item - loss on extinguishment of
debt ............................................ (3,273,182) --
------------ ------------
Net Income (Loss) ............................... (3,073,856) 335,448
Members' Equity - beginning of year ............. 2,999,621 2,664,173
Goodwill Resulting from Combination of
Affiliated Entities ............................. 5,922,748 --
Affiliate Advances .............................. (571,073) --
------------ ------------
Members' Equity - end of year ................... $ 5,277,440 $ 2,999,621
============ ============
See accompanying notes to financial statements.
3
<PAGE>
Avenue Plaza LLC
Statements of Cash Flows
Year Ended
December 31,
1997 1996
----------- -----------
Cash Flows from Operating Activities:
Net income (loss) ............................. $(3,073,856) $ 335,448
----------- -----------
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation ............................... 547,775 415,503
Amortization ............................... 418,423 118,575
Allowance for doubtful accounts ............ (38,000) 501,430
Extraordinary loss on extinguishment of
debt ....................................... 3,273,182 --
Changes in operating assets and
liabilities:
Receivables ............................. (1,955,427) (3,277,120)
Related-party receivables ............... (540,932) --
Other assets ............................ (8,143) (1,331,926)
Accounts payable and accrued expenses ... (10,508) (102,247)
Deferred revenues - vacation packages ... 84,273 (59,444)
Payable to related parties .............. (780,350) 336,562
Loan fees payable ....................... (1,583,125) 1,670,043
----------- -----------
Total adjustments .................... (592,832) (1,728,624)
----------- -----------
Net cash used in operating
activities ........................... (3,666,688) (1,393,176)
----------- -----------
Cash Flows from Investing Activities:
Purchase of vacation ownership interests
held for sale ................................. 477,650 (501,660)
Decrease in cash in escrow from vacation
ownership interests sales, net .............. 49,526 332,652
----------- -----------
Net cash provided by (used in)
investing activities ..................... 527,176 (169,008)
----------- -----------
Cash Flows from Financing Activities:
Borrowings on notes and mortgages payable ..... 8,067,360 6,064,202
Repayments on notes and mortgages payable ..... (5,151,470) (3,942,216)
Payment for loan costs ........................ (32,000) --
----------- -----------
Net cash provided by financing
activities ................................ 2,883,890 2,121,986
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents ...................................... (255,622) 559,802
Cash and Cash Equivalents, beginning of year ..... 867,262 307,460
----------- -----------
Cash and Cash Equivalents, end of year ........... $ 611,640 $ 867,262
=========== ===========
See accompanying notes to financial statements.
4
<PAGE>
Avenue Plaza LLC
Statements of Cash Flows - Continued
Year Ended
December 31,
1997 1996
----------- ----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest,
net of capitalized interest of $3,943 for
the year ended December 31, 1996 ............. $ 2,154,142 $1,651,291
=========== ==========
Noncash Financing and Investing Activities:
Financed loan costs .......................... $ 518,748 $ --
=========== ==========
Restricted cash acquired through financing to
be paid to extinguish debt ................... 15,514,176 --
=========== ==========
See accompanying notes to financial statements.
5
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements
Years Ended December 31, 1997 and 1996
1. Summary of Significant Accounting Policies:
The following is a summary of the more significant accounting policies and
practices of Avenue Plaza LLC which affect significant elements of the
accompanying financial statements:
Organization - Avenue Plaza LLC (the Company) was organized on January 28,
1993, under the laws of the State of Louisiana as a limited liability
company.
In accordance with the operating agreement, the term of the LLC shall
continue from year to year unless terminated sooner in accordance with the
terms of the agreement. Profits and losses of the LLC are allocated to
members in accordance with each member's interest in the LLC. Any
distributions, when authorized to be made, will be in proportion to each
member's interest in the LLC. The allocations of losses does not effect
the limitations on the liability of members and managers as required by
Louisiana R.S. 22:1320 All "major decisions" with respect to the
management of the project shall be made by favorable 2/3 majority vote. A
"major decision" involves the sale, mortgage, assignment, pledge and/or
transfer of all of the assets and the termination or dissolution of the
LLC. Each member will have a vote in proportion to his prorata interest in
the LLC. The members have designated one member to be the Manager of the
LLC with the full power and authority to conduct the day-to-day affairs of
the LLC. Any assignment of membership interest must be approved by all the
other members of the LLC.
Company's Activities - The Company acquired the Avenue Plaza Hotel (the
Project) located in New Orleans, Louisiana, primarily to renovate, convert
to, sell and manage interval ownership condominiums. The primary marketing
facility and sales office is located at the Project. The Project has been
established to provide for 260 units.
Revenue and Cost Recognition - Vacation Ownership - Vacation ownership
interests are sold for cash or as credit sales. Credit sales provide for a
minimum down payment and monthly installments, including interest, for a
period of generally seven years. Sales are included in revenues when a
minimum of 10% down payment is received, a 10-day rescission period has
elapsed, the installment note is not subject to future subordination, all
benefits and risks of ownership have transferred to the buyer, the Company
does not have substantial continued involvement with the property after
the sale, and when other requirements to close the sale have been met. All
funds received are held in escrow until the above requirements are met.
The installment contracts and associated mortgages receivable are
collateralized by a mortgage on the related unit. Until a contract
qualifies as a sale, all payments received are accounted for as deposits.
6
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
1. Summary of Significant Accounting Policies - Continued:
Revenue and Cost Recognition - Vacation Ownership - Continued - The
acquisition cost of the Project, renovation costs incurred through
December 31, 1997 and the projected cost of improvements are allocated
prorata to each vacation ownership interest sold based on relative sales
value. The remaining unsold portion of cost is reflected as hotel resort
property and equipment and inventory of vacation ownership interests. The
Project is stated at the lower of cost less depreciation or market.
Depreciation is recorded during the period the Project continues to be
operated as a hotel. At December 31, 1997, the Project was operating as a
hotel.
Marketing, advertising, commissions and other selling costs are expensed
as incurred. Sales of the vacation ownership interests commenced in May,
1993.
