SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to__________
Commission File Number: 0-18201
EQUIVEST FINANCE, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-2346270
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2 Clinton Square, Syracuse, New York 13202
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (315) 422-9088
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock. $.05 par value.
Series One Class A 12 1/2 % Cumulative Convertible Preferred Stock
(Title of Class)
Indicate by check mark whether the Registrant (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
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
The Company's revenues for the most recent fiscal year were $14,263,359.
The aggregate market value of the approximate 2,360,000 shares of Common
Stock of the Company outstanding as of August 29, 1997 held by non-affiliates
of the Company was approximately $9,440,000, calculated on the basis of the
closing price of such stock on that date. The total number of shares
outstanding of the Company's Common Stock, as of August 31, 1997, was
9,484,847.
<PAGE>
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1996
INDEX
PART I PAGE
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote 14
of Security Holders
PART II
Item 5. Market for Registrant's Common 15
Equity and Related Stockholder
Matters
Item 6. Management's Discussion and 16
Analysis of Financial Condition
and Results of Operations
Item 7. Financial Statements 19
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, 21
Promoters & Control Persons;
Compliance with Section
16(a) of the Exchange Act
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain 28
Beneficial Owners and Management
Item 12. Certain Relationships and Related 29
Transactions
PART IV
Item 13. Exhibits, List Reports on Form 30
8-K
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
General. Equivest Finance, Inc. (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 (formerly known as "Bennett Funding
International, Ltd."), the Company was an insurance premium finance company
licensed under the laws of the State of Florida. In 1995 the Company
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.
On March 29, 1996, 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 (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Northern District of New York (the "Bankruptcy Court").
On April 18, 1996, the U.S. Department of Justice appointed, and the
Bankruptcy Court approved, the Hon. 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 ("TPC") and certain other
affiliates of BFG. Mr. Breeden served as Chairman of the United States
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 to establish Richard C. Breeden & Co., a
firm specializing in aiding troubled companies and consulting on global
capital markets.
<PAGE>
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 former Chief Financial Officer of BFG
(Case 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 perjury and
criminal violations of the anti-fraud provisions of the federal securities
laws. The Civil Complaint alleges numerous violations of the anti-fraud
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 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.
On June 26, 1997, a federal grand jury issued a 43-count indictment
against Patrick Bennett, his brother Michael, and two associates on charges
ranging from conspiracy to obstruction of justice. The defendants were
arraigned on July 3, 1997, and were released after posting personal
recognizance bonds.
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 detailed in the complaints
described above and in 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. One of Resort Funding's two primary products is the
financing of consumer timeshare receivables, while the second is making
acquisition and development loans to fund construction of timeshare resorts.
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, 84 months). Resort Funding will usually purchase the
consumer notes at a negotiated price from the developer. Alternatively,
Resort Funding may lend against the consumer notes at a negotiated rate with
the developer. These "hypothecation" loans have an average period of 84
months, but cannot exceed 120 months. Consumer loans are usually over-
collateralized, and they are typically structured by Resort Funding with full
recourse to the developer.
Resort Funding's ability to acquire timeshare receivables and make
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, 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.
Such loans generally require the developer to amortize the loan with a
release fee for every timeshare interval sold applied to the outstanding
principal balance. In addition, these loans may include a fixed amortization
period if certain sales volumes are not achieved. Acquisition and development
<PAGE>
loans by Resort Funding are typically over-collateralized and are often
coupled with personal or corporate guarantees from the developer.
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 by developers
because most states, in an effort to protect the consumer, require that all
money collected from the consumer (pursuant to the sale of the timeshare
interval) be placed in escrow until the certificate of occupancy for the
resort is issued. The term of these pre-construction 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 timeshare contract and cash receipts used
as collateral. The 50% advance allows the developer to fund its 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 timeshare
interval purchases at resorts owned by these developers, as well as 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 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 Petitions in the
Bankruptcy Court. 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 the Company and Resort Funding
did not involve the fraudulent activities 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.
