10-Q 1 equivest3q10q7515.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2001 ------------------ Commission File Number: 0-18201 -------- EQUIVEST FINANCE, INC. ---------------------- (Exact name of Registrant as specified in its charter) Delaware 59-2346270 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 100 Northfield Street, Greenwich, Connecticut 06830 --------------------------------------------- ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (203) 618-0065 Securities registered pursuant to Section 12(b) of the Act: None Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act Of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 30, 2001, 28,377,870 shares of common stock of Equivest Finance, Inc. were outstanding. Transitional Small Business Disclosure Format. Yes [ ] No [X] EQUIVEST FINANCE, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 INDEX

PART I - FINANCIAL INFORMATION Item 1. Financial Statements. EQUIVEST FINANCE, INC. and SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS

3 See Accompanying Notes To Consolidated Condensed Financial Statements. EQUIVEST FINANCE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

4 See Accompanying Notes To Consolidated Condensed Financial Statements. EQUIVEST FINANCE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

5 See Accompanying Notes To Consolidated Condensed Financial Statements. EQUIVEST FINANCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EQUITY ACCOUNTS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2001

6 See Accompanying Notes To Consolidated Condensed Financial Statements. EQUIVEST FINANCE, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (UNAUDITED)

7 See Accompanying Notes To Consolidated Condensed Financial Statements. EQUIVEST FINANCE, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS A. Basis of Presentation The accompanying consolidated condensed interim financial statements as of September 30, 2001 and for the three-month and nine-month periods ended September 30, 2001 and 2000 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2001 are not necessarily indicative of the results expected for the year ended December 31, 2001. For further information, please refer to the consolidated financial statements and footnotes thereto included in Equivest Finance, Inc.'s (the "Company") Form 10-K for the year ended December 31, 2000. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, Equivest Capital, Inc. (formerly, Resort Funding, Inc.) and its subsidiary, BFICP Corporation (collectively, "Equivest Capital"), EFI Funding Company, Inc., EFI Development Funding, Inc., Equivest Capital Funding, Inc. (inactive), Resort Marketing Services, Inc., Mirror Lake Development, Inc., Mirror Lake Realty, Inc., Eastern Resorts Corporation and its subsidiaries, Eastern Resorts Company, LLC and Long Wharf Marina Restaurant, Inc. (collectively, "Eastern Resorts"); Bluebeard's Castle, Inc., and subsidiaries thereof, Castle Acquisition, Inc., Avenue Plaza LLC, Ocean City Coconut Malorie Resort, Inc., St. Augustine Resort Development Group, Inc., Equivest Washington, Inc., Equivest St. Thomas, Inc., Equivest Maryland, Inc., Equivest Florida, Inc., and Equivest Louisiana, Inc. (all of which were acquired or created in connection with the acquisition by the Company of six timeshare vacation resorts, one resort development site, management contracts and consumer notes receivable from Kosmas Group International, Inc. ("KGI") in March 1999 (the "Kosmas Acquisition"); Peppertree Resorts Ltd., and its subsidiaries, Peppertree Resort Villas, Inc., Peppertree Resorts Vacation Club, Inc. (now known as Equivest Vacation & Travel Club, Inc.), Peppertree Vacation Club, Inc. (now known as Equivest Club, Inc.), and Peppertree Resorts Management, Inc. (all of which were acquired in connection with the acquisition by the Company of fifteen timeshare vacation resorts, management contracts and consumer notes receivable from Peppertree Resorts, Ltd. ("Peppertree Resorts") in November 1999 (the "Peppertree Acquisition")); and Equivest Texas, Inc, which was created in connection with the acquisition by the Company of a resort development site on May 3, 2000 (known as Riverside Suites). All significant intercompany balances and transactions have been eliminated in consolidation. B. Summary of Significant Accounting Policies Use of Estimates The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from the Company's estimates. 8 Inventory and Cost of Timeshare Intervals Sold Inventory is stated at the lower of cost or market and consists of timeshare intervals held for sale and construction in progress of new timeshare units, including the cost of land for future timeshare units. These costs are charged to cost of timeshare intervals sold based upon the relative sales values of the intervals sold. Intervals reacquired are placed back into inventory at the lower of their original historical cost basis or market value. Property and Equipment Property and equipment (including equipment under capital lease) net of accumulated depreciation, are stated at cost. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets, which have been estimated as follows: Buildings and improvements 5-40 years Furniture and equipment 3-7 years Earnings Per Share Pursuant to SFAS 128, a reconciliation of the numerators and the denominators of the basic and diluted per-share computation follows:

Redeemable Preferred Stock In June 2001, the Board of Directors declared $1,650,000 in Series 2 Class A Preferred Stock dividends. The dividends, which represented the cumulative unpaid dividends through March 31, 2001, were paid through the issuance of 1,650 shares of Series 2 Class A Preferred Stock. At September 30, 2001, the cumulative undeclared and unpaid dividends amount to $333,000. SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended, became effective January 1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of the derivatives are recorded each period in current earnings or other comprehensive income depending on whether a derivative is designated as part of a hedge transaction, and if it is, the type of hedge transaction. The Company currently has no derivative instruments. 10 SFAS No. 142 - Goodwill and Other Intangible Assets In June of 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 is effective for the Company beginning January 2002 except for goodwill acquired after June 30, 2001, which would not be subject to amortization. The statement will have a significant impact on the Company's future reported income. Under SFAS 142, goodwill and certain other intangible assets will no longer be amortized but shall be tested for impairment loss at least annually. The impairment tests are to be at a reporting unit level (versus Company wide) using the unit's fair value. Any goodwill impairment loss shall be recorded in the income statement. Financial statements of prior periods will not be restated; however, adjusted amounts, including per share amounts, will be presented. The Company has started its study of SFAS 142; however, implementation of the accounting change will require careful detailed analyses which has to be determined and completed. Reclassifications Certain amounts for the three months and nine months ended September 30, 2000 have been reclassified to be consistent with the year 2001 classifications. C. Contingencies, Commitments and Liquidity DG Credit Facility. In January 2000, the Company, through its subsidiary EFI Funding Company, Inc., entered into a $150 million consumer loan credit facility with DG Bank Deutche Genossenschaftsbank AG ("DG Bank") as Agent for Autobahan Funding Company LLC ("DG Credit Facility"). The term of this facility is five years, and the interest rate is based on the lender's commercial paper rate plus 1.35%. The facility currently is the main facility for funding all subsidiary consumer loans and third party loans. Under the terms of the DG Credit Facility, the Company is responsible for all loan servicing, administration and processing. The Company in cooperation with DG Bank is seeking to increase the size of the total credit allowable under the DG Credit Facility, though there is no guarantee that the Company will be successful in achieving any such increases. Even if the Company does not obtain an increase in the size of the DG Credit Facility, the Company believes that the facility will be adequate to fund the Company's consumer loan portfolio for the foreseeable future. As of September 30, 2001, approximately $131.5 million was outstanding under the DG Credit Facility. CSFB Credit Facility. Beginning in 1997, the Company entered into several credit facilities with Credit Suisse First Boston Mortgage Capital LLC ("CSFB"), which ultimately provided more than $150 million in credit to the Company. In August 2001, CapitalSource Finance LLC ("CapitalSource") purchased the balance of the CSFB debt, which was then outstanding of $35 million, thereby extinguishing all remaining debt with CSFB. This represents payoff of the CSFB debt approximately five months before its maturity in February 2002, and completed repayment of more than $150 million of CSFB debt by the Company during the past two years. CapitalSource Finance LLC. In September 2001, the Company entered into new loan agreements with CapitalSource. As of September 30, 2001, the new 11 CapitalSource loans with an approximate balance of $24.5 million mature in August 2005, while loans with an aggregate balance of $7.0 million mature in August 2004. The Company will receive a 5% discount from the face amount of the former CSFB debt upon full repayment to CapitalSource of each individual loan, so long as no defaults occur thereunder. Bank of America Loan. In November 1999, the Company entered into a $20.7 million bridge loan with Bank of America, N.A. ("B of A Loan") in connection with an acquisition. This B of A Loan had an outstanding balance of $13.6 million as of September 30, 2001. The B of A Loan matures in February 2003 and is subject to certain conditions and debt covenants. These conditions include a $1 million special principal payment in November 2001 and $2.5 million in February 2002. The Company made the November 1st mandatory principal payment prior to its due date, and has already paid a significant portion of the required February 2002 payment. Other Indebtedness. The Company has certain additional facilities that were either undertaken or assumed in conjunction with its development activities. These facilities include traditional timeshare industry lenders as well as smaller regional or community banks. The aggregate balances of these loans as of September 30, 2001, were approximately $36.3 million. The majority of these other loans mature after the year 2001, and are repaid out of release fees on sales of VOIs. Beginning in September 1996, the trustee reached settlements of the claims of certain lenders against the Bennett Estate (as defined more fully under "Bankruptcy of Related Entities" in the company's 10-K filed April 2, 2001) relating to claims to certain lease collateral of the Bennett Estate. These settlements required the settling banks to make new non-callable term loans to Equivest Capital at concessionary interest rates of 0.5% to 4.0% (the "Settlement Loans"). Equivest Capital is also obligated to pay the Bennett Estate an annual arrangement fee of 3% of the unpaid principal balance of the Settlement Loans in addition to the interest paid to the banks. The Settlement Loans have a weighted average interest rate of 5.1% as of September, 2001, including the arrangement fee. The Settlement Loans are also collateralized by note receivables of the Company as to 100% of the face value of such notes. As of September 30, 2001, Equivest Capital's total outstanding balance on the Settlement Loans was approximately $16.1 million, and the weighted average remaining maturity was 20 months. In addition to these Settlement Loans, Equivest Capital also has an additional $7.0 million in loans from other community banks. In 2001, the Company began refinancing the settlement loans. Replacement loans may carry higher interest rates, and will most likely require some level of additional collateralization. 12 Liquidity. At September 30, 2001, the Company's debt to equity ratio was 2.7:1 compared to 3.4:1 at September, 30, 2000. The Company is seeking to reduce its leverage further through a program of selected sale of land and other assets, as well as normal debt repayment through timeshare release fees. Aggregate notes payable decreased by $39.7 million due to net debt paydowns during the first nine months of 2001. The Company has high overall levels of debt, and substantially all of the Company's assets have been pledged as collateral on its loans. The level of indebtedness could have important consequences to investors including: o Increasing the Company's vulnerability to general adverse economic or industry conditions; o Limiting its ability to obtain additional financing to fund future lending, resort acquisition and development and general corporate requirements; and o Requiring it to dedicate a substantial portion of its cash flow from operations to the payment of indebtedness, thereby reducing operating flexibility and opportunities for growth. The Company requires continuous financing to conduct its finance and resort acquisition and development businesses. The Company needs sources of liquidity to make new loans to consumers for the purchase of timeshare VOIs, to replace existing facilities that are maturing, to acquire land and develop new timeshare resorts, and to lend to third party developers. To meet its capital needs, the Company plans to expand its equity base through retained earnings and equity investments whenever possible; and to increase it's borrowing availability under warehouse lines like the DG Credit Facility. In addition, the Company is exploring the possibility of entering into additional financing transactions in which it either sells or borrows against the collateral in its loan portfolio, or issuing other debt securities in the capital markets as operations and market conditions permit. 13 D. Segment Information Financial information with respect to the financing and resort development segments in which the Company operates follows for the periods indicated:

15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking Statements Certain matters discussed or incorporated herein by reference contain forward-looking statements. These statements may be identified by the use of words or phrases such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." Forward-looking statements are based on the Company's current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. These factors include, among others, general economic and business conditions, industry trends, changes in business strategy or development plans, availability and quality of management, adverse weather conditions or other natural causes affecting any of the Company's sales centers, costs of marketing programs, including no-show rates among tour guests and price increases by third party tour vendors, a downturn in the real estate cycle or other factors which result in lower sales of vacation ownership interests, possible financial difficulties of one or more of the developers with whom the Company does business (such as the risk of carrying non-performing assets or losses if defaulted loans prove to have insufficient collateral backing), fluctuations in interest rates, increases in fees or interest costs associated with the Company's indebtedness, availability of adequate liquidity, prepayments by consumers of indebtedness, prepayments by developers, inability of developers to honor replacement obligations for defaulted consumer notes, and competition from organizations with greater financial resources. 16 THREE MONTHS ENDED September 30, 2001 September 30, 2001 Compared to September 30, 2000 During the third quarter of 2001, the Company's results were substantially adversely affected by the sharp reduction in travel that followed the terrorist attacks in New York City and Washington, D.C. on September 11, 2001. Both rental occupancies and the number of tours by potential timeshare purchasers declined significantly following the attacks. Because of the sudden nature of the terrorist attacks, unlike seasonal downturns or other normal business trends, the Company did not have any advance opportunity to implement personnel or other cost reductions until after the events had taken place. Timeshare marketing costs, for example, had already been incurred in order to generate potential purchaser tours of the Company's resort properties, though a large proportion of such tours were cancelled in the weeks immediately following the attacks. The resulting drop in gross sales revenues caused sales and marketing costs as a percentage of VOI sales to increase due to these events completely beyond the Company's control. Similarly, transient rental income from hotel operations declined significantly, distorting normal occupancy and other operating statistics due in substantial part to these extraneous factors. The impact of these extraordinary events was sufficiently large that the Company believes that comparisons of operating statistics, revenues, expenses or profit margins between the third quarter of 2001 and the third quarter of 2000 or other prior quarters could be misleading due to the inherently dissimilar conditions between the quarter ended September 30, 2001 and any other historic quarter. In part due to the events of September 11 and their aftermath, pretax profit margins fell from 16.9% of revenues in the six months ended June 30, 2001 to 3.5% of revenues during the third quarter of 2001, compared to 13.4% for the third quarter of 2000. Reflecting the factors described above, income before provision for income taxes was $1.1 million for the quarter ended September 30, 2001, compared with $6.2 million in the prior year, a decline of 82%. Net income was $0.6 million in the third quarter of 2001, compared with $3.5 million in the comparable period in 2000, a decrease of 82%. Earnings per share fully diluted were $0.02 per share in the third quarter of 2001, compared with $0.12 for the same period in 2000. In addition to the events of September 11, 2001, results during the quarter ended September 30, 2001 were affected by the Company's decision to increase significantly its provisions for potential consumer loan defaults in light of the overall trend in national economic conditions. During the third quarter of 2001 the Company increased total provisions for loan losses by approximately $1.9 million compared with the total provisions taken during the year earlier period. In order to generate these incremental reserves, the rate of provisioning as a percentage of current VOI sales increased during the quarter to 21.7% of VOI sales, compared with 7.9% of VOI sales during the third quarter of 2000. Total reserves against defaults on consumer receivables relating to purchases of VOIs in the Company's own resorts rose to $9.5 million at September 30, 2001, representing more than 580% of the total of $1.6 million of such notes that were 90 days or more in default at that date. At $9.5 million, total reserves applicable to the Company's own purchasers were approximately 137% of the target reserve level of $7.0 million suggested by the Company's "target reserve methodology", or "TRM". See "Provision for Doubtful Receivables". 17 In addition to the events of September 11, 2001 and the increase in loan loss provisioning, results in the quarter ended September 30, 2001 were affected by the deferral of sales revenue relating to units under construction in Newport, R.I., which reduced reported revenue and pretax net income by $2.0 million and $0.6 million, respectively. Also, the Company incurred a one-time increase of approximately $0.8 million in cost of property management as a result of contributions to certain homeowner associations. VOI Sales VOI Sales results were adversely affected by the sharp reduction in travel that followed the terrorist attacks in New York City and Washington, D.C. on September 11, 2001. The number of tours by potential timeshare purchasers declined severely following the attacks. VOI revenues decreased 39% to $19.0 million for the third quarter of 2001, from $31.1 million for the same period in 2000 due in part to the extraordinary events and in part to the closing of five sales centers and two telemarketing centers with excessive costs in 2000. For the quarter ending September 30, 2001, the Company sold approximately 960 fixed-week VOIs and 618 points packages, at a combined average sales price of approximately $11,800. VOI sales revenues for third quarter of 2001 reflected a 2% increase in the average sales price of a VOI compared to the same period in 2000. The Company now owns or manages 29 timeshare resort locations with a completed inventory of approximately 25,450 VOIs. The Company operates twelve sales centers, three of which sell points in the Company's "Vacation Club", as described herein. The following tables sets forth the number of timeshare intervals sold and the average sales price per timeshare interval: For the Quarter-ended September 30, September 30, 2001 2000 ---- ---- Timeshare intervals and points packages sold 1,578 2,725 Average Sales Price $11,787 $11,600 Number of VOIs in inventory at period end 25,483 27,610 Three of the Company's sales centers sell points in the Company's Vacation Club rather than traditional timeshare weeks. Pricing policies for vacation points involve a greater range of variation due to different sizes of point's packages than prices for fixed or floating week VOIs. Sales of biennial VOIs are counted as a sale of an interval, though the customer pays a lower absolute price for his or her alternate year usage rights. Inclusion of biennial sales tends to lower the average sales price per interval, though the available number of VOIs in inventory would be much greater if used as biennials rather than as whole weeks or their equivalent in points. Based on all the foregoing factors, the stated average sales price per timeshare interval may not