Revenue Recognition - Vacation Packages - Vacation package certificates
are sold to customers who have up to eighteen months to exercise the
certificate, at which time the certificate expires. All revenues, and
direct costs incurred relating to the sale of vacation package
certificates, are deferred until either the vacation is taken or the
eighteen-month period has expired and the Developer is no longer
contractually obligated to fulfill the vacation. These certificates give
the purchaser a week of stay at the Avenue Plaza and one week to exchange
with another resort.
Cash and Cash Equivalents - For the purpose of the statement of cash
flows, the Company considers all highly liquid debt instruments with an
initial maturity of three months or less as cash equivalents.
Cash in Escrow from Vacation Ownership Interests Sales - Funds received
from vacation ownership interest purchasers held during the statutory
rescission period, or until all conditions for the sales transactions to
be recognized have been met, are maintained in escrow accounts.
Installments Receivable on Vacation Ownership Interests Sales - Amounts
due on installment contracts and mortgage receivables from vacation
ownership interest purchasers are recorded as installment notes.
Allowance for Doubtful Accounts - The Company provides for estimated
future losses to be incurred related to uncollectible receivables.
Property and Equipment - The unsold portion of the Project is depreciated.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets. Maintenance and repairs are charged
to expense as incurred, and betterments are capitalized.
7
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
1. Summary of Significant Accounting Policies - Continued:
Restricted Cash Held for the Extinguishment of Debt - At December 31,
1997, proceeds of a note payable, net of loan costs, were being held in
trust on behalf of the Company. The use of the funds is restricted to the
extinguishment of the acquisition and renovation note payable to Finova
Capital Corporation (see Note 12).
Financing Costs - Loan origination fees and other costs associated with
the acquisition loan and hypothecation of installment notes receivable are
deferred and amortized over the various terms of the corresponding loans
using the effective interest method. Total loan origination fees and other
costs of financing were $674,555 and $1,411,454 less amortization of
$56,190 and $134,312 at December 31, 1997 and 1996, respectively.
Goodwill - Goodwill is being amortized on a straight-line basis over an
estimated useful life of eight years.
Impairment of Long-Lived Assets - In the event that facts and
circumstances indicate that the carrying amount of a long-lived asset may
be impaired, an evaluation of recoverability would be performed, If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow is
required.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market value. Inventory consists of hotel materials and
supplies.
Advertising Costs - All costs associated with advertising and promoting
the hotel resort and the sale of vacation ownership interests are expensed
in the year incurred. Advertising expense was approximately $60,263 and
$76,116 for the years ended December 31, 1997 and 1996, respectively.
Income Taxes - Avenue Plaza LLC is treated as a partnership for income tax
purposes and, as such, is not taxed. Under subchapter K of the Internal
Revenue Code, each member is taxed separately on their distributive share
of the Partnership's income whether or not that income is actually
distributed.
Use of Estimates - The preparation 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. Actual results could differ from
those estimates.
Reclassifications - Certain items in the prior year financial statements
have been reclassified to conform to the current year presentation.
8
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
2. Combination of Affiliated Entities:
On August 29, 1997, several entities controlled by Steven P. Kosmas,
Robert Paul Kosmas and Nicholas Kosmas (the Kosmas Brothers) have combined
into a newly formed entity, Kosmas Group International, Inc. (the Parent)
through an exchange of common stock of the affiliated entities for common
stock of the Parent. The combination of the interests owned by the Kosmas
Brothers was recorded in a manner similar to a pooling of interests with
the combination of the other interests accounted for as the purchase of a
minority interest using the purchase method. Goodwill of approximately
$10,430,000 was recorded in connection with the transaction, of which
approximately $5,923,000 was allocated to the Company and recorded on its
books. This goodwill is being amortized over eight years using the
straight-line method. The Parent has a 93% interest in the Company.
The only adjustment to the Company's financial statements was the
recording of the goodwill as of the date of the combination and the
amortization expense of $246,781 from the date of combination to December
31, 1997.
3. Installments Receivable on Vacation Ownership Interests Sales and Vacation
Packages:
Installments receivable are primarily the result of vacation ownership
interests sales at the Avenue Plaza Hotel. The terms of the notes vary
from one to nine years with an average interest rate of 18%. The notes are
collateralized by mortgages upon the unit weeks sold and are due in
monthly installments with interest computed by the simple interest method.
The Company routinely raises working capital through the hypothecation of
its installment notes receivable. The Company has an active and fundable
loan servicing agreement for the hypothecation of its installment notes.
Gross draws for the years ended December 31, 1997 and 1996 amounted to
$3,964,357 and $6,064,202, respectively. The amount of installments
receivable reported in the accompanying financial statements consists of
the following:
December 31,
1997 1996
------------ ------------
Contracts receivable in-house ......... $ 143,518 $ 340,399
Unpledged contracts receivable at
servicing company ..................... 3,144,991 2,097,767
Hypothecated notes receivable ......... 8,923,704 8,026,008
Installments receivable - vacation
packages .............................. 212,476 210,616
Allowance for doubtful accounts ....... (1,305,000) (1,343,000)
------------ ------------
$ 11,119,689 $ 9,331,790
============ ============
9
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
4. Hotel Resort Property and Equipment and Vacation Ownership Interests Held for
Sale:
The major components of property and equipment consist of the following:
December 31,
1997 1996
------------ ------------
Hotel resort property and equipment, net
of units sold:
Land ..................................... $ 355,738 $ 383,766
Building, property and equipment ......... 3,933,578 4,243,494
Renovations and construction costs ....... 6,933,961 7,433,713
Furniture and equipment .................. 474,959 384,193
------------ ------------
11,698,236 12,445,166
Less accumulated depreciation ............ (1,355,646) (1,125,957)
------------ ------------
10,342,590 11,319,209
------------ ------------
Developer property and equipment:
Land ..................................... 196,251 179,737
Building ................................. 696,194 686,714
Equipment ................................ 558,355 524,478
------------ ------------
1,450,800 1,390,929
Less accumulated depreciation ............ (348,608) (239,931)
------------ ------------
1,102,192 1,150,998
------------ ------------
$ 11,444,782 $ 12,470,207
============ ============
5. Notes and Mortgages Payable:
Notes and mortgages payable consist of the following at December 31, 1997 and
1996:
December 31,
1997 1996
------------- --------------
Note payable to Louisiana State Medical
Society Educational and Research Foundation
with interest at 10% per annum,
collateralized by real estate with a
carrying value of $267,930 at December 31,
1996; interest payable quarterly in
advance; entire principal balance paid
January, 1997 ............................... $ -- 247,500
Note payable to Regions Bank of Louisiana
with interest at 8.75% per annum,
collateralized by real estate with a
carrying value of $266,230 at December 31,
1997; principal and interest payments of
$2,024 due monthly; balance due January,
2012 ........................................ 198,252 --
10
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
5. Notes and Mortgages Payable - Continued:
December 31,
1997 1996
------------- --------------
Various notes payable with interest rates
ranging from 6.9% to 16.5%, collateralized
by various equipment and real estate;
maturity dates vary from February 1999
through July 2000, aggregate monthly
payments approximate $5,500 ................. 108,397 167,205
Notes payable to Finova Capital Corporation
with interest at Citibank prime plus 2.5%
(11% at December 31, 1997) for the
acquisition and renovation of the Project
not to exceed $11,160,444, collateralized
by all personal and real property including
inventory and accounts receivable; interest
is due monthly and paid from collections on
unhypothecated notes receivable serviced by
Finova Capital Corporation; as unit weeks
are sold, a $1,650 principal payment is
required; a principal payment of $1,750,000
is due February 11, 1998, and principal
payments of $2,000,000 are required
annually through 2001; unpaid balance is
due in full February 2002; amounts include
the $1,650 principal payment on each unit
sold ........................................ 9,859,528 7,791,494
Note payable to Finova Capital Corporation
with interest due monthly at Citibank prime
plus 2.5% (11% at December 31, 1997) for a
$15,000,000 hypothecation loan,
collateralized by all personal and real
property including inventory and accounts
receivable; the interest is payable monthly
until maturity at March 2004 ................ 8,192,244 7,268,159
Note payable to Credit Suisse First Boston
Mortgage Capital LLC with interest at the
British LIBOR rate plus 3.0% (8.7% at
December 31, 1997), collateralized by all
personal and real property including
inventory and accounts receivable; maximum
available loan amount of $19,000,000;
interest is due monthly; as unit weeks are
sold at $2,500 principal payment is
required; minimum aggregate principal
payments of $1,550,000 are required
annually; unpaid balance is due in full
December 2000; amounts include the $2,500
principal payment in each unit sold;
guaranteed by the Parent .................... 16,032,923 --
----------- -----------
$34,391,344 $15,474,358
=========== ===========
11
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
5. Notes and Mortgages Payable - Continued:
Estimated maturities on the notes and mortgages payable are as follows:
Year Ending December 31,
1998 $ 6,058,282
1999 6,240,047
2000 17,452,466
2001 2,366,707
2002 2,120,029
Thereafter 153,813
-----------
$34,391,344
===========
Interest paid during the years ended December 31, 1997 and 1996 on these
obligations amounted to $1,996,583 and $1,644,435, respectively.
Notes payable to Finova Capital Corporation contain additional loan
covenants requiring the following:
(a) Maximum annualized marketing cost of 50% of net sales of
vacation ownership interests.
(b) Maximum annualized general and administrative expenses of 12% of
aggregate net revenues of both net sales of vacation ownership
interests and revenues from hotel resort operations.
(c) Minimum tangible net worth of $1,800,000.
(d) Minimum cash or cash equivalent assets of $250,000.
(e) The hotel and vacation ownership operations are to be managed by
professional management companies with written agreements.
(f) Minimum annual net sales of vacation ownership interests of
$9,000,000 in 1998.
(g) Balance of acquisition/renovation loan and hypothecation loan
may not exceed $26 million in total.
The Company was in violation of certain of the covenants and has received
the appropriate waivers for the year ended December 31, 1997.
12
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
5. Notes and Mortgages Payable - Continued:
As partial consideration for Finova Capital Corporation's commitments, the
Company is to pay, in addition to all the basic interest, other charges
and fees due under the notes, $1,700,000 described as noncontingent
additional interest. For the year ended December 31, 1996, the entire
amount has been included in the accompanying balance sheet under the
caption "loan fees payable". This noncontingent additional interest was
paid in January, 1997.
Additionally, at the end of the project, the Company will pay an
additional amount based upon twenty-five percent of all cash flows, after
distributions to members of the Company to assist them with paying the
Federal and state income tax liabilities arising from taxable income of
the Company allocated to them. As of December 31, 1997 and 1996, $870,484
and $721,782 was accrued in "loan fees payable", respectively, in
accordance with the terms of this agreement. This loan fee was paid in
January, 1998 with the refinancing of this debt with Credit Suisse First
Boston Mortgage Capital LLC (see Note 12).