In certain instances, assets belonging to Resort Funding may have been
recorded in the name(s) of certain affiliated companies which have since
filed Petitions, while the economic substance of the transactions has been
recorded by Resort Funding. Restoring title of such assets to Resort
Funding will require approval of the Bankruptcy Court, which approval cannot
be assured.
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
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
<PAGE>
restatement of the intercompany 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. There is no assurance 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 National Association of Securities
Dealers Automated Quotation System ("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 for 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, $5,861,636 was available under the facility and
$44,138,364 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. Resort
Funding'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, Resort Funding's ability to make new
loans and to meet its financing commitments will be impaired.
Impact of Real Estate Economic Cycles and Lack of Product. The 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 country. 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, undersupply or other factors. Failure to generate new timeshare
intervals would adversely affect the Company's results. In addition, the
ready availability of financing for new timeshare projects through IPOs and
generous terms offered by numerous lenders could result in overbuilding and
an oversupply of intervals in the market. This could lead to declining values
for timeshare assets as has occurred in other real estate overexpansions.
<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 due to future changes in
interest rates or other factors, a decrease in earnings will result.
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 or the Trustee 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.
Withdrawal of 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 claimed it 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. The Company subsequently hired the accounting firm of Firley,
Moran, Freer & Eassa, P.C. ("FMFE") to serve as its independent auditor, and
FMFE has issued its opinion of the financial statements for the years ended
December 31, 1996 and December 31, 1995, which are included herein.
Unpaid Preferred Stock Dividends. As of December 31, 1996 the
Company had cumulative undeclared and unpaid dividends on its preferred stock
of $527,052. No Common Stock dividends can be paid until all preferred stock
<PAGE>
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
generally 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 the bankruptcy of the resort
developer), or of any other loss of benefits of ownership of their unit
(including cessation of the ability of the borrowers to exchange their
timeshare intervals in the resort for timeshare intervals in other
unaffiliated resorts), any such material defect, damage, change, breach of
contract, bankruptcy 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. In many cases the relatively small unpaid principal amount of
individual VOI notes may make normal judicial collection procedures
uneconomical. In addition, the bankruptcy of a resort developer would most
likely preclude such developer from honoring chargeback commitments. See
"Acquisition and Development Loan Portfolio."
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 developers 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, personal
and corporate guarantees, and Resort Funding's holdback on every loan. There
can be no assurance that this favorable experience will continue.
In July 1997, a resort developer customer of Resort Funding in Las
Vegas, Nevada filed for bankruptcy court protection. To date, Resort Funding
has purchased approximately $2.5 million of VOI loans from the now bankrupt
developer. Although to date the performance of these VOI loans is consistent
with the balance of Resort Funding's portfolio, there can be no assurance
that the bankrupt developer will be able to replace or repurchase contracts
that become delinquent, due to its financial condition. If the developer is
unable to repurchase or replace the delinquent contracts, Resort Funding may
experience material losses related to this portfolio. In addition, Resort
Funding has outstanding acquisition and development loans to this developer
of approximately $6 million.
Collection efforts are managed on a daily basis and, unless dictated
otherwise, consist of telephone contact and dunning notices. Collection
services usually begin when an account is 10 days delinquent. At that time,
Resort Funding 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
to 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 Resort Funding's 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 liabilities of the borrower
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
<PAGE>
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, 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 complete service includes monthly invoice generation
to customers, collection of payments and collection procedures if required.
<PAGE>
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>
Principal Percentage of Percentage of
Principal Balance Amount Principal Amount Number of Loans Number of 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
Total $65,019,000 100.0% 12,771 100.0 %
</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>
Principal Percentage of
Interest Rate Amount Principal 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%
Total 65,019,000 100.0%
</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.
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 totaled $31.4
million. Resort Funding has an underwriting process for acquisition and
development loans which includes site inspection and a 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
<PAGE>
by the corporate credit committee which is comprised of Resort Funding's
senior management.