reflect fully the actual revenues received for each equivalent to a whole week of resort usage. Interest Income Interest income includes interest earned from the Company's consumer receivable portfolio and interest earned from the Company's third party loan portfolio. Interest income decreased 12% to $8.7 million for the third quarter of 2001 from $9.9 million for the third quarter of 2000. The decrease in interest income is due to lower average outstanding balances on the loan portfolio by approximately $18 million. The majority of the decrease in 18 outstanding balances is due to a reduction to the acquisition and development loans and to a lesser degree a slight decline in third party consumer receivables. The declining interest rate environment positively affected the net interest margin, which improved from 1.2% of average earning assets for the third quarter of 2000 to 1.8% of average earning assets for the same period in 2001. Interest income related to the consumer loan portfolio increased to 98% of total interest income for the third quarter of 2001, compared to 93% of interest income for the same period in 2000. The increase is primarily due to lower average outstanding balances of A&D Loans. Interest on A&D Loans decreased 70% to $0.2 million for the three months ended September 30, 2001 from $0.7 million for the same period in 2000, mainly due to lower average outstanding balances. Resort Operations Due to the sharp reduction in travel that followed the terrorist attacks in New York City and Washington, D.C. on September 11, 2001, resort operation revenue was significantly affected. Resort operations revenue decreased 3% from $4.8 million for the third quarter of 2000 to $4.7 million for the same period in 2001. Other Income Other income decreased 53% to $0.2 million for the third quarter of 2001 as compared to $0.5 million for the same period in 2000. The decrease in other income is primarily due to a decrease in credit life proceeds and commitment fee income. Interest Expense Interest expense, net of capitalized amounts, decreased 37% to $4.1 million for the third quarter of 2001 as compared to $6.5 million for the same period in 2000. The decrease in interest expense is a result of lower outstanding loan balances, as well as significant reductions in interest rates. The average outstanding balance decreased approximately $35.0 million, while the weighted average interest rate on outstanding debt decreased from 8.8% for the third quarter of 2000 to 5.9% for the third quarter of 2001. The Company has not traditionally hedged against its interest rate risk due to the wide spread on its receivables and the speed with which new originations occur. However, under the DG Credit Facility, the Company is required to hedge within the facility once the interest rate spread has been reduced to approximately 600 basis points. This is currently the largest financing facility that the Company maintains. The significant reductions in market interest rates experienced in late 2000 and continuing into 2001 result in lower interest costs on virtually all the Company's debt while its interest receivable rates are largely fixed. Provision For Doubtful Receivables In addition to the events of September 11, 2001, results during the quarter ended September 30, 2001 were affected by the Company's decision to increase significantly its rate of provisioning for potential consumer loan defaults in light of the overall trend in economic conditions. During the third quarter of 2001, the Company added approximately $1.9 million to reserves by taking additional provisions against VOI sales compared with the prior year period. In order to generate this level of new reserves, the Company increased the rate of provisioning on new VOI sales to 21.7% of VOI sales, compared with 7.9% of VOI sales during the third quarter of 2000. 19 Total reserves against defaults on consumer receivables relating to purchases of VOIs in the Company's own resorts rose to $9.5 million at September 30, 2001, representing more than 580% of the total of $1.6 million of such notes that were 90 days or more in default at that date. At $9.5 million, total reserves applicable to the Company's own purchasers were approximately 137% of the target reserve level of $7.0 million suggested by the Company's "target reserve methodology", or TRM. The Company has used its TRM successfully to provide a disciplined approach to reserving for consumer loan delinquencies for several years, and the Company believes that the TRM system produces reserves that adequately provide for future losses. However, the data underlying the TRM system reflects the prior decade, and consequently does not include significant data concerning default rates during recessionary periods. Therefore, the Company chose to reduce reported pretax income by approximately $2.0 million during the third quarter to increase provision levels to reflect this uncertainty, while an additional $2.0 million in reserves were released from reserves for repaid construction loans and were added to reserves against the consumer loan portfolio. In aggregate, during the third quarter the Company added a total of approximately $4.0 million to its provisions for loan losses on notes from its VOI customers. This represents approximately the amount of write offs against reserves that would occur if the Company experienced an entire year of consumer note defaults at a rate of 125% of the average annual rate of note defaults over the past decade. The Company will actively review consumer default trends during future quarters, and expects to maintain a higher level of provisioning during coming quarters than was true during 2000 or the first half of 2001, though lower as a percent of VOI sales than during the third quarter of 2001. The Company's loan portfolio remains of generally high quality, as evidenced by the low level of nonperforming loans. Nonperforming loans were $2.6 million or 1.0% of total loans at September 30, 2001 as compared to $4.8 million or 1.7% of total loans for the same period in 2000. Net write-offs remained relatively constant at $3.1 million or 1.2% of average loans for the third quarter of 2000 and 2001. The Company assumes all default risk for receivables relating to purchases of VOIs in the Company's own resorts. However, the Company has a right to "chargeback" defaulted consumer receivables relating to consumer purchases in third party resorts to the third party developers. Thus, as the proportion of the Company's total consumer loan portfolio that relates to the Company's own resorts grows, the total level of provisioning for doubtful receivables relating to the Company's own sales becomes more significant. As part of its TRM, the Company has established a Minimum Target Reserve amount for its owned consumer loans based on the principal aging of the consumer loans. The following list sets forth the target reserve level based on the aging of any given owned consumer note receivable: o Current - 29 days past due 5% o 30 - 59 days past due 10% o 60 - 89 days past due 50% o 90+ days past due 95% 20 The targeted reserve level is based on the outstanding principal balance of the Consumer loan less an inventory recapture amount. When the Company believes that collectibility of a receivable is unlikely, that amount is charged against the allowance for doubtful receivables. As of September 30, 2001, the targeted reserve level based on the outstanding principal balance less an inventory recapture amount was $7.0 million as compared to actual reserves of $9.5 million, reflecting an actual reserve level of 137% of target. The increase in the reserve position represents an improvement from the second quarter of 2001 when the actual reserve level was $0.6 million less than the targeted reserve. 21 The following table sets forth the performance of the consumer receivable portfolio at September 30, 2001:

(1) Includes the consumer receivables that collateralize the Hypothecation Loans. At September 30, 2001, 95.0% of the aggregate consumer receivable portfolio was current, and there were 380 notes with a principal balance of $2.2 million that were over 90 days past due. Of this amount, $1.6 million relates to the consumer receivables in the Company's resorts. During 2001, the company wrote off 1,731 consumer notes with an outstanding principal balance of $12.5 million, leading to a charge against reserves after inventory recovery of $8.9 million. Total reserves and overcollateralization of approximately $32.3 million at September 30, 2001 represented more than 1,200% coverage of the $1.6 million in total consumer receivables that were 90 days or more past due. The following table sets forth the current and historic composition of reserves and over collateralization, reserves as a proportion of total loans, and the levels of past due loans and chargebacks: 22 Loan Reserves Coverage (Dollars in thousands)

------------------------ (1) Specific reserves and the overcollateralized contracts relate to specific developers, and any application of these reserves or overcollateralized contracts to defaulted loans would be done on a developer by developer basis. (2) Chargeback percentage is based on Consumer Financing, because only these loans can be charged back. 23 The following table shows changes in the Company's allowance for doubtful accounts: Consolidated Changes in Allowance for Doubtful Accounts (Dollars in thousands)

---------------- (1) In accordance with the terms of certain agreements with developers, the Company charges certain bad debts directly against developer holdbacks, rather than against the general allowance for doubtful accounts. Cost Of Timeshare Intervals Sold The cost of timeshare intervals sold for the third quarter of 2001 decreased to $4.6 million or 24.3% of VOI revenue, compared to $7.6 million for the third quarter of 2000, or 24.4% of VOI revenue. The decline in dollar volume is a result of the reduced volume of VOIs sold during the third quarter of 2001. Sales And Marketing During the third quarter of 2001, the Company's sales and marketing costs were adversely affected by the extraordinary events of September 11, 2001 as described above. Timeshare marketing costs had already been incurred in order to generate potential purchaser tours of the Company's resort properties, though a significant number of such tours were cancelled in the weeks immediately following the attacks. The resulting sharp drop in gross sales revenues caused sales and marketing costs as a percentage of VOI sales to increase significantly during the final weeks of the quarter. Sales and marketing expense decreased 39% to $10.0 million for the third quarter of 2001 from $16.4 million for the same period in 2000. The decrease in total sales and marketing dollar expense is due to the decline in VOIs sold during the quarter. Sales and marketing costs in the third quarter of 2001 decreased to 52.5% of VOI sales revenues from 52.9% for the third quarter of 2000 and 54.7% for the year 2000. 24 Resort Management Resort operation expense increased 25% to $3.8 million for the third quarter of 2001 from $3.0 million for the same period in 2000. The Company incurred a one-time increase of approximately $0.8 million in costs of property management as a result of contributions to certain homeowner associations. Rental occupancies and transient rental income from hotel operations both declined. Depreciation And Amortization Depreciation and amortization increased 3% to $1.2 million for the third quarter of 2001 from $1.2 million for the third quarter of 2000. The slight increase is primarily due to $0.1 million increase associated with depreciation expense. Goodwill amortization remained constant at $0.4 million for the third quarter of 2001 and 2000. Goodwill associated with the Peppertree Acquisition is approximately $18.0 million and is being amortized over 20 years, while goodwill associated with the acquisition of Eastern Resorts is approximately $25.7 million and is being amortized over 40 years. Depreciation of the properties increased 25% to $0.4 million for the third quarter of 2001 from $0.3 million for the same period in 2000. The increase in depreciation is a result of a larger base of depreciable assets. Loss On Sale of Assets The Company recognized a $0.2 million loss on the sale of an asset during the third quarter of 2001. The loss was incurred upon the sale of a parcel of Peppertree property of $4.9 million. This transaction reduced notes payable by approximately $2.5 million. The company is continuing its efforts to sell additional surplus land. General And Administrative General and administrative expense increased 15% to $3.2 million for the third quarter of 2001 from $2.7 million for the same period in 2000. General and administrative expense as a percentage of total revenue increased to 9.7% of total revenue for third quarter of 2001, compared with 6.0% of total revenue for the third quarter of 2000. The following items contributed to the increase in general and administrative expense: payroll costs, travel, outside service costs, and servicing fees due to growth of the Company. General and administrative costs may continue to increase in absolute dollars as the Company invests in its management and organization infrastructure. Payroll related expense comprises the largest segment of general and administrative expense, representing approximately 49.8% of general and administrative expense during the third quarter of 2001. Provision For Income Taxes The provision for income taxes for the third quarter of 2001 decreased 80% to $0.5 million from $2.7 million for the same period in 2000. The decrease is attributable to the decrease in pretax income during 2001 as compared to the same period in 2000. The provision for income taxes represents approximately 45.6% and 43.1% of pretax income for 2001 and 2000, respectively. 25 Inflation Inflation has not had a material impact on the Company's revenues, operating income and net income during any of the Company's three most recent years. However, to the extent inflationary pressures affect short-term interest rates, a significant portion of the Company's debt service costs may be affected, as may be the interest rates the Company charges to its customers (both customers and developers). 26 NINE MONTHS ENDED September 30, 2001 During the first nine months of 2001, the Company's results included revenue and expense from the Company's subsidiary in Texas, Riverside Suites, which was acquired in the third quarter of 2000. Other than the addition of the Riverside Suites project, whose results were not material, results of the first nine months for both 2001 and 2000 include the same locations. Net Income Income before provision for income taxes decreased 25% to $11.2 million for the nine months ended September 30, 2001, as compared to $15.1 million for the same period in 2000. Net income decreased 25% to $6.5 million for the nine months ended September 30, 2001 from $8.7 million for the same period in 2000. Diluted earnings per share decreased 28% to $0.21 for the nine months ended September 30, 2001 from $0.29 for same time period in 2000. The decrease in net income is primarily attributable to a reduction in aggregate VOI income ("VOI Income"). While profits as a percent of VOI sales revenue ("VOI sales margin") rose appreciably during the first six months of 2001 compared to 2000, aggregate VOI gross revenue fell significantly. This was primarily due to a decline in the number of tours by potential buyers. During the six months ended June 30 aggregate VOI profits were up slightly due to the rise in VOI sales margin. During the third quarter the aggregate VOI sales margin fell due to a result of the terrorist attacks on September 11, 2001, a loss on the sale of an asset, and a decrease in resort operation net margin. The reduction in VOI profits is a direct result of the reduced volume of tours by prospective purchasers, driven by managements decision in 2000 to close two telemarketing centers and five sales centers that were not cost-effective, as well as the negative impact that the events of September 11, 2001 had on the entire travel and tourism industry. Aggregate VOI income was also reduced by several million in non-cash charges to increase aggregate loan loss provisions due to overall economic uncertainty, there was also an affect from deferred sales of approximately $1.7 million pending the completion of new construction in Newport. Aggregate VOI income declined 42% to $5.9 million for the nine months ended September 20, 2001 from $10.3 million for the same period in 2000. Aggregate resort operations income ("Resort Income") decreased 7% to $5.2 million for the third quarter of 2001 as compared to $5.6 million for the same period in 2000, reflecting the lower demand following the terrorist's attacks on September 11, 2001, a one-time charge of $0.8 million in costs of property management as a result of contributions to certain homeowner associations. Resort management expense as a percentage of resort operation revenue increased to 64.8% for the third quarter of 2001 as compared with 62.4% for the same period in 2000. In addition to the decrease in net VOI Income and Resort Income, the Company incurred losses of $0.7 million upon the sale of parcels of Peppertree property, which reduced notes payable by $3.5 million. The Company's pretax income as a percent of revenues decreased to 12.2% for the first nine months of 2001 from 12.3% for the same period in 2000. During the same period, total expenses decreased 25% from $107.5 million for the nine months ending 2000 to $81.0 million for the same time period in 2001. The decline in expenses is primarily due to the decrease in variable costs (cost of timeshares sold and sales and marketing costs) associated with the reduction in VOI sales. The declining interest rate environment positively affected the net interest margin, which improved from 3.6% of average earning assets for the nine months ended September 30, 2000 to 4.8% of average earning assets for the same period in 2001. 27 Total revenue decreased 25% to $92.3 million for the nine months ended September 30, 2001 as compared to $122.5 million for the same time period in 2000. The decline in revenue is due almost entirely to a reduction in VOI sales revenue, which fell $27.7 million during the first nine months of 2001 as compared to the same period in 2000. This reduction in sales revenue is primarily attributable to the closure of five former sales centers and two telemarketing centers during 2000 at the Company's Peppertree subsidiary, and the tragic events of September 11, 2001, which also resulted in lost VOI revenue. The aggregate reduction in sales revenues also reflected reduced tour volumes at non-Peppertree Resorts' sales centers, partly the result of the Company eliminating higher cost tour sources, and partly the result of slower overall economic activity. Of the total reduction in VOI sales, $20.2 million was related to former Peppertree locations and $7.5 million was related to non-Peppertree Resorts sales locations. Approximately $1.7 million of the $7.5 million decline in non-Peppertree Resorts VOI sales revenue during the first nine months of 2001 was a result of deferred sales pending the completion of new construction in Newport, a condition that did not occur during the same period in 2000. VOI Sales VOI revenues decreased 36% to $49.7 million for the nine months ending September 30, 2001, from $77.4 million for the same period in 2000. Vacation ownership revenue decreased to 53.8% of total revenue for the nine months ended September 30, 2001 as compared to 63.2% for the same period in 2000 due to the decline in VOI sales revenues. For the nine months ended September 30, 2001, the Company sold 2,691 fixed-week VOIs and 1,355 points packages, at a combined average sales price of approximately $11,942. VOI sales revenues for nine months ended September 30, 2001, reflected a 42% decrease in the number of VOIs sold, and a 7% increase in the average sales price of a VOI compared to the same period in 2000. The Company now owns or manages 29 timeshare resort locations with a completed inventory of approximately 25,450 VOIs. The Company operates twelve sales centers, three of which sell points in the Company's "Vacation Club", as described herein. The following tables sets forth the number of timeshare intervals sold and the average sales price per timeshare interval:

Interest Income Interest income includes interest earned from the Company's consumer receivable portfolio and interest earned from the Company's third party loan portfolio. Interest income decreased 5% to $27.1 million for the nine months ended 2001 from $28.7 million for the same period in 2000. The slight decrease in interest income is primarily due to lower average outstanding balances on acquisition and development loans and to a lesser degree third party consumer receivables. The declining interest rate environment and debt repayment 28 positively affected the net interest margin, which improved from 3.6% of average earning assets for the nine months ended September 30, 2000 to 4.8% of average earning assets for the same period in 2001. Interest income related to the consumer loan portfolio increased to 97% of total interest income for the nine months ended September 30, 2001, compared to 92% of interest income for the same period in 2000. The increase is primarily due to lower average outstanding balances of A&D Loans. Interest on A&D Loans decreased 57% to $0.9 million for the nine months ended September 30, 2001 from $2.2 million for the same period in 2000, mainly due to lower average outstanding balances. Third party A&D Loan originations declined 54% from $6.7 million for the first nine months of 2000 to $3.1 million for the same period in 2001. The decline in A&D loan originations is attributable to the continued shift in the Company's consumer loan growth strategy from generating receivables through new A&D lending to relying on captive originations from the sale of VOIs in the Company's own resorts. Net interest income improved to $12.4 million for the nine months ending September 30, 2001 from $9.5 million for the same period in 2000. The decline in earning assets is primarily centered in acquisition and development loans and third party consumer receivables. The decline in A&D loans and third party originations is primarily attributable to a shift in the Company's consumer loan growth strategy from generating receivables through new A&D lending to relying on captive originations from the sale of VOIs in the Company's own resorts. Resort Operations Resort operations revenue remained constant at $14.8 million for the nine months ended September 30, 2001 and 2000. However, resort management expenses increased $0.3 million to $9.6 million for the nine months ended September 30, 2001 compared with $9.2 million in the prior year. Resort management expense as a percentage of resort operation revenue increased to 64.8% for the first nine months of 2001 as compared with 62.4% for same period in 2000. Other Income Other income decreased 58% to $0.7 million for the nine months ended September 30, 2001 as compared to $1.6 million for the same period in 2000. The decrease in other income is primarily due to a decrease in credit life proceeds and commitment fee income. Interest Expense Interest expense, net of capitalized amounts, decreased 23% to $14.7 million for the nine months ending September 30, 2001 as compared to $19.1 million for the same period in 2000. The decrease in interest expense is a result of several loan facilities that were repaid during the 2001, as well as significant reduction in interest rates. The average outstanding balance decreased approximately $17 million, while the weighted average interest rate on outstanding debt decreased from 8.8% for the first nine months of 2000 to 6.8% for the same period in 2001. The Company has not traditionally hedged against its interest rate risk due to the wide spread on its receivables and the speed with which new originations occur. However, under the DG Credit Facility, Company is required to hedge within the facility once the interest rate spread has been reduced to approximately 600 basis points. This is currently the largest financing facility that the Company maintains. The significant reductions in market interest rates experienced in late 2000 and continuing into 2001 result in lower interest costs on virtually all the Company's debt while its interest receivable rates are largely fixed. 29 Provision For Doubtful Receivables The provision for doubtful receivables increased 22% from $6.1 million for the third quarter of 2000 to $7.5 million for the same period in 2001. The Company's rate of provisioning for doubtful receivables as a percentage of timeshare sales increased from 7.9% of VOI sales during the nine months ended September 30, 2000 to 13.8% of VOI sales for the same period in 2001. Total reserves against defaults on consumer receivables relating to purchases of VOIs in the Company's own resorts rose to $9.5 million at September 30, 2001, representing more than 580% of the total of $1.6 million of such notes that were 90 days or more in default at that date. At $9.5 million, total reserves applicable to the Company's own purchasers were approximately 137% of the target reserve level of $7.0 million suggested by the Company's "target reserve methodology", or TRM. The Company has used its TRM successfully to provide a disciplined approach to reserving for consumer loan delinquencies for several years, and the Company believes that the TRM system produces reserves that adequately provide for future losses. However, the data underlying the TRM system reflects the prior decade, and consequently does not include significant data concerning default rates during recessionary periods. Therefore, the Company chose to reduce reported pretax income by approximately $2.0 million during the third quarter to increase provision levels to reflect this uncertainty, while an additional $2.0 million in reserves were released from reserves for repaid construction loans and were added to reserves against the consumer loan portfolio. In aggregate, during the third quarter the Company added a total of approximately $4.0 million to its provisions for loan losses on notes from its VOI customers. This represents approximately the amount of write-offs against reserves that would occur if the Company experienced an entire year of consumer note defaults at a rate of 125% of the average annual rate of note defaults over the past decade. The Company will actively review consumer default trends during future quarters, and expects to maintain a higher level of provisioning during coming quarters than was true during 2000 or the first half of 2001, though lower as a percent of VOI sales than during the third quarter of 2001. The Company's loan portfolio remains of generally high quality, as evidenced by the low level of nonperforming loans. Nonperforming loans were $2.6 million or 1.0% of total loans at September 30, 2001 as compared to $4.8 million or 1.7% of total loans for the same period in 2000. Net write-offs of $8.9 million for the nine months ended September 30, 2001 represented 3.5% of average loans, while net write-offs for the same period in 2000 were $6.5 million or 2.5% of average loans. The increase in net-write-offs is due in part to the continued write-offs of the acquired Peppertree portfolio, which represent 57% of net write-offs for the nine months ending September 2001, but also to a more accelerated write-off process that reduced 90 day past due loans significantly. Net delinquencies actually fell somewhat during the 2001 period compared to 2000 when the dollar amount of write-offs and 90 day past due loans are combined. The Company assumes all default risk for receivables relating to purchases of VOIs in the Company's own resorts. However, the Company has a right to "chargeback" defaulted consumer receivables relating to consumer purchases in third party resorts to the third party developers. Thus, as the proportion of the Company's total consumer loan portfolio that relates to the Company's own resorts grows, the total level of provisioning for doubtful receivables relating to the Company's own sales becomes more significant. As part of its TRM, the Company has established a minimum target reserve amount ("MTR") for its owned consumer loans based on the principal aging of the consumer loans. The following list sets forth the target reserve level based on the aging of any given owned consumer note receivable: 30 o Current - 29 days past due 5% o 30 - 59 days past due 10% o 60 - 89 days past due 50% o 90+ days past due 95% The targeted reserve level is based on the outstanding principal balance of the Consumer loan less an inventory recapture amount. When the Company believes that collectibility of a receivable is unlikely, that amount is charged against the allowance for doubtful receivables. As of September 30, 2001, the targeted reserve level based on the outstanding principal balance less an inventory recapture amount was $7.0 million as compared to actual reserves of $9.5 million, reflecting an over reserved position of $2.5 million. The increase in the reserve position represents an improvement from the second quarter of 2001 when the actual reserve level was $0.6 million less than the targeted reserve. The following table sets forth the performance of the consumer receivable portfolio at September 30, 2001:

(1) Includes the consumer receivables that collateralize the Hypothecation Loans. At September 30, 2001, 95.0% of the aggregate consumer receivable portfolio was current, and there were 380 notes with a principal balance of $2.2 million that were over 90 days past due. Of this amount, $1.6 million relates to the consumer receivables in the Company's resorts. During 2001, the company wrote off 1,761 consumer notes with an outstanding principal balance of $12.5 million, leading to a charge against reserves after inventory recovery of $8.9 million. Total reserves and overcollateralization of approximately $32.3 million at September 30, 2001, represented more than 1,200% coverage of the $1.6 million in total consumer receivables that were 90 days or more past due. 31 The following table sets forth the current and historic composition of reserves and over collateralization, reserves as a proportion of total loans, and the levels of past due loans and chargebacks:

(1) Specific reserves and the overcollateralized contracts relate to specific developers, and any application of these reserves or overcollateralized contracts to defaulted loans would be done on a developer by developer basis. (2) Chargeback percentage is based on Consumer Financing, because only these loans can be charged back. 32 The following table shows changes in the Company's allowance for doubtful accounts:

---------------- (1) In accordance with the terms of certain agreements with developers, the Company charges certain bad debts directly against developer holdbacks, rather than against the general allowance for doubtful accounts. Cost Of Timeshare Intervals Sold The cost of timeshare intervals sold for the nine months ended September 30, 2001 decreased 38% to $11.6 million or 23.3% of VOI revenue, compared to $18.5 million for the nine months ended September 30, 2000, or 24.0% of VOI revenue. The decline in dollar volume is a result of the reduced volume of VOIs sold during the first nine months of 2001. Sales And Marketing Sales and marketing expense decreased 42% to $24.6 million for the nine months ended September 30, 2001 from $42.3 million for the same period in 2000. The decrease in total sales and marketing dollar expense is due to the decline in VOIs sold and to the reduction in sales commissions and marketing expenses at Peppertree and other locations during the first nine months of 2001. Sales and marketing costs for the first nine months 2001 decreased to 49.6% of VOI sales revenues from 54.7% for the same period in 2000 and for the year 2000. Resort Management Resort operation expense increased 3% to $9.6 million for the nine months ended September 30, 2001 from $9.2 million for the same period in 2000. Resort operation costs for the third quarter of 2001 increased to 64.8% of resort operations from 62.4% for the same period in 2000. The Company incurred an increase of approximately $0.8 million in costs of property management as a result of contributions to certain homeowner associations. 33 Depreciation And Amortization Depreciation and amortization remained constant at $3.5 million for the first nine months of 2000 and 2001. Debt issue costs declined $0.3 million to $1.1 million for the first nine months of 2001 as compared to $1.5 million for the same period in 2000. Although debt issue costs declined, both goodwill amortization and depreciation expense increased during the first nine months of 2001. Goodwill amortization increased 13% to $1.2 million for the first nine months of 2001 from $1.1 million for the same period in 2000. Goodwill associated with the Peppertree Acquisition is approximately $18.0 million and is being amortized over 20 years, while goodwill associated with the acquisition of Eastern Resorts is approximately $25.7 million and is being amortized over 40 years. Depreciation of the properties increased 17% to $1.2 million for the first nine months of 2001 from $1.0 million for the same period in 2000. The increase in depreciation is a result of a larger base of depreciable assets. Loss On Sale of Assets The Company recognized a $0.7 million loss on the sale of assets during the first nine months of 2001. The loss was incurred upon the sale of parcels of Peppertree property of $5.4 million. This transaction reduced notes payable by approximately $3.5 million. The Company is continuing its efforts to sell additional surplus land. General And Administrative General and administrative expense increased 4% to $8.8 million for the first nine months of 2001 from $8.5 million for the same period in 2000. General and administrative expense as a percentage of total revenue increased to 9.6% of total revenue for the first nine months of 2001, compared with 6.9% of total revenue for the same period in 2000. The increase in general and administrative expense as a percentage of total revenue principally reflects the decrease in total revenue. Payroll related expenses comprise the largest segment of general and administrative expense, representing approximately 53.4% of total general and administrative expense. Provision For Income Taxes The provision for income taxes for the nine months ended September 30, 2001 decreased 26% to $4.7 million from $6.4 million for the same period in 2000. The decrease is attributable to the decrease in pretax income during 2001 as compared to the same period in 2000. The provision for income taxes represents approximately 42.3% and 42.5% of pretax income for 2001 and 2000, respectively. Inflation Inflation has not had a material impact on the Company's revenues, operating income and net income during any of the Company's three most recent years. However, to the extent inflationary pressures affect short-term interest rates, a significant portion of the Company's debt service costs may be affected, as may be the interest rates the Company charges to its customers (both customers and developers). 