6. Related-Party Transactions:
Related-party transactions for the years ended December 31, 1997 and 1996
consist of transactions between entities owned by the Parent (the
Affiliated Entities) and certain stockholders of the Parent as follows:
<TABLE>
<CAPTION>
Amount Due at Amount Due at
Expenses December 31, Expenses December 31,
Incurred 1997 Incurred 1996
----------- ----------- -------- --------------
<S> <C> <C> <C> <C>
The Company paid tour expenses for an
affiliated entity during 1997 and 1996 .... $ 81,389 $ -- $ -- $ 413
The Company has a referral agreement
with an affiliated entity at a
specified dollar cost per referral ........ 905,314 -- 1,508,620 140,713
At December 31, 1997 and 1996, there
were outstanding loans owed to
stockholders of the Parent; they are
demand notes with an 8% rate of
interest; includes accrued interest of
$334,205 and $271,174, respectively ....... 94,746 1,380,202 199,796 2,372,171
</TABLE>
13
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
6. Related-Party Transactions - Continued:
<TABLE>
<CAPTION>
Amount Due at Amount Due at
Expenses December 31, Expenses December 31,
Incurred 1997 Incurred 1996
----------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
The Company has a demand note
payable to a stockholder of
the Parent with an 8% rate
of interest ............................... 7,671 280,000 -- --
A stockholder of the Parent is to
be paid 2% of net sales of
vacation ownership interests for
overseeing local operations as
stated in the articles of
organization; in addition, the
resident project manager and the
overall project manager, both
stockholders of the Parent, are
to be paid 2% and 3% each,
respectively, of the net vacation
ownership interest sales;
included in the amount due at
December 31, 1997 and 1996, is
interest of $3,565 and
$90,255, respectively ..................... 554,368 114,366 901,613 702,881
The attorney that provides
legal services with regard
to the sale of vacation
ownership interests is a
stockholder of the Parent of
the Company; the expenses
incurred included associated
closing costs an vacation
ownership interests sales ................. 352,636 -- 507,655 --
The Company pays a management fee
in the amount of 1.5% of gross
revenues for overseeing the hotel
operations to a company which is
owned by a stockholder of the
Parent .................................... 160,000 80,000 194,000 --
</TABLE>
14
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
6. Related-Party Transactions - Continued:
<TABLE>
<CAPTION>
Amount Due at Amount Due at
Expenses December 31, Expenses December 31,
Incurred 1997 Incurred 1996
----------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
The Company has an administrative
service agreement with an
affiliated entity; the entity
provides services including
contract processing, collections,
administrative and accounting ............. 316,728 92,074 271,978 --
The Company has received advances
from several affiliated entities;
these advances are non-interest
bearing and have no stated
repayment terms ........................... -- 489,186 -- --
D and J Marketing, a corporation
owned by a stockholder of the
Parent, provides marketing
services for the Company .................. 4,826 -- 14,774 --
--------- --------- --------- -----------
2,477,678 2,435,828 3,598,436 $ 3,216,178
========= ========= ========= ===========
</TABLE>
15
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
6 Related-Party Transactions - Continued:
Amount Receivable At
December 31,
1997 1996
-------- --------
The Company has entered into a verbal
marketing agreement with an affiliated
entity to provide tours of vacation
ownership interests ............................. $134,741 $ 6,566
At December 31, 1996, there were amounts
due from stockholders of the Parent ............ 16,000 16,000
Overpayment for marketing services rendered
by D and J Marketing, a corporation
owned by a stockholder of the Parent ........... 31,851 17,179
Prepayment to an affiliated entity for back
office agreement ............................... -- 12,246
The Company has advanced monies to
affiliated entities of the Parent; these
advances are non-interest bearing and
have no stated repayment terms ................. 420,331 10,000
-------- --------
$602,923 $ 61,991
======== ========
7. Contingent Liabilities:
Upon acquisition of the Project, the Company acquired, by assignment, the
liability to approximately 1,600 already existing "right to use owners"
from prior developers. The prior developers of the Project sold interval
leases, in which the purchaser was never a deeded owner. The majority of
the leases began in 1984 and are for terms of thirty years. The Company
will not offer these right to use or lease vacation ownership interests
for sale. Upon expiration and/or cancellation of such right to use or
lease vacation ownership interests, the Company intends to sell these unit
weeks in fee simple ownership. Approximately 900 right to use owners
existed at December 31, 1997. The Company has encouraged these owners to
convert to vacation ownership interest unit week owners by offering them
conversion privileges.
16
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
8. Concentration of Credit Risk:
The more significant concentrations of credit risk are as follows:
Demand and Time Deposits - The Company has demand and time deposits with
three banks located in Louisiana and two banks in Florida in the amount of
$884,225 and $1,079,999 at December 31, 1997 and 1996, respectively.
Escrow Funds - The Company has escrowed funds deposited with an escrow
agent in the amount of $226,324 and $250,980 at December 31, 1997 and
1996, respectively.
The Company has no policy requiring collateral to support its deposits,
although all demand and time deposits with banks are federally insured up
to $100,000 under Federal Depository Insurance protection.
9. Operating Leases:
The Company leases a parking garage under a noncancelable lease agreement
expiring August 31, 2048., The monthly lease payment inclusive of
applicable taxes during the period was $3,729. The monthly lease payment
shall be adjusted by the average percentage of the change in the Consumer
Price Index on January 1, 2000 and every five years thereafter.
As a marketing effort for vacation ownership interests sales, the Company
leases various locations in downtown New Orleans. Lease periods range from
three months to five years. Monthly lease payments range from $750 to
$10,000.
At December 31, 1997, the future minimum lease payments due under those
leases with a term greater than one year are as follows:
Year Ending December 31,
1998 $107,844
1999 87,494
2000 53,144
2001 48,944
2002 44,744
--------
$342,170
========
Rent expense under all operating leases totaled $271,069 for the period.
17
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
10. Management of the Association and Developer Subsidy:
The Company, as developer of the Avenue Plaza condominiums, established a
managing entity, the Avenue Plaza Owners Association, Inc., a Louisiana
nonprofit corporation.
All unit week owners automatically become members of the Association which
is governed by a Board of Directors appointed by the Company to govern the
Association until the Company has sold at least eight-five percent of the
unit weeks. Thereafter, the Board of the Association is elected by the
members of the Association. The Association has entered into a management
agreement with Plaza Management Company, Inc., a Louisiana corporation.
The management company is owned by members of the Company. The initial
contract is for three years and is automatically renewable for consecutive
one-year periods depending upon certain conditions.
Each unit week owner is required to remit an annual maintenance fee to the
Association as set forth in an estimated annual operating budget. Any unit
remaining unsold will not be fully liable for the payment of the common
expenses normally accruing to a unit week until the Company has sold at
least eight-five percent of the units included in the condominium
property. During this period, the Company assumes responsibility for
payment of the deficiency, if any, in the amount of funds available to
meet actual operating expenses.
11. Commitments:
The Company operates a professional spa at the Project. The Company
entered into a contract with a corporation which would provide the
personal services of a professional spa manager and consultant. The
minimum monthly base fee for these services is $2,500. In addition to the
base fee, a 10% royalty is also paid for any products sold at the spa's
retail price. These products include nutritional supplements, clothing and
other products which reflect the name or logo of the professional spa
manager/consultant. The agreement term is for six years, ending May 31,
2000. Additional options to extend the agreement are available.
18
<PAGE>
Avenue Plaza LLC
Notes to Financial Statements - Continued
Years Ended December 31, 1997 and 1996
12. Extraordinary Item:
In December, 1997, the Company entered into a note payable with Credit
Suisse First Boston Mortgage Capital LLC. At December 31, 1997, the
proceeds of the note payable, net of loan costs, were being held in trust
on behalf of the Company. The use of the funds is restricted to the
extinguishment of the acquisition and renovation debt to Finova Capital
Corporation and related costs.
