SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event
reported):
June 19, 1997
EQUIVEST FINANCE, INC.
(Exact Name of registrant as specified in its charter)
Florida 0-18201 59-2346270
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
Two Clinton Square, Syracuse, New York 13202
(Address of principal executive offices)
(315) 422-9088
Registrant's telephone number, including area code
<PAGE>
Item 5. Other Events.
Presented below is a description of Equivest Finance, Inc.'s (the
"Company") business and management's discussion and analysis of the period
ended December 31, 1996 as compared to December 31, 1995. Filed as part of
this Current Report on Form 8-K are the unaudited 1996 consolidated financial
statements of the Company.
Description of Business
Introduction
General. The Company is a holding company which, through its wholly-
owned subsidiary, Resort Funding, Inc. ("Resort Funding") provides financing
to resort developers through the purchase of their vacation ownership
interests ("VOIs" or "timeshare intervals") and through the direct financing
of resort properties to be developed and sold to consumers pursuant to
timeshare interval programs. The Company's commitments on any single project
for purchase of consumer receivables typically range from $1 million to $20
million and commitments on any single project to a developer for acquisition
and development financing typically range from $200,000 to $10 million.
Prior to acquiring Resort Funding, the Company was an insurance premium
finance company licensed under the laws of the State of Florida. In 1995
Equivest discontinued operations as an insurance premium finance company.
Since February, 1996, all of the Company's business has been conducted
through Resort Funding.
Bankruptcy of Affiliated Companies and Related Litigation. Effective
February 16, 1996, the Company entered into the Agreement and Plan of
Exchange, dated as of February 16, 1996 (the "Exchange Agreement"), among the
Company, The Bennett Funding Group, Inc. ("BFG") and Resort Funding, pursuant
to which the Company acquired all of the common stock of Resort Funding from
BFG in exchange for the issuance to BFG of 10,000 shares of the Company's
Series 2 Preferred Stock and 3,000 shares of the Company's Convertible
Preferred Stock. As a result of the Exchange Agreement and certain prior
investments, BFG and an affiliate acquired beneficial ownership of
approximately 86% of the Company's voting shares.
Subsequent to the closing of the transactions contemplated by the
Exchange Agreement, BFG, along with its affiliate Bennett Management &
Development Corp. ("BMDC"), also a principal stockholder of the Company,
filed voluntary petitions (the "Petitions") for reorganization (Case Nos.
96-61376 and 96-61379, respectively) under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of New York (the "Bankruptcy Court").
On April 18, 1996, following the March 29, 1996 filing of the Petitions,
the U.S. Department of Justice appointed, and the Bankruptcy Court approved,
Richard C. Breeden as trustee in bankruptcy (the "Trustee") for BFG and BMDC,
as well as for certain other related debtors. Mr. Breeden was subsequently
appointed Trustee of Aloha Capital Corporation ("ACC"), The Processing Center
<PAGE>
("TPC") and other affiliates of BFG. Mr. Breeden served as Chairman of the
Securities and Exchange Commission (the "SEC") from 1989 to 1993, following
several years service in the White House and as a lawyer in private practice.
Mr. Breeden was the chairman of the world-wide financial services industry
group of the accounting firm of Coopers & Lybrand from 1993 to September
1996, when he resigned from Coopers & Lybrand to establish Richard C. Breeden
& Co., a firm specializing in aiding troubled companies and consulting on
global capital markets.
The Petitions were filed after (i) the SEC filed a civil complaint (the
"Civil Complaint") in the United States District Court for the Southern
District of New York (the "Court") against BFG, BMDC, certain of their
affiliates and Patrick R. Bennett, the Chief Financial Officer of BFG, No. 96
Civ. 2237 (JES) and (ii) the United States Attorney for the Southern District
of New York filed a criminal complaint (the "Criminal Complaint") in the
Court against Patrick Bennett alleging criminal violations of the antifraud
provisions of the federal securities laws and perjury. The SEC suit alleges
numerous violations of the antifraud provisions of the federal securities
laws, based in part on allegations of sales of fictitious equipment leases,
fraudulent misrepresentations to investors in private placements of debt
securities and misappropriation of corporate assets. In June of 1996 the
Trustee filed an adversary proceeding seeking more than $1 billion in damages
from, among others, prior controlling stockholders of BFG and its affiliates
and certain of their business associates, the previous auditing firm and
others.
Notwithstanding the allegations of fraudulent financial dealings at BFG
and BMDC, the Trustee has advised the Company that he has concluded, based on
his investigations to date, that the operations of Resort Funding were not
involved in the fraudulent activities of the type detailed in the complaints
described above and the Trustee's adversary proceeding. Moreover, the
Trustee has advised the Company that he has determined not to challenge the
transactions effected pursuant to the Exchange Agreement.
Loan Program. Resort Funding's primary product is the financing of
consumer timeshare receivables. The consumer notes are originated by the
timeshare developers with interest rates generally ranging from 10-18% and
amortization periods from 36-120 months. Typically the consumer notes have
an 84 month term and an interest rate of 11-16%. Resort Funding will usually
purchase the consumer notes at a negotiated price from the developer. In
addition, Resort Funding may also lend against the consumer notes at a
negotiated rate with the developer. These loans have an average period of 84
months, but cannot exceed 120 months. Acquisition and development loans and
consumer loans are usually overcollateralized. The consumer loans and
purchases of consumers loans by Resort Funding are typically structured with
full recourse to the developer.
Resort Funding's ability to acquire timeshare receivables and receivable
loans is not only reliant upon offering attractive receivable financing
products, but has become increasingly dependent on its ability to provide a
flexible acquisition and development program to the project developer.
Acquisition and development lending is provided to developers to acquire,
<PAGE>
construct and renovate resort properties. Resort Funding provides
acquisition and development loans that are primarily floating rate loans with
a minimum floor rate of interest, and maturities ranging from 3 to 5 years.
The loans require the developer to amortize the loan with a release fee for
every timeshare interval sold.
In addition, Resort Funding provides pre-construction funding which
provides developers funds to support pre-construction sales while
construction is taking place. These funds are usually required because most
states, in an effort to protect the consumer, require that all money
collected from the consumer (pursuant to the sales of the timeshare interval)
be placed in escrow until the certificate of occupancy for the resort is
issued. The term of these loans vary in length from 6 to 18 months and
typically provide for a loan of up to 50% of each timeshare interval sale
with the contract and cash receipts used as collateral. The 50% advance
allows the developer to fund sales and marketing costs. Once the certificate
of occupancy is issued, a reconciliation takes place at which time all of the
approved consumer contracts are either purchased or hypothecated and the
proceeds, along with the cash receipts, are used to pay off the interim loan.
At December 31, 1996, Resort Funding had agreements for resort
development financing with 18 developers covering 19 timeshare resort
complexes. Resort Funding's consumer contract lending results from interval
purchases at resorts owned by these developers and a limited number of other
resort developments not financed by Resort Funding. At December 31, 1996,
Resort Funding was committed to lend approximately $12.7 million in funds for
resort construction or renovation. Resort Funding has also agreed to
purchase consumer timeshare interval contracts from 31 resorts, subject to
satisfactory underwriting approval of each individual consumer.
Risk Factors
Bankruptcy of Affiliated Companies; Relationship to Bankruptcy. BFG and
BMDC, both affiliates of the Company, have filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Northern District of New York. The
Trustee has to date been successful in staying numerous civil actions against
various defendants, including the Company and Resort Funding, raising
allegations that the defendants were involved in the alleged wrongdoings of
BFG and BMDC and its principals. In addition, notwithstanding the
allegations of fraudulent financial dealings at BFG and BMDC, the Trustee has
advised the Company that he has concluded, based on his investigations to
date, that the operations of Resort Funding did not involve fraudulent
activities of the type detailed in the Civil Complaint, the Criminal
Complaint, and the Trustee's adversary proceeding. However, there can be no
assurance that the Trustee's continuing investigations of BFG and BMDC will
not yield different conclusions which could affect the Company.