34 Item 3. Quantitative and Qualitative Disclosures About Market Risk Information required by Item 3 is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Result of Operations in Item 2 above. PART II - OTHER INFORMATION Item 1. Legal Proceedings. The Company is currently subject to litigation and claims arising from employment, tort, contract, alleged negligence and construction matters, among others, all arising in the ordinary course of its business. Management does not expect any of these lawsuits or claims, even if adversely decided, to have a material adverse effect on the Company or its business. The Company is, however, required to disclose any material proceeding to which any director or officer has a material interest adverse to the Company, and any material bankruptcy, receivership or similar proceeding with respect to the Company. The Company is also required to disclose any proceeding that involves primarily a claim for damages if the amount involved, exclusive of interests and costs, exceeds ten percent (10%) of the current assets of the Company on a consolidated basis. Except as set forth herein, there have not been any new developments with respect to material proceedings to which any director or officer has a material adverse interest, or any material bankruptcy, receivership, or similar proceedings with respect to the Company, except as previously disclosed in the Company's most recent 10-K filing for year ended December 31, 2000, the Company's Form 10-Q filed May 15, 2001, for the quarterly period ended March 31, 2001, and the Company's Form 10-Q filed August 15, 2001, for the quarterly period ended June 30, 2001. As previously reported, the Company has filed a complaint against C. Wayne Kinser ("Kinser"), a director and former principal owner of Peppertree, and Pioneer Hotel Corporation, the sole general partner of Great Smokies Hotel Associates, L.P. The complaint was originally filed with the Supreme Court of New York but was voluntarily withdrawn and re-filed with the Superior Court Division of the State of North Carolina. The complaint is a result of the breach, by Kinser and the additional defendants, of the November 1999 Agreement and Plan of Reorganization (the "Agreement") pursuant to which the Company purchased various Peppertree entities. The complaint sets forth multiple causes of action, including a default under a promissory note held by a wholly owned subsidiary of the Company, and guaranteed by Kinser. The complaint further alleges that Kinser defaulted upon his obligation to make payment of taxes due and owing by various Peppertree entities and incurred prior to their acquisition by the Company, and that Kinser breached his fiduciary duty to the Company, as a result of his improper inducement of the Company to make a tax payment at a time when he served as a Director of the Company. The Company's action seeks recovery of more than $3 million from Mr. Kinser. This complaint includes an additional count, asserting that defendant Kinser has further breached his fiduciary duty to the Company by refusing to honor in good faith long standing business relationships, thereby tortuously interfering with the business of the Company and its subsidiaries. On October 8, 2001 the defendants filed their response to the complaint, entitled "Motion to Dismiss, Answer and Counterclaims." Defendants' 35 answer generally denied facts alleged in the complaint. Defendants' counterclaim contains four (4) separate counts or claims alleging: i) that the Company breached the Agreement by refusing to purchase the Holiday Inn SunSpree Resort ("Sunspree"); ii) that the Company owes Kinser an additional $350,000.00, representing a portion of the purchase price allegedly improperly applied to Peppertree's tax liabilities; iii) that the Company breached an agreement to manage the SunSpree resort; and iv) that the Company's attachment of the Sunspree in order to protect its anticipated recovery was wrongful. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. (a) Exhibits. The following exhibits are filed herewith: 10.1 Second Master Loan Modification Agreement entered into as of the 7th day of September, 2001, by and among Equivest FINANCE, INC., ("EFI"), EQUIVEST CAPITAL, INC. (f/k/a Resort Funding, Inc.), ("RFI"), Eastern Resorts Company, LLC, ("Company"), Eastern Resorts Corporation, ("ERC"), Ocean City Coconut Malorie Resort, Inc., ("Coconut Malorie"), Bluebeard's Castle, Inc., ("Bluebeard"), Castle Acquisition, Inc., ("Castle"), Avenue Plaza LLC, ("Avenue Plaza"), EQUIVEST WASHINGTON, INC., (f/k/a EFI D.C. Acquisition, Inc., successor to the interests of Capital City Suites, Inc.) ("EFI DC"), and EQUIVEST TEXAS, INC., ("Equivest Texas"), (EFI, RFI, the Company, ERC, Coconut Malorie, Bluebeard, Castle, Avenue Plaza, EFI DC and Equivest Texas shall be individually referred to as the "Borrower" and collectively referred to as the "Borrowers"), jointly and severally, and EFI, Equivest Maryland, Inc. (f/k/a EFI Maryland Acquisition, Inc.) ("Equivest Maryland"), Equivest Louisiana, Inc. (f/k/a EFI Louisiana Acquisition, Inc.) ("Equivest Louisiana"), and Equivest St. Thomas, Inc. (f/k/a EFI St. Thomas Acquisition, Inc.) ("Equivest St. Thomas"), (EFI, Equivest Maryland, Equivest Louisiana and Equivest St. Thomas shall be individually referred to as the "Guarantor" and collectively referred to as the "Guarantors"), jointly and severally, and CAPITALSOURCE FINANCE LLC, a Delaware limited liability company ("CapitalSource") and CAPITALSOURCE 36 HOLDINGS LLC, a Delaware limited liability company ("CapitalSource Holdings"). 10.2 Trust Agreement dated as of September 6, 2001, by and among CAPITALSOURCE FINANCE LLC ("CapitalSource"), EQUIVEST CAPITAL, INC. ("ECI" and in its capacity as a certificate holder hereunder, together with CapitalSource, the "Initial Certificate holders"), CS RESORTS, INC., as Owner Trustee, and THE CAPITAL TRUST COMPANY OF DELAWARE, OR DELAWARE TRUSTEE. (b) Reports on Form 8-K: The Company filed the following reports on Form 8-K during the quarter covered by this report: (i) August 9, 2001 Form 8-K announcing record income for second quarter and first six months; Diluted EPS Rises 25% for Second Quarter; Second Quarter Profit Margin Rises 49%; (ii) September 25, 2001 Form 8-K announcing completion of $37 Million Construction Loan Financing to Eliminate Debt Held by CS First Boston; SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, there unto duly authorized. EQUIVEST FINANCE, INC. By: /s/ Gerald L. Klaben, Jr. ------------------------- Gerald L. Klaben, Jr Senior Vice President and Chief Financial Officer Dated: November 14, 2001 37

EQUIVEST FINANCE INC 10-Q