In January, 1998, the Company extinguished its acquisition and renovation
debt and related liabilities to Finova Capital Corporation for a fee of
$3,100,000 including amounts owed for cash flow participation.
An extraordinary loss of $3,273,182 was incurred as a result of the early
extinguishment of the debt owed to Finova Capital Corporation and has been
recognized in the accompanying statements of operations and changes in
members' equity for the year ended December 31, 1997.
19
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
FINANCIAL STATEMENTS
For the Period August 14, 1997 (Date of Inception)
through December 31, 1997
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Contents
Page
----
Report of Independent Accountants 1
Financial Statements:
Balance Sheet 2
Statement of Operations 3
Statement of Capital Deficiency 4
Statement of Cash Flows 5
Notes to Financial Statements 6
<PAGE>
PricewaterhouseCoopers LLP
Citrus Center
Suite 1200
255 S. Orange Avenue
Orlando FL 32801
Telephone (407) 843-1190
Report of Independent Accountants Facsimile (407) 244-7601
To the Stockholder of
Ocean City Coconut Malorie Resort, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of capital deficiency and of cash flows present fairly, in all
material respects, the financial position of Ocean City Coconut Malorie Resort,
Inc. at December 31, 1997, and the results of its operations and its cash flows
for the period August 17, 1997 (date of inception) through December 31, 1997 in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/
- ---------------------------------
April 2, 1998, except for Note 3,
as to which the date is May 18, 1998
1
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
Assets
Cash and Cash Equivalents $ 44,302
-----------
Hotel Resort Guests' Receivables, net 19,032
-----------
Hotel Resort Property and Equipment, net of accumulated depreciation 5,691,614
Other Assets:
Financing costs, net 93,647
Inventories 17,954
Prepaid expenses 64,295
-----------
Total other assets 175,896
-----------
Total Assets $5,930 844
===========
Liabilities and Capital Deficiency
Liabilities:
Notes and mortgages payable $ 6,055,000
Accounts payable and accrued expenses 148,180
Payable to affiliates 139,238
-----------
Total liabilities 6,342,418
-----------
Capital Deficiency:
Common stock, without par value, 5,000 shares authorized, 1,000 shares
issued and outstanding --
Affiliate advances (190,000)
Accumulated deficit (221,574)
-----------
Total capital deficiency (411,574)
-----------
Total Liabilities and Capital Deficiency $ 5,930,844
===========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Statement of Operations
For the Period from August 14, 1997 (Date of Inception) through December 31,
1997
Operating Revenues:
Hotel resort operations $ 150,888
---------
Total operating revenues 150,888
---------
Costs and Operating Expenses:
Cost of operations 91,974
Payroll and related expenses 20,909
Room expenses 2,111
Other expenses 4,514
General and administrative 25,434
Advertising and promotional expenses 2,526
Repairs and maintenance 809
Utilities 4,892
Fixed expenses 60,261
Depreciation and amortization 37,770
---------
Total costs and operating expenses 251,200
---------
Loss From Operations (100,312)
---------
Other Income (Expense):
Interest income 748
Interest expense (122,010)
---------
Total other income (expense) (121,262)
---------
Net Loss $(221,574)
=========
See accompanying notes to financial statements.
3
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Statement of Capital Deficiency
For the Period from August 14, 1997 (Date of Inception) through December 31,
1997
<TABLE>
<CAPTION>
Common Accumulated Affiliate
Stock Deficit Advances Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, August 14, 1997
(Date of Inception) $ -- $ -- $ -- $ --
Issuance of 1,000 shares
of common stock 1,000 1,000
Subscription receivable
for 1,000 shares (1,000) (190,000) (191,000)
Net loss -- (221,574) -- (221,574)
------------- ------------- ------------- -------------
Balance, December 31, 1997 $ -- $ (221,574) $ (190,000) $ (411,574)
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Statement of Cash Flows
For the Period from August 14, 1997 (Date of Inception) through December 31,
1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss $ (221,574)
-----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 31,603
Amortization 6,167
Changes in operating assets and liabilities:
Hotel resort guests receivables (18,922)
Inventories (5,009)
Prepaid expenses 14,487
Accounts payable and accrued expenses 148,180
-----------
Total adjustments 176,506
-----------
Net cash used in operating activities (45,068)
-----------
Cash Flows from Investing Activities:
Purchases of hotel resort property and equipment (17,632)
Receivables from affiliates (190,000)
-----------
Net cash used in investing activities (207,632)
-----------
Cash Flows from Financing Activities:
Financing costs (5,000)
Payable to affiliates 39,238
Borrowings on notes and mortgages receivable 262,764
-----------
Net cash provided by financing activities 297,002
-----------
Net Increase in Cash and Cash Equivalents 44,302
Cash and Cash Equivalents, beginning of period --
Cash and Cash Equivalents, end of period $ 44,302
===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 61,008
===========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Deposit on purchase of hotel resort property and equipment with advance
from affiliate $ 100,000
===========
Purchase of hotel resort property and equipment ($5,705,585), hotel guest receivables
($110), inventory ($12,945) and prepaid expenses ($78,782) and other assets
with notes and mortgage payable $ 5,797,422
===========
Financing costs incurred with notes and mortgages payable $ 94,814
===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Notes to Financial Statements
For the Period From August 14, 1997 (Date of Inception) through December 31,
1997
1. Summary of Significant Accounting Policies:
The following is a summary of the more significant accounting policies and
practices of Ocean City Coconut Malorie Resort, Inc. which affect
significant elements of the accompanying financial statements:
Organization - Ocean City Coconut Malorie Resort, Inc. (the Company) was
organized on August 14, 1997 under the laws of the State of Maryland. The
Company is a wholly-owned subsidiary of Kosmas Group International, Inc.
(the Parent).
Company's Activities - The Company acquired The Coconut Malorie Hotel (the
Project) located in Ocean City, Maryland primarily to renovate, convert
to, sell and manage interval ownership condominiums. The primary marketing
facility and sales office is located at the Project. The Project has been
established to provide for 85 units. At December 31, 1997, the Project was
still being operated as a hotel.