The Company utilizes certain of its affiliates, including BMDC and BFG,
for certain of its administrative requirements. At December 31, 1996, the
Trustee beneficially controlled approximately 86% of the Company's
outstanding shares of voting stock, after giving effect to conversion of the
<PAGE>
preferred stock. In addition, Resort Funding owes BFG approximately $23.8
million pursuant to certain intercompany notes. On March 5, 1997, the
Trustee received bankruptcy court approval for an amendment to and
restatement of notes. Under the amended and restated note terms, the
principal amount of the notes cannot be called until after January 15, 1998
upon ninety days written notice to Resort Funding, unless the loans are in
default. It is likely that further modification of such notes will be
necessary. Any such modification would require approval of both the Trustee
and the bankruptcy court. No assurance can be given that the Trustee will
receive such bankruptcy court approval. The Trustee's primary responsibility
is to maximize assets for the benefit of the creditors of the bankrupt
estates.
Absence of a Public Market for the Common Stock and Preferred Stock.
There is no existing established market for the Common Stock of the Company
since the Company was delisted from the Nasdaq Stock Market in February,
1996. Accordingly, there has been no active trading market in the Common
Stock. The Company hopes to qualify for reinstatement in the future by the
Nasdaq Stock Market or listing on another securities exchange; however, no
assurance can be given that the Company will qualify for such reinstatement
or listing.
Additional Financing Requirements. Resort Funding's business is capital
intensive. Resort Funding's primary source of funding for new originations
is a $50 million purchase pledge facility with Holland Limited Securitization
Inc. (HLS), a multi-seller commercial paper issuer sponsored by ING (U.S.)
Capital Markets, Inc. ("ING") which expires in May 2000. At December 31,
1996, $6,031,396 was available under the facility and $43,568,604 was the
balance of funds used under the facility. The pledge facility is over
collateralized by approximately $10,000,000. ING continues to provide new
funds to Resort Funding pursuant to the facility, although certain defaults
under the facility may have occurred. ING has taken Resort Funding out of
its securitization program and increased the interest rate on the facility by
approximately 3%. ING has advised Resort Funding that due to the bankruptcy
of BFG, its mandate from its parent company is to wind down and ultimately
terminate its lending relationship with Resort Funding. The Company's future
success depends, in part, on its ability to locate and obtain additional
financing on competitive terms. To the extent that such additional financing
is not available, the Company's ability to make new loans and to meet its
financing commitments will be impaired.
Impact of Real Estate Economic Cycles. The business risks associated
with the Company's business become more acute in an economic slowdown. Such
an environment is generally characterized by decreased demand for vacation
real estate and declining real estate values in many areas of the county.
Delinquencies, foreclosures, and loan losses generally increase during
economic slowdowns or recessions and any such future slowdowns could
adversely affect future operations of the Company. Moreover, there can be no
assurance that the timeshare interval industry will not decrease even in a
stable economic environment, whether in response to sales practice abuses,
oversupply or other factors.
<PAGE>
Prepayments. A significant portion of the Company's revenues has been
comprised of interest earned over the term of the contract on the VOIs
purchased. If prepayments are made, as may happen if changes in interest
rates occur in the future, a decrease in earnings will result. However, such
repayments will not result in any future earnings decreases caused by
accounting restatements.
Dependence on Senior Management. The Company's success depends upon the
continued contributions of Resort Funding's small senior management team and
the Trustee. The loss of services of certain of Resort Funding's executive
officers could have a material adverse effect upon the Company's business.
Regulation. The operations of the Company are subject to extensive
regulation by federal, state and local government authorities and are subject
to various laws and judicial and administrative decisions imposing various
requirements and restrictions including, among other things, regulating
credit granting activities, establishing maximum interest rates and finance
charges, requiring disclosure to customers, and setting collection,
repossession and claims handling procedures and other trade practices.
Although the Company believes that it is in compliance in all material
respects with applicable local, state and federal laws, rules and
regulations, there can be no assurance that more restrictive laws, rules and
regulations will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to sell
loans, further limit or restrict the amount of interest and other charges
earned under loans purchased by the Company, or otherwise adversely affect
the business or prospects of the Company.
Environmental Liabilities. In the course of its business, the Company
may acquire in the future properties securing loans it has arranged that are
in default. There is a risk that hazardous substances or waste could be
discovered on such properties after foreclosure by the Company. In such
event, the Company might be required to remove such substances from the
affected properties at its sole cost and expense. There can be no assurance
that the cost of such removal would not substantially exceed the value of the
affected properties or the loans secured by the properties or that the
Company would have adequate remedies against the prior owner or other
responsible parties, or that the Company would not find it difficult or
impossible to sell the affected properties either prior to or following any
such removal.
Lack of Certain Audited Financials. On March 29, 1996, Mahoney Cohen
Rashba & Pokart, PC ("Mahoney Cohen") sent a letter to BFG resigning as BFG's
auditor and withdrawing its reports on all financial statements of BFG and
its related entities including Resort Funding. In the letter, Mahoney Cohen
stated that such financial statements were based on, among other things,
information supplied by Patrick Bennett and, in light of the allegations that
Mr. Bennett had provided Mahoney Cohen with false and misleading information
relating to BFG and BMDC, Mahoney Cohen had no choice but to withdraw its
reports on such financial statements. Mahoney Cohen is among the defendants
of the Trustee's adversary proceeding as a result of their audits of BFG.
<PAGE>
Unpaid Preferred Stock Dividends. As of December 31, 1996 the Company
has cumulative undeclared and unpaid dividends on its preferred stock of
$527,051. No Common Stock dividends can be paid until all preferred stock
dividends are paid. See "Management's Discussion and Analysis - Liquidity
and Capital Resources."
Collection and Delinquency Rules Associated with VOI Loans. Resort
Funding's collection of payments due under the VOI loans is subject to
certain risks associated with VOI ownership. Although individual owners are
obligated to make payments under their notes irrespective of any defect in,
damage to, or change in conditions of the vacation resort (such as erosion,
construction on adjacent or nearby properties, or environmental problems) or
any breach of contract by the property owners association to provide certain
services to the VOI borrowers (including any such breach resulting from a
destruction of the resort) or of any other loss of benefits of ownership of
their unit (including cessation of the ability of the borrowers to exchange
their time intervals in the resort for time intervals in other unaffiliated
resorts), any such material defect, damage, change, breach of contract, or
loss of benefits is likely to result in a delay in payment or default by a
substantial number of the borrowers whose VOIs are affected.
Competition. The financing of VOI loans is highly competitive and many
of Resort Funding's competitors have significantly greater financial
resources. Resort Funding targets mature resorts with completed amenities
and established property owners associations, as well as new property
construction with established developers. There can be no assurance that
Resort Funding's strategies will be effective.
Substantial Leverage. Resort Funding is highly leveraged. At December
31, 1996, Resort Funding had notes payable obligations of $106.7 million, and
equity capital of approximately $4 million. As stated above, approximately
$23.8 million of these notes are owed to BFG. Resort Funding's high degree
of leverage could (i) make it more vulnerable to changes in general economic
conditions or downturns in industry conditions than its competitors; (ii)
restrict Resort Funding's ability to take advantage of certain business
opportunities since a substantial portion of Resort Funding's cash flow will
be committed to the payments of interest and principal on its indebtedness;
and (iii) restrict Resort Funding's ability to obtain additional financing in
the future.
Mismatch of Interest Rates. Loans to consumers for timeshare purchases
are at fixed interest rates and Resort Funding borrows at a floating interest
rate. Because Resort Funding does not utilize interest rate hedges at this
time, this mismatch, in an increasing interest rate environment, could
adversely affect Resort Funding's performance.
Concentration of Acquisition and Development Loans. There is
substantial concentration of Resort Funding's acquisition and development
loan portfolio in a small number of borrowers. A default by any of these
developers could materially affect Resort Funding's performance. See "--
Acquisition and Development Loan Portfolio".
<PAGE>
VOI Loans
Underwriting. Resort Funding has established loan underwriting
criteria and procedures designed to minimize credit losses on its portfolio.