Characteristics of Acquisition and Development Loan Portfolio.
<TABLE>
<CAPTION>
Percentage of
# of Resorts Principal Balance Principal 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 12-14%.
As previously noted, in July 1997 a Las Vegas, Nevada developer and
customer of Resort Funding filed for bankruptcy court protection. As of July
31, 1997, the developer had outstanding indebtedness on its acquisition and
development loans of approximately $6 million, which is secured by first and
third mortgages on the property. This amount owed includes principal,
accrued interest, and certain other fees relating to such loans. Though the
appraised value of this property is substantially in excess of the debt owed
to Resort Funding, there can be no assurance that the bankruptcy will not
affect the amount owed to Resort Funding. A loss by Resort Funding on this
loan could have a material impact on Resort Funding's financial statements,
and the Company.
As of July 31, 1997, a resort property located in Hilton Head, South
Carolina was approximately three months delinquent in payment of its
obligations to Resort Funding under an acquisition and development loan
agreement. As of July 31, 1997, Resort Funding was owed approximately
$140,000.00 by the developer in overdue payments. There can be no assurance
that the resort will bring its obligation current in the future. The balance
owed to Resort Funding under such acquisition and development loan as of July
31, 1997 was approximately $3.4 million. There can be no assurance Resort
Funding will receive principal payments relating to this obligation in the
short term, or that it will not incur a loss on this loan.
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 the purchase of VOIs and
the direct financing of developers' 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 from 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) 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.
<PAGE>
Item 2. Properties
The Company's offices are located at 2 Clinton Square,
Syracuse, New York 13202. The Company leases approximately 10,500 square
feet of office space from an affiliated entity at a cost of $13,309 per
month. The lease payments are adjusted annually to reflect increases in real
estate taxes and operating expenses.
Item 3. Legal Proceedings
The Company is involved in various legal actions and claims arising
in the ordinary course of business. Management believes there is no merit to
any such claims against the Company. In addition, the Company has been named
as a defendant in certain civil actions related to the Petition. See
"Business-Risk Factors". The outcome of this litigation and its impact on
the Company is not presently determinable.
In January 1996, Joseph Mooney, former Senior Executive Vice
President and Director of the Company, filed a lawsuit in the Circuit Court
of Broward County, Florida against the Company, Murray Bacal (the former
Chairman of the Board of the Company), and another defendant alleging, among
other things, that the Company breached its obligations to him under a
termination agreement and a prior letter of intent that Mr. Mooney claims
would have permitted him to acquire certain assets of the Company. Mr. Mooney
alleged that the Company tortuously interfered with certain of his business
opportunities he had. Mr. Mooney sought from the Company certain declaratory
and equitable relief, damages in excess of $1,050,000, prejudgment interest,
court costs, reasonable attorneys fees and such other relief as the court may
deem appropriate. In December 1996, Mr. Mooney moved for summary judgment
on certain limited aspects of his claims. On February 4, 1997, the court
granted partial summary judgment to Mr. Mooney with respect to his claim that
the termination agreement had been breached. The court ruled that Mr. Mooney
was entitled to damages in the amount of $33,472.50, together with interest
in the amount of $4,069.78, with respect to the breach. The Company has
determined not to appeal this judgment since the amount awarded is covered by
insurance. The Company believes that it has meritorious defenses to the
remaining allegations in the complaint and intends to defend the matter
vigorously. In addition, the Company filed certain counterclaims against Mr.