Revenue and Cost Recognition - Vacation Ownership - Vacation ownership
interests will be sold for cash or as credit sales. Credit sales require a
minimum down payment and monthly installments, including interest, for a
period of generally seven years. Sales will be included in revenues when a
minimum of 10% down payment is received, a 10-day rescission period has
elapsed, the installment note is not subject to future subordination, all
benefits and risks of ownership have transferred to the buyer, the Company
does not have substantial continued involvement with the property after
the sale, and when other requirements to close the sale have been met. All
funds received will be held in escrow until the above requirements are
met. The installment contracts and associated mortgages receivable are
collateralized by a mortgage on the related unit. Until a contract
qualifies as a sale, all payments received will be accounted for as
deposits. There were no deposits at December 31, 1997.
The acquisition cost of the Project, renovation costs incurred, and the
project costs of improvements will be allocated pro-rata to each vacation
ownership interest sold based on relative sales value. The remaining
unsold portion of cost is reflected as hotel resort property and equipment
and inventory of vacation ownership interests. The Project is stated at
the lower of cost less depreciation or market. Depreciation is recorded
during the period the Project continues to be operated as a hotel. At
December 31, 1997, the Project was operating solely as a hotel.
Marketing, advertising, commissions and other selling costs of the
vacation ownership interest will be expensed as incurred. Sales of the
vacation ownership interests will commence in 1998.
Cash and Cash Equivalents - For the purpose of the statement of cash
flows, the Company considers all highly liquid debt instruments with an
initial maturity of three months or less as cash equivalents.
6
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Notes to Financial Statements - Continued
For the Period from August 14, 1997 (Date of Inception) through December 31.
1997
1. Summary of Significant Accounting Policies - Continued:
Property and Equipment - As disclosed in "Revenue and Cost Recognition -
Vacation Ownership" above, the unsold portion of the Project is
depreciated. Depreciation expense is computed using the straight-line
method over the estimated useful lives of the assets. Maintenance and
repairs are charged to expense as incurred, and betterments and renewals
are capitalized.
Financing Costs - Loan origination fees and other costs associated with
the notes and mortgages payable are deferred and amortized over the
various terms of the corresponding loans using the straight-line method.
Total loan origination fees and other costs of financing were $99,814 less
amortization of $6,167 at December 31, 1997.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market value. Inventory consists of hotel materials and
supplies.
Income Taxes - Ocean City Coconut Malorie Resort, Inc. is a Qualified
Subchapter S Subsidiary of Kosmas Group International, Inc. Under the
provisions of the Internal Revenue Code, the income of the Company is
taxed to the stockholders of the Qualified Subchapter S parent, Kosmas
Group International, Inc.; therefore, no provision for income taxes is
included in the financial statements.
Use of Estimates - The preparation 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. Actual results could differ from
those estimates.
2. Hotel Resort Property and Equipment:
The major components of hotel resort property and equipment consist of the
following:
Land $ 700,000
Building, property and
equipment 4,905,585
Building improvements 15,750
Furniture and equipment 101,882
------------
5,723,217
Less accumulated
depreciation (31,603)
------------
$ 5,691,614
============
7
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Notes to Financial Statements - Continued
For the Period from August 14, 1997 (Date of Inception) through December 31,
l997
3. Notes and Mortgages Payable:
Notes and mortgages payable consist of the following at December 31, 1997
Mortgage payable for the acquisition of the Project
with interest at prime plus 2.5% (11 % at December
31, 1997) but no less than 10.5% per annum, payable
monthly; as unit weeks are sold, per unit week
principal payments of $1,800 to $2,000 are required;
as of December 31, 1997, no unit weeks have been
sold; the note is personally guaranteed by
stockholders of the Parent and the Parent and is
collateralized by real estate (with a carrying value
of $5,691,614), fixtures and other improvements; the
entire unpaid principal balance plus all accrued and
unpaid interest is payable in full on October 24,
2001 $5,500,000
Note payable to a corporation with no interest due,
payable in full on January 15, 1998 55,000
Mortgage payable to individual with interest at 10%
per annum, payable monthly; principal payments of
$250,000 are payable annually on October 24, 1998
and 1999; collateralized by a second mortgage on
real estate (with a carrying value of $5,691,614) 500,000
Note payable with interest at prime plus 2% (10.5% at
December 31, 1997) but no less than 9.5% per annum,
payable monthly for a $22,000,000 revolving
hypothecation loan collateralized by eligible
installment receivables on vacation ownership
interest sale, personally guaranteed by stockholders
of the Parent and the Parent; interest and principal
paid monthly with collections on the collateralized
receivables; outstanding principal and interest due
48 months from last advance taken; last advance
cannot be taken any later than October 24, 2001 --
----------
$6,055,000
==========
8
<PAGE>
Ocean City Coconut Malorie Resort, Inc.
Notes to Financial Statements - Continued
For the Period from August 14, 1997 (Date of Inception) through December 31,
1997
3. Notes and Mortgages Payable - Continued:
Estimated maturities on notes and mortgages payable are as follows:
Year Ending December 31,
1998 $ 1,007,000
1999 2,373,000
2000 2,412,000
2001 263,000
-----------
$ 6,055,000
===========
Notes and mortgage payable contain various nonfinancial loan covenants,
the most restrictive of which is filing of annual audited financial
statements. The covenants were waived by the lender.
4. Related-Party Transactions:
Related-party transactions for the year ended December 31, 1997 consist of
transactions between other entities owned by the Parent (the Affiliated
Entities) as follows:
Amount
Amount Due at Receivable at
December 31, December 31,
1997 1997
------------- -------------
The Company borrowed funds from
and advanced funds to affiliated
entities; the advances are
non-interest bearing and have no
specific repayment terms $139,238 $190,000
======== ========
9
<PAGE>
5. Concentration of Credit Risk:
The more significant concentrations of credit risk are as follows:
Demand and Time Deposits - The Company has demand and time deposits with
three banks located in Maryland and one bank in Florida with bank balances
in the amount of $60,287 at December 31, 1997.
The Company has no policy requiring collateral to support its deposits,
although all demand and time deposits with banks are federally insured up
to $100,000 under Federal Depository Insurance protection.
10
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
See Accompanying Notes To Condensed Combined Financial Statements.