The loan underwriting process includes reviewing each borrower's credit
application, which includes employment and salary information, banking
information and current debts, reviewing each borrower's credit history
through one of the major credit bureau agencies, calculating debt-to-income
ratios for affordability and a telephone verification to each borrower
confirming the terms and conditions of the contract in addition to confirming
the correct billing address. The primary focus of Resort Funding's
underwriting is to assess the likelihood that the borrower will repay the
loan as agreed. However, because of the relatively small size of developers
funded by Resort Funding, unique aspects of particular projects or other
factors, Resort Funding can and does depart from its normal loan underwriting
criteria on a case by case basis.
Collections and Delinquencies. Resort Funding believes that its low
annual delinquency rate of approximately 3% (after chargebacks of such
delinquent contracts to the developer as described below) for the VOI
portfolio is attributable to the application of its credit underwriting
criteria, collection efforts as soon as a borrower is 10-15 days delinquent,
as well as personal and corporate guarantees and the company's holdback on
every loan. It is also attributable, in part, to the fact that Resort
Funding's developer customers have never failed or otherwise ceased to be
able to perform repurchase obligations with respect to defaulted contracts.
There is no assurance that this favorable experience will continue.
Collection efforts are managed on a daily basis and unless dictated
otherwise, consist of telephone contact and dunning notices. Collection
services begin when an account is 10 days delinquent. At this time the
Company attempts to contact the borrower and determine the reason for the
delinquency and to attempt to bring the account current. Resort Funding also
generates and mails weekly delinquency reports to developers. This is done
in an effort to make the developer aware of any delinquent accounts and
encourage the developer to assist with certain delinquent accounts. If the
status of the account continues to deteriorate, an analysis of the
delinquency is reviewed by the collection manager to determine the
appropriate action. Generally, when a loan becomes 90 days delinquent in
accordance with its original terms and it is determined the amounts are
uncollectible from the borrower, the loan is charged back to the developer.
Regulations and practices regarding the rights of the mortgagor in
default vary greatly from state to state. To the extent permitted by
applicable law, Resort Funding collects late charges and returned check fees
and records these items as additional revenue.
Loan Servicing. Resort Funding's VOI portfolio, as required by ING, is
serviced jointly by an unaffiliated third party (the "Servicer") and Resort
Funding. The Servicer issues coupon books to customers on an annual basis
and collects payments from approximately 11,000 VOI borrowers. Resort
Funding is charged a fee for the setup of each VOI borrower with the Servicer
<PAGE>
as well as a fee per VOI borrower for each coupon book. Resort Funding
provides collection, including contacting delinquent borrowers by telephone
and mail, for the approximately 11,000 VOI borrowers that remit payment to
the Servicer. Resort Funding also services approximately 5,400 VOI borrowers
on a complete basis, utilizing its own facilities and personnel and those of
TPC. This includes monthly invoice generation to customers, collection of
payments and collection procedures if required.
Characteristics of the VOI Portfolio. The following table sets forth
the characteristics of the VOI portfolio of Resort Funding as of December 31,
1996:
<TABLE>
<CAPTION>
Percentage of Percentage of
Principal Principal Number of Number of
Principal Balance Amount Amount Loans Loans
--------------------------- ------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Less than $4,000 $ 9,934,000 15.3% 4,344 34.0%
$4,000 - $5,999 20,172,000 31.0 4,035 31.6
$6,000 - $7,999 19,344,000 29.8 2,802 21.9
$8,000 - $9,999 9,829,000 15.1 1,107 8.7
More than $10,000 5,740,000 8.8 483 3.8
----------- ----- ------ -----
$ 65,019,000 100.0% 12,771 100.0%
Total =========== ===== ====== =====
</TABLE>
At December 31, 1996, the weighted average interest rate of the VOI loans
included in Resort Funding's portfolio was 13.83% and the weighted average
remaining maturity was approximately 66 months. The following table sets
forth as of December 31, 1996 the distribution of interest rates payable on
the VOI loans:
<TABLE>
<CAPTION>
Percentage of
Principal Principal
Interest Rate Amount Amount
---------------------- ------------------------ ------------------------
<S> <C> <C>
Less than 10.0% 7,000 0.1 %
10.0% - 11.9% 3,252,000 5.0 %
12.0% - 13.9% 30,005,000 46.1 %
14.0% - 15.9% 30,668,000 47.2 %
16.0% - 11.9% 1,087,000 1.6 %
----------- -----
65,019,000 100.0 %
Total =========== =====
</TABLE>
At December 31, 1996 Resort Funding's VOI borrowers resided in all 50 states,
the District of Columbia and 6 territories and foreign countries.
<PAGE>
Acquisition and Development Loan Portfolio
General. Resort Funding also provides acquisition and development loans
to resort developers. At December 31, 1996 Resort Funding's outstanding
receivables for acquisition and development loans totalled $31.4 million.
Resort Funding has an underwriting process for acquisition and development
loans which includes site inspection and review of the following:
developer's experience and financial condition, market suitability for
timeshare development, resort sales and marketing program (including market
competition and sales team experience), and the development budget. The
final approval for the acquisition and development loan is made by the
corporate credit committee which is comprised of Resort Funding's senior
management.
Characteristics of Acquisition and Development Loan Portfolio.
<TABLE>
<CAPTION>
Principal Principal Percentage of
# of Resorts Balance Amount Principal Amount
- --------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
7 < $1 million $ 2,600,000 8.3%
4 1-2 million 5,100,000 16.2
4 2-3 million 9,900,000 31.5
1 3-4 million 3,400,000 10.8
2 > 5 million 10,400,000 33.2
----------- ------
Total $31,400,000 100.0%
=========== ======
</TABLE>
Interest rates on acquisition and development loans generally range from
12-13%. At March 31, 1997, all of Resort Funding's acquisition and
development loans were current except for one in the amount of $5.5 million
for which Resort Funding believes it has adequate collateral. In addition,
Resort Funding has recently reached agreement with respect to another
obligor, who owes Resort Funding $2.7 million, who the Company alleged had
been in default with respect to certain payments.
Regulation
The industry is subject to extensive regulation by the federal
government and the states and foreign jurisdictions in which the resort
properties are located and in which vacation packages and VOIs are marketed
and sold. At the federal level, the Federal Trade Commission has taken the
most active regulatory role through the Federal Trade Commission Act, which
prohibits unfair or deceptive acts or competition in interstate commerce.
Other federal legislation to which Resort Funding is or may be subject to
appears in the Securities Act of 1933, the Truth in Lending Act, the Equal
Opportunity Credit Act and the Interstate Land Sales Full Disclosure Act. In
<PAGE>
addition, many states have adopted specific laws and regulations with respect
to the sale of vacation packages and interval ownership programs.
Resort Funding is a member of the American Resort Developers Association
(the "ARDA"), the principal trade association representing the segment of the
leisure industry that deals with ownership of resort and vacation products.
Membership in ARDA entitles Resort Funding to various benefits and services,
including advertising in ARDA publications and exhibiting at trade shows.
ARDA has adopted a Code of Standards and Ethics, which sets forth standards
of conduct and ethics to which Resort Funding is subject.
Competition
The financing of resort developers through purchase of VOIs and direct
financing of developer's acquisition and development of resort properties is
highly competitive, with competition occurring primarily on the basis of term
and interest rates of the loans and customer service. Competitors in the
financing business include commercial financial institutions, major lodging,
hospitality and entertainment companies and finance companies, most of which
have significantly greater resources than the Company. There can be no
assurance that Resort Funding will not face increased competition from
competitors currently in the business or new entities entering the business.
Resort Funding believes that it competes principally on the basis of (i)
superior industry knowledge and experience, (ii) providing timely and
complete customer service, (iii) providing acquisition and development loans,
(iv) by attracting borrowers whose needs are not met by traditional financial
institutions and (v) providing developers with complete consumer receivable
servicing.