Mooney alleging that Mr. Mooney had wrongfully retained certain Company
property and had wrongfully interfered with the Company's conduct of its
business, all in violation of the terms of the termination agreement. The
counterclaims further allege that Mr. Mooney knowingly and feloniously
obtained, or converted to his own use and benefit, at least $250,000 of the
Company's money. The counterclaims seek compensatory damages, treble
damages, pre- and post-judgment interest, costs, attorney's fees and such
further relief as the court deems appropriate. Mr. Mooney has answered,
denying liability on the Company's counterclaims. The Company intends to
vigorously pursue its counterclaims.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
On June 25, 1991, each of the Company's Common Stock commenced
trading on the NASDAQ Stock Market as a small-capitalization issue. In March
1996 the Company's stock was delisted from the NASDAQ Stock Market and
presently trades on the over-the-counter market. The high and low bids of
the Company's Common Stock are shown for the calendar periods indicated:
COMMON STOCK
Quarter High Bid Low Bid
- ------- --------- --------
1997 1st 3-1/4 0-771/2
1997 2nd 2-7/8 1-5/8
1996 1st(1) 5-3/8 4
1996 2nd(1) n/a n/a
1996 3rd(1) 1-1/16 0-11/16
1996 4th 0-3/4 0-5/16
1995 1st 3-3/4 1-7/16
1995 2nd 5-3/8 2
1995 3rd 6-7/8 3-5/8
1995 4th 6 3-3/4
Such quotations reflected inter-dealer price, without retail
mark-up, mark-down or commission, and did not necessarily represent
an actual transaction.
___________
(1) From February 7, 1996 to July 14, 1996, there were no
reported trades in the Company's Common Stock. During this period,
the Company's largest stockholders, BFG and BMDC, filed for
bankruptcy protection. Trading of the Company's Common Stock resumed
on July 15, 1996 with a high bid of 1 1/16 a low bid of 1 1/16, and a
close of 1 1/16. There were 3,000 shares traded on that day. The high
and low bids shown above relate only to periods in which any actual
trading occured.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
During 1995, the Company discontinued its operations as an insurance
premium financing company. Since the Company existed primarily as a holding
company during 1996, it incurred administrative and corporate expenses of
$483,000, including costs relating to the Exchange Agreement and corporate
insurance costs. Therefore, the following presentation and discussion relates
to Resort Funding and its operations.
SELECTED FINANCIAL DATA
Resort Funding, Inc.
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/96 12/31/95
----------------------- -----------------------
<S> <C> <C>
Revenues:
Interest $12,998,000 $11,022,000
Gain on Sales of Contracts 422,000 1,403,000
Other Income 843,000 770,000
Total Revenue 14,263,000 13,195,000
Costs and Expenses:
Provision for doubtful receivables 179,000 794,000
Debt related costs including amortization of financing costs 904,000 848,000
Interest 8,270,000 5,982,000
Selling, General and Administrative 2,738,000 3,449,000
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
</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.
Interest revenue was partially offset by a decrease of 69.9% to
$422,000 in 1996 from $1,403,000 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 ING, Resort Funding's primary lender.
<PAGE>
Other income increased by 9.5% in 1996 to $843,000 from $770,000 in
1995, primarily as the result of an increase in contract-related 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 due to the increase in the interest rate on the ING
facility, as well as the higher balances outstanding caused by ING's
prohibition on the sales of loans. Aggregate interest paid to ING increased
260.0% to $2,535,000 from $704,000. 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 1995.
Selling, General and Administrative costs decreased 20.6% in 1996 to
$2,738,000 from $3,449,000 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.
The provision for doubtful receivables decreased 77.5% in 1996 to
$179,000 from $794,000 in 1995, due to a slowdown in the rate of net
portfolio growth, under Resort Funding's policy of providing an allowance for
doubtful receivables based upon 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 the underlying collateral, and
current economic conditions.
Debt-related costs, including amortization of financing costs,
increased 6.6% in 1996 to $904,000 from $848,000 in 1995 due to an increase
in fees mainly attributable to a 3% arrangement fee charged by the bankrupt
estate of BFG and other affiliated companies (the "Estate"). The 3%
arrangement fee relates to settlements between the Estate and certain of its
bank creditors whereby certain banks made a new term loan to Resort Funding
at favorable 1/2% to 4% interest rates. Resort Funding is obligated to pay
the arrangement fee of 3% per annum to the Estate based on the unpaid
principal balance of the new term loan. The increase in fees was partially
offset by a decrease in fees associated with the ING credit facility.