1
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Equivest Finance, Inc. ("Equivest") purchased six timeshare vacation resorts and
one resort development site from Kosmas Group International, Inc. on March 26,
1999 (collectively, "KGI properties"). Equivest will pay $4 million in cash,
less certain adjustments, 490,000 shares of Equivest Common Stock and will
assume approximately $72 million of notes payable and certain other liabilities.
Equivest is borrowing the funds from its existing credit facilities to pay the
cash portion of the purchase price.
Also, as previously reported in Form 8-K filed on September 1, 1998, Equivest
purchased Eastern Resorts Corporation ("Eastern") on August 28, 1998 for $15
million in cash and 3,200,000 shares of common stock. Eastern owns 100% of
Eastern Resorts Company, LLC. The financial results of Eastern are included in
Equivest's historical results as of December 31, 1998 from the purchase date.
The financial results referred to represent the activities of Eastern Resorts
Company, LLC and its wholly owned subsidiary Long Wharf Marina, Inc. Equivest
borrowed most of the funds to pay the cash portion of the purchase price.
The unaudited pro forma combined balance sheet as of December 31, 1998 presents
the historical consolidated balance sheets of Equivest, Eastern, and KGI
properties. The purchase accounting adjustments, as described in the related
notes and below, are calculated as if the Eastern and Kosmas acquisitions had
been effective December 31, 1998.
The unaudited pro forma combined statement of income for the twelve months ended
December 31, 1998 present the consolidated results of operations of Equivest,
Eastern, and KGI properties. The purchase accounting and other pro forma
adjustments, as described in the related notes and below, are calculated as if
the Eastern and KGI properties acquisitions had been effective as of the
beginning of such period. The pro forma adjustments are based upon currently
available information and certain assumptions that Equivest's management
believes are reasonable under current circumstances.
The unaudited pro forma combined financial statements are based on historical
financial statements of Equivest, Eastern, and KGI properties and should be read
in conjunction with their respective financial statements and notes. The pro
forma data is not necessarily indicative of the results of operations or
financial condition of Equivest had these transactions occurred
See Accompanying Notes To Condensed Combined Financial Statements.
2
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
on the dates indicated, nor the results of future operations. Equivest
anticipates cost savings and additional benefits as a result of certain of the
transactions contemplated in the pro forma financial statements. Such benefits
and any other changes that might have resulted from management of the combined
companies have not been included as adjustments to the pro forma condensed
financial statements.
The unaudited pro forma combined financial statements will change due to certain
changes in the purchase accounting adjustments included in the pro forma once
all valuations of assets and liabilities are final.
See Accompanying Notes To Condensed Combined Financial Statements.
3
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
EQUIVEST FINANCE, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1998
(Amounts in Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
Historical Historical Pro
Equivest Kosmas forma Pro
Finance, Resorts Interco Consol. Acquis. forma
ASSETS Inc. Properties Elim. Balances Adj. total
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 3,487 $ 335 $ -- $ 3,822 $ -- $ 3,822
Total receivables, net 142,326 17,309 (7,500) a) 152,135 -- 152,135
Investment in real estate joint venture 2,971 -- -- 2,971 -- 2,971
Inventory 10,361 39,258 -- 49,619 15,376 c) 64,995
Deferred financing costs, net 3,756 1,273 -- 5,029 (1,273) b) 3,756
Cash - restricted 1,422 2,774 -- 4,196 -- 4,196
Accrued interest receivable 971 -- -- 971 -- 971
Property & equipment 3,048 6,344 -- 9,392 -- 9,392
Goodwill, net 27,247 16,586 -- 43,833 (16,586) b) 27,247
Stock registration costs 1,480 -- -- 1,480 -- 1,480
Other Assets 315 1,154 -- 1,469 -- 1,469
--------- --------- --------- --------- --------- ---------
Total Assets $ 197,384 $ 85,033 $ (7,500) $ 274,917 $ (2,483) $ 272,434
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable and Other Liabilities:
Accounts payable $ 2,213 $ 2,048 $ -- $ 4,261 $ -- $ 4,261
Deferred incomes taxes 2,569 3,783 -- 6,352 -- 6,352
Taxes payable 1,994 -- -- 1,994 -- 1,994
Deferred revenues -- 2,371 -- 2,371 (1,048) d) 1,323
Due to related party -- -- -- -- 7,975 e) 7,975
Accrued expenses and other liabilities 3,985 6,243 -- 10,228 3,750 f) 13,978
--------- --------- --------- --------- --------- ---------
Total Accounts Payable and Other
Liabilities 10,761 14,445 -- 25,206 10,677 35,883
Notes payable 133,117 55,468 (7,500) a) 181,085 -- 181,085
--------- --------- --------- --------- --------- ---------
Total Liabilities 143,878 69,913 (7,500) 206,291 10,677 216,968
STOCKHOLDERS' EQUITY
Cumulative Redeemable Preferred Stock--Series
2 Class A 30 -- -- 30 -- 30
Common Stock, $.01 par value 252 3 -- 255 2 g) 257
Additional paid-in capital 49,115 15,000 -- 64,115 (13,045) g) 51,070
Stockholder's/member's advances, net -- (2,901) -- (2,901) 2,901 g) --
Retained earnings 4,109 3,018 -- 7,127 (3,018) g) 4,109
--------- --------- --------- --------- --------- ---------
53,506 15,120 -- 68,626 (13,160) 55,466
--------- --------- --------- --------- --------- ---------
Total Liabilities and Stockholders'
Equity $ 197,384 $ 85,033 $ (7,500) $ 274,917 $ (2,483) $ 272,434
========= ========= ========= ========= ========= =========
</TABLE>
a) Reflects the elimination of the notes receivable and the notes payable
between the companies.
b) Reflects the elimination of certain assets not acquired in the purchase
transaction.
See Accompanying Notes To Condensed Combined Financial Statements.
4
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
c) Reflects the adjustment to assets for the allocation of the purchase price
based on the fair values of the assets acquired.
d) Reflects the elimination of certain liabilities not assumed in the
purchase transaction.
e) Reflects the assumption of certain other liabilities.
f) Reflects the estimated unpaid cash consideration of the business purchased
including legal and accounting costs. Also reflects the elimination of
certain liabilities not assumed in the purchase transaction.
g) Reflects the elimination of the pre-purchase equity amounts of the
companies acquired in the purchase accounting transaction.