Employees
As of December 31, 1996, Resort Funding had 23 full-time and 9 part-time
employees. Resort Funding's employees are not covered by a collective
bargaining agreement. Resort Funding considers its relations with its
employees to be good.
Management's Discussion and Analysis
Since Equivest Finance Inc. conducted essentially no business during
1995 and 1996 other than certain discontinued operations, the following
presentation and discussion relates to Resort Funding and its operations.
<PAGE>
SELECTED FINANCIAL DATA
Resort Funding, Inc.
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/96 12/31/95
------------- -----------
(unaudited)
<S> <C> <C>
Revenues:
Interest $ 12,998,000 $ 11,022,000
Gain on Sales of Contracts 422,000 1,373,000
Other Income 843,000 800,000
------------- ------------
Total Revenue 14,263,000 13,195,000
------------- ------------
Costs and Expenses:
Provision for doubtful receivables 179,000 794,000
Amortization of financing costs 662,000 210,000
Interest 8,270,000 5,982,000
Selling, General and Administrative 2,980,000 4,087,000
------------- -----------
Total Costs and Expenses 12,091,000 11,073,000
------------- -----------
Income Before Provision for Taxes 2,172,000 2,122,000
Provision for Income taxes
Current 815,000 1,133,000
Deferred (166,000) (538,000)
------------- -----------
Total Provision for Income Taxes 649,000 595,000
------------- ------------
Net Income $ 1,523,000 $ 1,527,000
Retained Earnings at Beginning of Period $ 1,830,000 $ 303,000
------------- -----------
Retained Earnings at End of Period $ 3,353,000 $ 1,830,000
============= ============
</TABLE>
Resort Funding Comparison of Year Ended December 31, 1996 to December 31,
1995
Revenues increased 8.1% to $14,263,000 for the year ended December 31,
1996, from $13,195,000 for the year ended December 31, 1995 as a result of a
17.9% increase in interest revenue to $12,998,000 in 1996 from $11,022,000 in
1995. Interest on consumer contracts increased by 1.5% in 1996 to $8,285,000
from $8,161,000 and interest on acquisition and development loans increased
54.4% in 1996 to $4,256,000 from $2,756,000 in 1995 because of the increase
in outstanding loans held by the Company.
Interest revenue was partially offset by a decrease of 69.3% to $422,000
in 1996 from $1,373,000 in 1995 on gains on the sale of consumer contracts.
This decrease was the result of a prohibition on sales of loans after March
31, 1996 imposed by the Company's primary lender.
<PAGE>
Other income increased by 5.4% in 1996 to $843,000 from $800,000 in 1995
primarily as the result of an increase in charge back fees and a one time
special origination fee in 1996 partially offset by a decrease in origination
fees and service income.
Interest expense increased 38.2% in 1996 to $8,270,000 from $5,982,000
in 1995. Interest expense increased primarily because of the increase in the
interest rate on the ING facility which such expense increased 260.0% to
$2,535,000 from $704,000. Interest expense on the ING facility also
increased because of the higher balances outstanding caused by ING's
prohibition on the sales of loans by the Company. Interest expense on other
bank notes increased in 1996 by 364.1% to $3,411,000 from $735,000 in 1995
due to an increase in the borrowing levels. Intercompany interest expense in
1996 decreased by 48.8% to $2,051,000 from $4,004,000 in 1995 due primarily
to the repayment of intercompany debt as the ING facility was drawn down in
early 1996.
Selling, General and Administrative costs decreased 27.1% in 1996 to
$2,980,000 from $4,087,000 in 1995 primarily as a result of decreased
application, recording and processing fees paid to an affiliate of the
Company. Securitization facility fees decreased by 70.0% as a result of the
discontinuation of the ING conduit facility, and payroll related expenses
decreased by 17.7% as a result of termination by the Trustee of the prior
practice of allocating certain parent and affiliate compensation expenses to
the Company. These reductions were partially offset by an increase in
outside services of 242.6% in 1996 to $483,000 from $141,000 in 1995.
Liquidity and Capital Resources
Resort Funding's primary source of financing for new originations is a
$50 million purchase pledge facility with ING which expires in May 2000. At
December 31, 1996, $6,031,396 was available under the facility and
$43,968,604 was the balance of funds used under the facility. ING continues
to provide funds to Resort Funding pursuant to the facility, although certain
defaults under the facility may have occurred. The ING debt is
collateralized by security agreements on the pledged receivables and
assignments of payments due on the collateral. Additionally, the facility
agreements contain both specific and general covenants including maintenance
of specified collateralization and default rates with respect to pledged
receivables, and tangible overall net worth requirements. Since April 10,
1996 interest on borrowings has been at the bank's prime rate plus 2%.
In September 1996, the Trustee submitted a motion on behalf of BFG and
ACC (collectively, the "Debtors") pursuant to Federal Rule of Bankruptcy
Procedure 9019 ("Rule 9019") for approval of the compromise and settlement of
the claim(s) of certain lenders to BFG and ACC (the "Banks") arising out of
the lease financing agreements pursuant to which the Banks made loans to the
debtors. The motion, which was approved by the bankruptcy court, required
the Banks to make a new, interest-only term loan to Resort Funding at
favorable 1/2 to 4% interest rates (the "Settlement Loans"). At December 31,
1996, Resort Funding had received $14,395,521 from the Banks in Settlement
Loans, on which interest is payable in monthly installments through 2003.
<PAGE>
Resort Funding is obligated to pay an arrangement fee of 3% per annum to the
Trustee based on the unpaid principal balance of the new term loans. A
portion of the proceeds of the Settlement Loans, $7,437,968, were on-loaned
to the Trustee to purchase the Banks' loans to BFG or ACC. Resort Funding's
loan to the Trustee bears interest at 10% per annum and is non-recourse to
the Trustee or the Debtors' estates. The Trustee pledged certain rent
collateral to Resort Funding to secure the loans from Resort Funding.
In December 1996 Resort Funding received approval of a bond exchange
agreement with its public bondholders. The outstanding bond principal
balance and accrued and unpaid interest of $3.5 million were exchanged for
unsecured promissory notes which bear interest at 8% per annum payable
monthly. The promissory notes mature on December 1, 1998. Resort Funding is
current on its obligations under the new notes.
On March 5, 1997, the Trustee received bankruptcy court approval for an
amendment to and restatement of certain demand loans in the amount of $23.8
million between Resort Funding and BFG. Under the amended and restated note
terms, the principal amount of the notes is not due until a demand therefor
is made upon ninety days written notice to Resort Funding. Unless the loans
are in default no such demand for payment may be made prior to January 15,
1998. Depending on the type of default, the notes and accrued interest would
be either payable upon written notice or payable without notice. It is
likely that further modification of such notes will be necessary. Any such
modification would require approval of both the Trustee and the bankruptcy
court.
In July 1991, the Company issued 575,000 shares of Series 1 Class A
12 1/2% Cumulative Convertible Preferred Stock, par value $3.00 (the
"Cumulative Convertible Preferred Stock"). As of May 31, 1997, all but 9,915
shares of the Cumulative Convertible Preferred Stock had been converted into
the Company's Common Stock. The holder of the Cumulative Convertible
Preferred Stock is entitled to receive, when and if declared by the Board of
Directors of the Company, $.375 per share per annum payable on March 31, June
30, September 30 and December 31 of each year. The holders of the Cumulative
Convertible Preferred Stock are entitled to elect two directors if the
Company shall fail to pay dividends for four or more consecutive quarterly
dividend periods. The Company has failed to pay dividends on the Cumulative
Convertible Preferred Stock since December 31, 1995. Dividends on the
Company's Common Stock cannot be paid until such Cumulative Convertible
Preferred Stock dividends are paid in full.
The Company issued 10,000 shares of Series 2 Preferred Stock, par value
$3.00 (the "Series 2 Preferred Stock") and 3,000 shares of Convertible
Preferred Stock (the "Convertible Preferred Stock") to BFG in exchange for
all the stock of Resort Funding. The Series 2 Preferred Stock dividends are
cumulative and payable quarterly when declared by the Company at the rate of
$60.00 per annum per share. At December 31, 1996, the cumulative undeclared
and unpaid dividends amounted to $523,333. Dividends on the Company's Common
Stock cannot be paid until such Convertible Preferred Stock Dividends are
paid in full. The holder of the Series 2 Preferred Stock is entitled to the
number of votes which equals 20% of the total number of votes of the Company
<PAGE>
after taking into account Common Stock and Convertible Preferred Stock. The
Company may at its option any time after the February 16, 2002, redeem the
Series 2 Preferred Stock in whole or part at the $10,000,000 liquidation
value plus accrued and unpaid dividends.
The Convertible Preferred Stock dividends are cumulative and payable
quarterly when declared by the Company at the rate of $60.00 per annum per
share effective after February 16, 1997. Dividends on the Company's Common
Stock cannot be paid until the dividends on the Convertible Preferred Stock
are paid in full. Each share of Convertible Preferred Stock is mandatorily
convertible into 2,500 shares of the Company's Common Stock as soon as the
Company has a sufficient number of authorized and unissued shares reserved to
permit the conversion. The holder of the Convertible Preferred Stock is
entitled to the number of votes which is equal to the number of shares Common
Stock into which the Convertible Preferred Stock is convertible. In the
event of voluntary or involuntary liquidation by the Company, the holder of
the Convertible Preferred Stock is entitled to a $1,000 per share liquidation
value and all accrued and unpaid dividends, whether or not dividends were
declared by the Board of Directors.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
The following exhibits are being filed herewith:
28. Unaudited consolidated balance sheets of the Company as of December
31, 1996 and the related unaudited consolidated statements of
earnings, stockholders' equity and cash flows for 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
hereunto duly authorized.
EQUIVEST FINANCE, INC.
/s/ Thomas J. Hamel
By: ----------------------------
Thomas J. Hamel, Director
Dated: June 19, 1997
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page No.
- ------- ----------- --------
28 Unaudited consolidated balance sheets of
the Company as of December 31, 1996 and
the related unaudited consolidated
statements of earnings, stockholders'
equity and cash flows for 1996.
Exhibit 28
Consolidated Financial Statements
EQUIVEST FINANCE, INC.
AND SUBSIDIARIES
December 31, 1996
<PAGE>
Consolidated Financial Statements(unaudited)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
Consolidated Financial Statements(unaudited)
Consolidated Balance Sheet(unaudited)....................................
Consolidated Statement of Income(unaudited)..............................
Consolidated Statement of Equity Accounts(unaudited) ....................
Consolidated Statement of Cash Flows(unaudited)..........................
Notes to Consolidated Financial Statements...............................
<PAGE>
CONSOLIDATED BALANCE SHEET(unaudited)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash $ 4,037,201
Receivables:
Accounts receivable 6,234,491
Notes and advance receivable, net 90,307,500
Less allowance for doubtful receivables (1,979,182)
------------
94,562,809
Accounts receivable-related party 671,411
Notes receivable-related party 7,537,968
------------
Total Receivables 102,772,188
Deferred financing costs, less amortization
of $922,702 3,859,554
Cash--restricted 1,128,773
Other assets 1,406,091
------------
$113,203,807
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and other liabilities:
Accounts payable $ 715,698
Accounts payable--related parties 680,842
Accrued expenses and other liabilities 994,788
-------------
2,391,328
Notes payable:
Recourse notes payable 37,925,876
Non-recourse notes payable 41,500,180
Notes payable 3,516,140
Notes payable--related party 23,803,257
-------------
Total Notes Payable 106,745,453
-------------
109,136,781
SUBSEQUENT EVENTS AND CONTINGENCIES
12.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
$3 par value; 1,000,000 shares authorized,
9,915 shares issued and outstanding 29,745
PREFERRED AND COMMON STOCK AND OTHER CAPITAL
Cumulative Redeemable Preferred Stock--Series 2
Class A, $3 par value; 15,000 shares authorized,
10,000 shares issued and outstanding 30,000
Cumulative Convertible Preferred Stock--Series 2,
$3 par value; 3,000 shares authorized, issued and
outstanding 9,000
Common Stock, $.05 par value; 10,000,000 shares
authorized, 9,484,847 shares issued and outstanding 474,243
Additional paid in capital 6,330,956
Retained earnings (deficit) (2,806,918)
------------
4,037,281
------------
$113,203,807
============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF INCOME(unaudited)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
REVENUE
Interest $12,997,682
Gains on sales of contracts 422,328
Other income 843,349
-----------
14,263,359
COSTS AND EXPENSES
Provision for doubtful receivables 178,543
Interest 8,270,593
Amortization of financing costs 662,390
Selling, general and administrative 3,462,588
-----------
12,574,114
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,689,245
PROVISION FOR INCOME TAXES
Current 195,000
Deferred (166,000)
------------
29,000
------------
NET INCOME $ 1,660,245
============
EARNINGS PER COMMON SHARE
Weighted average shares outstanding 9,512,708
Fully diluted average shares outstanding 17,012,708
Net income $ 1,660,245
Preferred stock dividend requirement (527,051)
------------
Net income after preferred stock dividends $ 1,133,194
============
Primary earnings per share $0.12
============
Fully diluted earnings per share $0.07
============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF EQUITY ACCOUNTS(unaudited)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
Year ended December 31, 1996
<TABLE>
<CAPTION>
Redeemable
Additional Preferred Convertible
Paid Stock-- Preferred Retained
Common Common in Series 2 Stock-- Earnings
Total Shares Amount Capital Class A Series 2 (Deficit)
------------ ------------ ------------ ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 $2,377,026 9,484,847 $474,243 $6,369,956 $ -0- $ -0- $(4,467,163)
Issue Preferred Stock --
Series 2 Class A (30,000) 30,000
Issue Preferred Stock --
Series 2 ( 9,000) 9,000
Net Income 1,660,245 1,660,245
---------- --------- -------- ---------- ---------- --------- -----------
Balances, December 31, 1996 $4,037,281 9,484,847 $474,243 $6,330,956 $ 30,000 $ 9,000 (2,806,918)
========== ========= ======== ========== ======== ========= ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS(unaudited)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
Year ended December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income $ 1,660,245
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 683,926
Provision for doubtful receivables 178,543
Provision for deferred taxes (166,000)
Gains on sales of contracts (422,328)
Changes in assets and liabilities:
Increase in other assets (2,200,751)
Increase in restricted cash (39,808)
Decrease in accounts payable, cash overdraft
and accrued expenses (4,831,379)
Decrease in accounts payable--related parties (1,416,178)
---------
NET CASH USED IN OPERATING ACTIVITIES (6,553,730)
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of contracts 6,734,809
Sale of property and equipment 22,951
Increase in receivables, net (24,855,827)
----------
NET CASH USED IN INVESTING ACTIVITIES (18,098,067)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on loans payable--related party (3,461,772)
Proceeds from notes payable 280,156
Proceeds from recourse notes payable 38,021,805
Payments on recourse notes payable (22,785,337)
Proceeds from non-recourse notes payable 29,146,944
Payments on non-recourse notes payable (12,995,603)
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,206,193
----------
INCREASE IN CASH 3,554,396
Cash at beginning of year 482,805
----------
CASH AT END OF YEAR $4,037,201
==========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 124,682
Interest paid $ 6,223,101
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization: Equivest Finance, Inc. and Subsidiaries
(collectively, the "Company"), includes Equivest Capital Funding, Inc. and
Resort Funding, Inc. (formerly Bennett Funding International, Ltd.) and its
subsidiary, BFICP Corporation.
Equivest Finance, Inc.("Equivest") is a Florida licensed company which was in
the business of financing auto insurance premiums primarily in Florida. In
mid 1995, Equivest discontinued operating as an insurance premium finance
company and is now a holding company.