See Accompanying Notes To Condensed Combined Financial Statements.
5
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
EQUIVEST FINANCE, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Combined Income Statement
For the Year ended December 31, 1998
(Amounts in Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
Historical Historical Historical
Equivest Eastern Kosmas Pro forma
Finance, Resorts Resorts Interco Consol. Acquis. Pro forma
Inc. Company Properties Elim. Balances Adj. total
------- -------- ---------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Interest $20,399 $ 1,831 $ 2,390 $ (1,549) a) $23,071 $ -- $23,071
Timeshare interval sales 4,553 8,727 20,653 -- 33,933 -- 33,933
Resort operations 3,646 7,017 14,584 -- 25,247 -- 25,247
Other income 1,039 63 701 (118) b) 1,685 -- 1,685
------- -------- ---------- ---------- ------- ---------- -------
Total Revenue 29,637 17,638 38,328 (1,667) 83,936 -- 83,936
------- -------- ---------- ---------- ------- ---------- -------
Costs and Expenses:
Interest 7,458 1,313 4,752 (1,549) a) 11,974 1,400 c) 13,374
Cost of intervals sold 1,145 2,095 3,501 -- 6,741 1,662 d) 8,403
Sales and marketing 2,175 3,706 12,656 -- 18,537 -- 18,537
Resort management 3,270 6,060 11,551 -- 20,881 -- 20,881
Depreciation and amortization 2,162 -- 2,256 -- 4,418 (515) e) 3,903
Provision for doubtful accounts 791 466 2,886 -- 4,143 -- 4,143
General and administrative 4,122 1,313 6,516 (118) b) 11,833 (623) f) 11,210
------- -------- ---------- ---------- ------- ---------- -------
Total Costs and Expenses 21,123 14,953 44,118 (1,667) 78,527 1,924 80,451
------- -------- ---------- ---------- ------- ---------- -------
Income/(Loss) Before Provision for
Income Taxes 8,514 2,685 (5,790) -- 5,409 (1,924) 3,485
Provision for Income Taxes 3,270 1,070 g) (1,374) g) -- 2,966 (1,526) g) 1,440
------- -------- ---------- ---------- ------- ---------- -------
------- -------- ---------- ---------- ------- ---------- -------
Net Income/(Loss) $ 5,244 $ 1,615 $ (4,416) $ -- $ 2,443 $ (398) $ 2,045
======= ======== ========== ========== ======= ========== =======
Earnings per common share:
Basic $ .20 $ .06
======= =======
Diluted $ .20 $ .06
======= =======
Weighted avg. number of common shares
outstanding:
Basic 23,010,104 2,594,110 25,604,214
Diluted 23,451,243 2,594,110 26,045,353
</TABLE>
a) Reflects the elimination of interest income and interest expense among the
companies.
b) Reflects the elimination of fee income and fee expense among the companies
c) Reflects interest expense on bank borrowings of $15 million at 8.75% for
the Eastern Resorts transaction and $6.0 million at 8.75% for the Kosmas
properties transaction.
d) Increase is from the purchase price of the Kosmas properties allocated to
their timeshare inventories and its resulting effect on cost of sales.
See Accompanying Notes To Condensed Combined Financial Statements.
6
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
e) Reflects the amortization of the financing costs associated with the bank
borrowings, and the reduction of the amortization of the financing costs
associated with the Kosmas properties. Also, reflects amortization of
goodwill arising from the Eastern Resorts purchase, and the elimination of
goodwill included in the Kosmas financial statements.
f) Reflects the fees paid to affiliates of the Kosmas properties that are
eliminated at no additional cost to the company.
g) Reflects the effect of income taxes on (i) the 1998 historical income
statement of Eastern, a limited liability company, (ii) the 1998
historical income statement of the Kosmas properties, and (iii) the tax
deductible pro forma acquisition adjustments.
See Accompanying Notes To Condensed Combined Financial Statements.
7
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
EQUIVEST FINANCE, INC. and SUBSIDIARIES
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
NOTE A: BASIS OF PRESENTATION
On March 26, 1999 Equivest acquired six timeshare vacation resorts and one
resort development site from Kosmas Group International, Inc. on March 26, 1999
(collectively, "KGI properties"). Equivest will pay $4 million in cash, less
certain adjustments, 490,000 shares of Equivest Common Stock and the assumption
of approximately $72 million of notes payable and certain other liabilities. The
transaction has been recorded as a purchase.
Also, in 1998, as previously reported in Form 8K filed on September 1, 1998,
Equivest acquired all of the outstanding ownership in Eastern Resorts
Corporation for approximately $15 million in cash and 3,200,000 shares of
Equivest Common Stock. The transaction was recorded as a purchase. The pro forma
acquisition adjustments related to the purchase of Eastern are also included in
these pro forma financial statements.
NOTE B: PURCHASE PRICE
The purchase price of KGI properties and its allocation to assets acquired and
liabilities assumed follows:
Cash $ 4,000,000
490,000 shares of common stock at $4.00 per share 1,960,000
Other acquisition costs 750,000
Related party liabilities 7,975,000
Notes payable and other liabilities assumed 67,867,000
-----------
$82,550,000
===========
NOTE C: AMORTIZATION PERIOD OF GOODWILL
The goodwill that resulted from the acquisition of Eastern is being amortized
over a 40 year period.
NOTE D: NOTES PAYABLE
The borrowing to finance the $15 million cash portion of the Eastern purchase
price bears interest at LIBOR plus 3%, which amounted to 8.75% at the
acquisition date. The borrowing is a bridge loan which matures June 11, 1999.
See Accompanying Notes To Condensed Combined Financial Statements.
8
<PAGE>
EQUIVEST FINANCE, INC. and SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Amortization of deferred financing costs related to this loan has been based on
the maturity date of the loan.
The borrowing to finance the $4 million cash portion of the purchase price of
the resorts and property from Kosmas came from the Company's existing credit
facilities, and for purposes of the pro forma, the interest rate used was 8.75%.
There are no financing costs associated with this particular borrowing.
NOTE E: INCOME TAXES
The pro forma total effective tax rate was assumed to be 40%.
See Accompanying Notes To Condensed Combined Financial Statements.
9