On February 16, 1996, Equivest entered into an Agreement and Plan of Exchange
with The Bennett Funding Group, Inc. ("BFG"). In this transaction, Equivest
acquired all of the capital stock of Resort Funding, Inc. ("Resort Funding")
from BFG in exchange for $10,000,000 liquidation amount of Equivest
Redeemable Preferred Stock and $3,000,000 liquidation amount of Equivest
Convertible Preferred Stock. The Convertible Preferred Stock is convertible
into 7,500,000 shares (approximately 44% of the outstanding shares after
giving effect to the transaction) of Common Stock of Equivest. Another
affiliated entity, Bennett Management and Development Corporation ("BMDC")
also owns approximately 42% of the Common Stock of Equivest. Prior to the
exchange transaction, BFG and BMDC owned approximately 75% of the Company's
voting stock. Subsequently, they own approximately 86% of the Company's
voting stock. Because of the relationships among the parties, the Company
accounted for the transaction as if it were a pooling of interest. The
accompanying consolidated financial statements for the year ended December
31, 1996 include Resort Funding and subsidiary for the full year. The
results of operations of the separate entities for the period January 1, 1996
through February 16, 1996 are immaterial.
Resort Funding and its subsidiary, BFICP Corporation, provide financing to
domestic and international timeshare resort developers (the "Resorts").
Financing provided includes consumer lending for timeshare intervals and
resort acquisition and development lending.
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Equivest and its subsidiaries, Equivest
Capital Funding, Inc. and Resort Funding and its subsidiary, BFICP Corporation.
All significant intercompany balances and transactions have been eliminated
in consolidation.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Interest Income: The Company recognizes interest income on consumer financing
contracts using the interest method over the term of the contract. It
recognizes interest income on outstanding resort acquisition and development
loans when earned, based upon the terms of the loan agreements.
Gains on Sales of Contracts: Gains on sales of contracts result from periodic
sales of consumer receivables sold on a nonrecourse basis. A gain is recorded
to the extent the net proceeds exceed the net investment in the consumer
receivables sold. Proceeds from the securitization and sales of consumer
receivables aggregated $4,041,300 in 1996.
Other Income: Other income primarily represents fees which are recognized as
income when the Company performs the related service. These services include
billing services for developers, servicing of accounts receivable sold under
its financing facility (discontinued after April 1996), and loan commitment,
chargeback and collection fees to Resorts.
Allowance for Doubtful Receivables: Receivables have been reduced by an
allowance for doubtful receivables. The allowance is an amount which management
believes will be adequate to absorb possible losses on existing receivables.
The evaluation considers past loss experience, known and inherent risks in the
portfolio, adverse conditions that may affect the borrower's ability to repay,
the estimated value of underlying collateral, and current economic conditions.
Receivables are charged against the allowance when management believes that
collectibility is unlikely.
The Company follows Statement of Financial Accounting Standards No 114 (SFAS
114) "Accounting by Creditors for Impairment of a Loan". Under SFAS 114, the
allowance for doubtful receivables for loans identified as impaired is
specifically determined using the loan's projected discounted cash flow or
its net collateral value. At December 31, 1996, the Company has no loans
specifically valued under SFAS 114.
Because of uncertainties in the estimation process, it is at least reasonably
possible that management's estimate of loan losses inherent in the loan
portfolio and the related allowance will change in the near term. That
amount cannot be estimated.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Deferred Financing Costs: Deferred financing costs represent unamortized
expenses associated with issuing certain debt and fees payable to trustee
resulting from bank settlement transactions (see Note I). Amortization of
these costs is computed on a straight-line basis over the term of the
associated debt and does not differ materially from that computed using the
effective interest method. The amortization of deferred financing costs,
included in selling, general and administrative expenses in the accompanying
statement of income, amounted to $662,390 for 1996.
Income Taxes: The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 (SFAS 109). SFAS 109 is an asset
and liability approach to accounting for deferred income taxes. This requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in tax laws or rates. A valuation allowance reduces deferred tax assets when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. Additional income tax accounting information for 1996 has
been disclosed in Note M to the consolidated financial statements.
Earnings Per Common Share: Primary earnings per common share is computed by
dividing net income less the preferred stock dividend requirements by the
weighted average number of common shares and, as appropriate, common stock
equivalents outstanding for the period. Fully diluted earnings per common
share assumes conversion of convertible preferred stock, elimination of the
related preferred stock dividend requirements and the issuance of common
stock for all other potentially dilutive equivalents outstanding.
NOTE B--CONTINGENT LIABILITIES
On March 28, 1996, both BFG and BMDC were named in a series of suits filed by
the Securities and Exchange Commission. On March 29, 1996, both entities
filed for bankruptcy court protection under Chapter 11 of the U.S. Bankruptcy
Code. At December 31, 1996, Resort Funding has outstanding notes (see Note
L) and accrued interest payable to BFG of $23,803,256 and accounts payable to
its affiliates of $680,842. Additionally, after the exchange described in
Note A, BFG and BMDC owned approximately 86% of the outstanding Common Stock
of the Company, assuming full conversion of their holdings of Convertible
Preferred Stock. Board level management of the Company is effectively under
the control of an independent bankruptcy trustee ("Trustee") whose primary
responsibility is to maximize assets for the benefit of the bankrupts'
creditors. The ultimate impact of these events on the Company's business
and operations is not presently determinable.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE B--CONTINGENT LIABILITIES--Continued
The Company has been named with BFG and its affiliates in two class action
type claims brought in connection with investments made by the claimants
through BFG or its other affiliates. The complaints have not yet been
answered and it is too early to assess the likelihood of an unfavorable
outcome. One action has been stayed by an order of the Bankruptcy Court and
the other will likely be stayed.
The Company is a defendant in a legal action filed by a former officer and
director of the Company against the Company and other parties containing
numerous allegations. The Company believes that this legal action is lacking
in merit and intends to vigorously defend the lawsuit.
NOTE C--CASH
The Company maintains accounts at several banks which customarily exceed the
FDIC insured limit of $100,000.
NOTE D--ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable consist of: (1) amounts due from timeshare interval
owners for maintenance and service charges which the Company remits to the
Resorts upon receipt, and (2) the principal amount of unpaid and delinquent
timeshare interval contracts which are receivable from Resorts under the
recourse provisions of applicable financing agreements. Receivables are
stated at their unpaid principal balances. Amounts due Resorts for
maintenance and service charges are included in accounts payable.
Notes and advance receivables include: (1) the unpaid balance from loans to
Resorts for acquisition and development of resort properties, (2) the unpaid
contract amounts receivable from timeshare interval owners less the unearned
income and holdbacks on funds borrowed under those contracts, and (3)
retained interests in receivables sold under securitization agreements.
Interest rates on these receivables range from 12% to 18% per annum.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE D--ACCOUNTS AND NOTES RECEIVABLE--Continued
The following are the components of notes and advance receivable as of
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Notes receivable--consumer contracts $94,047,861
Unearned interest income (27,846,532)
Holdbacks on consumer contracts (12,385,961)
-----------
Net consumer contract receivables 53,815,368
Notes and advance receivables--resorts 33,045,142
Retained interests in securitized receivables 3,446,990
-----------
$90,307,500
===========
</TABLE>
Substantially all consumer contracts are with full recourse to the resort
developers. Also, the Company's practice is to withhold approximately
fifteen percent of the purchase price of the consumer contracts until the
contract receivable has been fully collected. The amount of funds withheld
comprises holdbacks on consumer contracts.
Notes and advance receivables--resorts includes an advance to a resort of
$2,743,119 which is due in thirty-six equal monthly payments, including
interest at 12% per annum, provided there is sufficient cash flow from
designated timeshare sales. The advance was made under a five year agreement
which provides for the Company to receive fifty percent of defined cash flow
from a resort facility. Interest income is recognized as earned and
additional cash flow, if any, will be recognized as income when received.
The advance has been classified as a loan because it has been guaranteed by
the corporate partners of the developer and the borrower's investment meets
the requirements for loan classification versus an equity type investment.
In May 1997, the Company restructured the financing arrangement with the
resort in connection with the financing of a new resort. The five year
agreement was cancelled and the outstanding advance was converted to a
promissory note which bears interest at 12% per annum. The note is
collateralized by security interests in the unsold timeshare intervals at the
date of the note. Principal is required to be paid in stipulated amounts, as
timeshare intervals are sold. The note is also guaranteed by the corporate
partners of the developer.
Retained interests in securitized receivables represent the discounted amount
of collections from securitized receivables over the amounts due to investors
in the securitizations. Realization of the carrying value amount is based on
the declines during the period in the present value of the projected
collections using the same discount rate as was appropriate at the time of
securitization.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE D--NOTES AND ADVANCE RECEIVABLES--Continued
Unearned interest income relates to time share contracts and represents the
unamortized interest to be recorded in income over the remaining loan terms.
The activity in the allowance for doubtful accounts for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance--January 1, 1996 $1,800,640
Provision for uncollectibles 178,542
Charge-offs -0-
----------
Balance--December 31, 1996 $1,979,182
==========
</TABLE>
The Company's concentration of credit risk in its accounts and notes
receivable is substantially mitigated by credit and evaluation procedures.
The Company generally requires collateral and has set up reserves for
potential credit losses which have been within management's expectations.
At December 31, 1996, the Company had agreements for resort development
financing with 18 developers covering 19 timeshare resort complexes. The
Company's consumer contract lending results from interval purchases at
resorts owned by these developers and a limited number of other resort
developments not financed by the Company. At December 31, 1996, the Company
was committed to lend approximately $12.7 million in funds for resort
construction or renovation. The Company has also agreed to purchase consumer
timeshare interval contracts from 31 resorts, subject to satisfactory
underwriting approval of each individual consumer.
Based on their maturity dates, the gross receivables from resorts and
consumers (including unearned income and holdback amounts) are due during the
years ending December 31 as follows: 1997--$29,594,515; 1998--$19,147,350;
1999--$20,083,166; 2000--$14,482,998; 2001--$6,999,470; and thereafter--$0.
NOTE E--ACCOUNTS RECEIVABLE--RELATED PARTY
Accounts receivable--related party represents amounts due from affiliated
entities for advances made by the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE F--NOTES RECEIVABLE--RELATED PARTY
Notes receivable--related party is comprised of $100,000 due from an
affiliated entity (BMDC) which bears interest at 8.75%; and $7,437,968 due
from the bankruptcy Trustee in connection with the financing described in
Note I. The notes due from the Trustee bear interest at 10% and are
collateralized by third-party leases. In the event of default, the Company
can apply any unpaid amounts to its notes payable to these related parties.
NOTE G--RESTRICTED CASH
Restricted cash includes $951,079 on deposit with financial institutions at
December 31, 1996 in conjunction with requirements of lending agreements.
The amounts are held as security in case of default by the Company. As part
of the financing facility described in Note K, the Company is also required
to maintain an account for interest rate hedge purposes. The required
balance is determined monthly and amounts to $139,065 at December 31, 1996.
The remaining restricted cash of $38,629 at December 31, 1996 is a dual
signature account held jointly by the Company and a resort developer. The
cash is available only as payment for chargebacks on timeshare contracts
after approval by both joint account holders. All restricted cash accounts
are held in interest bearing accounts and several exceed the FDIC insured
limit of $100,000.
NOTE H--OTHER ASSETS
Other assets include deferred taxes--$824,824 (see Note M), accrued interest
receivable--$425,471, prepaid expenses, and furniture and equipment.
Substantially all furniture and equipment was fully depreciated at December
31, 1996.
NOTE I--RECOURSE NOTES PAYABLE
At December 31, 1996, recourse notes payable includes (1) outstanding loans
of $20,902,915 due to banks in monthly installments through 2001 which bear
interest at rates ranging from 9% to 11%; (2) outstanding loans of
$14,395,521 due to banks and others in monthly installments through 2003
which bear interest at rates ranging from 1/2% to 4%; and (3) a fee in the
amount of $2,627,440 due an affiliate in connection with arrangement of (2).
The notes are collateralized by security agreements and assignment of
payments due on consumer loans from timeshare intervals and resort
acquisition and development loans and, as further described below, third
party leases.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE I--RECOURSE NOTES PAYABLE--Continued
In November and December 1996, the Company obtained financing at
favorable 1/2% to 4% interest rates from banks and others who were creditors
of affiliated entities which had filed for bankruptcy protection as described
in Note B. The bankruptcy Trustee arranged this financing and borrowed part
of the proceeds ($7,437,968) from the Company in order to settle the
bankrupts' obligations with those creditors. As consideration for the
financing, the Company will pay a fee to the Trustee based on an annual rate
of approximately 3% of the unpaid principal balance of the loans. The
Company is expensing this fee as interest over the loan periods.
Subsequent maturities of recourse notes payable for the years ending December
31 are: 1997--$9,067,342; 1998--$5,020,891; 1999--$5,471,437; 2000--
$4,019,782; 2001--$4,865,444; and thereafter--$9,480,980.
NOTE J--NOTES PAYABLE
Notes payable consist of unsecured promissory notes which mature December 1,
1998. Interest at 8% per annum is payable monthly. The unsecured promissory
notes were issued during 1996 in connection with a bond exchange agreement.
The bond exchange agreement allowed the Company, after receiving more than
90% approval from the former bondholders, to include the outstanding bond
principal balance and accrued and unpaid interest as of November 30, 1996 in
the unsecured promissory note.
NOTE K--NONRECOURSE NOTES PAYABLE AND CONTRACT SECURITIZATION SALES
The Company has a $50,000,000 purchase/pledge financing facility with a bank
which expires in May 2000. Under this agreement, the Company's qualifying
consumer contract notes receivable can either be securitized and sold to the
bank without recourse or used as collateral for borrowings.
At December 31, 1996, $6,031,396 was available under the facility and
$43,968,604 was the balance of funds used under the facility including the
outstanding loan balance of $33,323,221. The remaining amount of $10,645,383
represents the balance of the facility used by the sale of consumer contract
notes receivable during 1995 and 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE K--NONRECOURSE NOTES PAYABLE AND CONTRACT SECURITIZATION
SALES--Continued
The debt is collateralized by security agreements on the pledged receivables
and assignments of payments due on the collateral. Additionally, the
agreement contains both specific and general covenants including maintenance
of specified collateralization and default rates with respect to pledged
receivables and tangible and overall net worth requirements.
Certain events of default under the agreement occurred as the result of the
bankruptcy filing by BFG and related events. However, the bank has not
declared the facility to be in default and has continued to provide funds to
the Company. Effective April 10, 1996, interest on borrowings has been at the
bank's prime rate plus 2%. In the event of termination, the bank could
allocate the outstanding balance to a fixed period at its discretion.
At December 31, 1996, the balance of recourse notes payable, $8,176,959,
includes (1) outstanding loans of $6,441,959 due to banks in monthly
installments through 2001 which bear interest at rates ranging from 9% to
11%; and (2) an outstanding loan of $1,735,000 due to a bank in monthly
installments through 2001 which bears interest at 3%.
NOTE L--RELATED PARTY TRANSACTIONS
Notes payable--related party includes an unsecured demand note of $18,803,257
and a subordinated demand note of $5,000,000 payable to BFG with interest at
10 1/2% per annum. On March 5, 1997, the Trustee received bankruptcy court
approval for an amendment to and restatement of the demand notes due BFG.
Under terms of the amended and restated notes the holder may not demand
repayment until after January 16, 1998 unless the notes are in default. The
holder is also required to give 90 days written notice to the Company.
Depending on the type of default, the notes and accrued interest would be
either payable upon written notice or payable without notice. BFG
subordinated $5,000,000 of its loan to the Company in connection with the
financing facility described in Note K. Under the financing agreements, the
subordinated debt is currently required for the purpose of meeting stipulated
minimum net worth amounts. Interest expense incurred on the related party
debt amounted to $2,050,773 for the year ended December 31, 1996.
BFG provides office facilities to the Company under a lease which expires
March 31, 2002. The lease provides for annual rental plus escalation for the
Company's percentage share of increases in real estate taxes and certain
operating and maintenance expenses. The minimum future annual rent for the
noncancellable lease term, excluding escalation, amounts to $161,213
($967,278 through 2002).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE L--RELATED PARTY TRANSACTIONS--Continued
Under an agreement which expired March 31, 1996, the Company paid BFG
$422,115 for various administrative services including billing, collection,
legal and management services.
The Company currently receives limited administrative services from BFG
related to billing consumers amounts due under timeshare interval contracts.
The expense amounted to $85,871 during 1996.
NOTE M--INCOME TAXES
The Company files a consolidated federal income tax return which includes all
of its subsidiaries. Each company files separate state income tax returns.
The Company acquired Resort Funding and BFICP Corporation on February 16,
1996 (see Note A). Accordingly, for federal income tax purposes, the
operations of these companies from February 17, 1996 to December 31, 1996 are
included in the Company's consolidated federal income tax return and their
operations prior to that date are included in the consolidated federal income
tax return of BFG.
The Company has established valuation allowances for its net operating loss
carryforwards because utilization of certain of these losses is limited due
to an "ownership change" (as defined by Section 382 of the Internal Revenue
Code of 1986, as amended) which occurred in June 1993 and because there is no
assurance that the Company will generate sufficient taxable earnings to
utilize the unrestricted loss carryforwards before they expire. Management
believes that all other net deductible temporary differences will reverse
during periods in which the Company generates net taxable income.
The consolidated provision for income taxes included in the accompanying
Statement of Income consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Current provision:
Federal $ -0-
State 195,000
---------
195,000
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE M--INCOME TAXES--Continued
<TABLE>
<CAPTION>
<S> <C>
Deferred provision:
Federal 31,000
State (197,000)
--------
(166,000)
--------
$ 29,000
========
</TABLE>
Net deferred tax assets of $824,824, included in Other Assets in the
accompanying balance sheet, are comprised of:
<TABLE>
<CAPTION>
<S> <C>
Receivable allowance $ 694,408
Net operating loss carryforwards 1,539,195
State income taxes, net of federal benefit 130,416
----------
2,364,019
Valuation allowance (1,539,195)
----------
$ 824,824
==========
</TABLE>
The provision for income taxes for the year ended December 31, 1996 is less
than amounts computed by applying the statutory rate (34%) to income before
income taxes for the following reasons:
<TABLE>
<CAPTION>
<S> <C>
Income taxes at statutory rates $ 589,000
Benefit of operating loss carryforwards (534,000)
State income taxes, net of federal income
tax benefit (2,000)
Other items (24,000)
--------
Provision for income taxes $ 29,000
========
</TABLE>
The Company had federal net operating loss carryforwards of approximately
$4,528,000 at December 31, 1996 which expire in the following years: 2007--
$1,872,000; 2008--$9,000; 2009--$2,001,000; and 2010--$646,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE N--12.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
Each share of this issue of preferred stock is convertible into 2.81 shares
of Common Stock at any time until August 26, 2006. It is also redeemable
through that date, at the Company's option, at a redemption price of $4 per
preferred share, provided that the closing bid of the Company's Common Stock
is at least $5 per share during each of the 20 business days preceding the
redemption notice. The Company is required to redeem, to the extent
permitted by law, any remaining outstanding shares at their $3 par value per
share by August 26, 2006 (or thereafter at the earliest possible date that
payment may be lawfully and properly made). Dividends on this issue are
cumulative and payable quarterly when declared by the Company. At December
31, 1996, the cumulative undeclared and unpaid dividends amount to $3,718.
NOTE O--PREFERRED STOCK CAPITAL
Cumulative Redeemable--Series 2 Class A: The holder of this issue is
entitled to the number of votes which equals 20% of the total number of
voting shares of the Company's stock after taking into account both Common
and Convertible Preferred Stock. In the event of liquidation, these shares
have a liquidation value of $1,000 per share ($10,000,000 in total) plus all
accrued and unpaid dividends, rank senior to the Series 2 Convertible stock
described below, and are equal in preference to the 12.5% Preferred Stock
described in Note N. The Company may, at its option any time after February
16, 2002, redeem this stock in whole or in part at its liquidation value plus
accrued and unpaid dividends. Dividends on this issue are cumulative and
payable quarterly when declared by the Company at the rate of $60 per annum
per share. At December 31, 1996, the cumulative undeclared and unpaid
dividends amount to $523,333.
Cumulative Convertible--Series 2: The holder of this issue is entitled to
that number of votes which is equal to the shares of Common Stock into which
it is convertible. Each share is mandatorily convertible into 2,500 shares
of Common Stock (7,500,000 shares in total) upon the date the Company has a
sufficient number of authorized and unissued shares reserved for this
conversion. In the event of liquidation, these shares have a liquidation
value of $1,000 per share ($3,000,000 in total) plus all accrued and unpaid
dividends. Dividends on these shares are cumulative from and after February
16, 1997 and will be payable quarterly when declared by the Company at the
rate of $60 per annum per share.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), Disclosure
about Fair Value of Financial Instruments, requires the disclosure of
estimated fair value of on- and off-balance sheet financial instruments. A
financial instrument is defined by SFAS 107 as cash, evidence of an ownership
interest in an entity, or a contract that creates a contractual obligation or
right to deliver or to receive cash or another financial instrument from a
second entity on potentially favorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS 107 specifies that
fair values should be calculated based on the value of one trading unit
without regard to any premium or discount that may result from concentrations
of ownership of a financial instrument, possible income tax ramifications,
estimated transaction costs that may result from bulk sales or the
relationship between various financial instruments. Fair values for the
Company's financial instruments are based on judgments regarding current
economic conditions, interest rate characteristics, loss experience and other
factors. Many of these estimates involve uncertainties and matters of
significant judgement and cannot be determined with precision. Therefore,
the calculated fair value estimates cannot always be sustained by comparison
to independent markets, and, in many cases, may not be realizable in a
current sale of the instrument. Changes in assumptions could significantly
affect the instruments.
Fair value estimates do not include anticipated future business or the values
of assets, liabilities and customer relationships that are not considered
financial instruments. Other assets and liabilities that are not considered
financial instruments include deferred tax assets, property and equipment,
and deferred financing costs. Accordingly, the estimated fair value amounts
of financial instruments do not represent the entire value of the Company.
Cash and Restricted Cash: The carrying amounts reported in the balance sheet
is their estimated fair value since the amounts are payable on demand.
Accounts and Notes Receivable: The estimated fair values of accounts and
notes receivable were developed using estimated cash flows and maturities
based upon contractual interest rates and historical experience and
discounting those cash flows using current market interest rates. The
Company's carrying value of accounts and notes receivables, including the
advance receivable, approximates their fair value. The Company's commitments
to lend as disclosed in Note D also approximate their fair value using the
same methodology for estimating fair value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
Notes Payable: The fair values of notes payable are estimated using rates
currently available to the Company for similar debt and remaining maturities
except that it is not practicable to estimate the fair
value of its related party indebtedness. The carrying amounts and fair
values of notes payable is summarized as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- ----------
<S> <C> <C>
Notes payable excluding related party
indebtedness $ 82,942,196 $77,229,196
Related party indebtedness 23,803,257
------------
$106,745,453
============
</TABLE>
12.5% Redeemable Convertible Preferred Stock: It is not practicable, because
of cost, to determine the estimated fair value of this relatively small
amount outstanding.
NOTE Q--STOCK OPTIONS
On September 2, 1988, the Board of Directors of the Company adopted a Stock
Option Plan (the "Plan") which was ratified by stockholders on the same date.
The Plan covers 100,000 shares of Common Stock and is intended to strengthen
the Company s ability to attract and retain qualified personnel by affording
such individuals an opportunity to hold a proprietary interest in the
Company. The Plan authorizes the issuance of the options covered thereby as
either "Incentive Stock Options" within the meaning of the Internal Revenue
Code of 1986, as amended, or a "Non-Statutory Stock Options." The Plan also
provides that no options may be granted after September 1, 1998. At December
31, 1996 there were no options outstanding under the Plan.