Resort Funding's provision for income taxes included in the selected
financial data increased 9.1% in 1996 to $649,000 from $595,000 in 1995. The
consolidated provision for income taxes included in the Company's financial
statements decreased 95.1% in 1996 to $29,000 from $595,000 in 1995. The
reduction is attributable to the use of the Company's net operating loss
carryforwards to offset taxable income arising after February 16, 1996 which
shelters the Company's book income from federal taxes. The current portion
of the provision relates to currently-payable state income taxes.
<PAGE>
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, $5,861,636 was available under the facility and
$44,138,364 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 by
assignments of payments due on the collateral. Additionally, the facility
agreements contain both specific and general covenants including maintenance
of specified collateralization, default rates with respect to pledged
receivables, and tangible overall net worth requirements. Since April 10,
1996 interest on borrowings has been at ING'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 for approval of the compromise and settlement of the claim(s)
of certain lenders (the "Banks") to BFG and ACC arising out of the lease-
financing agreements pursuant to which the Banks made loans to the Debtors.
The settlements, which were approved by the Bankruptcy Court, required the
Banks to make new, interest-only term loans to Resort Funding at favorable
1/2 to 4% interest rates (the "Settlement Loans"). Additional such
settlements have been entered into from time to time with a total amount
through August 31, 1997, of approximately $22,000,000. 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. Resort
Funding is obligated to pay an arrangement fee of 3% per annum to the Trustee
based on the unpaid principal balance of the Settlement Loans. As of December
31, 1996, a portion of the proceeds of the Settlement Loans, $12,482,296, had
been on-loaned to the Trustee to purchase the Banks' loans to BFG and ACC
under the terms of the settlements. Resort Funding's loan to the Trustee
bears interest at 10% per annum and is non-recourse to the Trustee and the
Estate. At December 31, 1996, the Trustee had repaid $5,044,328 of the on-
loan. The Trustee pledged certain lease payment 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 90 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 payable either upon written notice or without notice. It is likely
that further modification of such notes will be necessary in connection with
future financings. 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 August 31, 1997, all but
<PAGE>
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 of 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, 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. At June 30, 1997, the cumulative undeclared and unpaid
dividends amounted to $66,500. 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 of 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
The information required by Item 7 appears in Annex A to this report,
which follows the signature page.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On March 29, 1996, 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 in the
<PAGE>
Civil Complaint, including allegations that Mr. Bennett had provided
Mahoney Cohen with false and materially misleading information
relating to BFG and BMDC, Mahoney Cohen claimed it had no choice but
to withdraw its reports on such financial statements. Although there
were no allegations in the Civil Complaint that Mr. Bennett had
provided false or materially misleading information regarding Resort
Funding to Mahoney Cohen in connection with its reports on Resort
Funding's financial statements, Mahoney Cohen nevertheless
subsequently confirmed that its letter of resignation and withdrawal
covered reports on financial statements of Resort Funding as well.
Prior to such resignation and withdrawal of reports, Resort Funding
had no disagreements with Mahoney Cohen as to any matter of
accounting principles or practices, financial statement disclosure or
audit scope or procedure, and Mahoney Cohen's reports on its
financial statements did not contain any adverse opinion or
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
On April 5, 1996, the Company received a letter from Puritz
& Weintraub, the Company's independent accountants, stating that such
firm was resigning as the Company's auditor effective as of the date
of such letter. The opinions of Puritz & Weintraub with respect to
the financial statements of the Company for the periods ended August
31, 1994 and 1995 and December 31, 1995 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles, nor has
there been any disagreement as to any matter of accounting principles
or practices, financial statement disclosure or audit scope or
procedure during the Company's two most recent fiscal years or any
subsequent interim period.
In October 1996, the Company engaged FMFE to audit the
financial statements for the periods ended December 31, 1996 and 1995. The
financial statements included in Annex A include FMFE's unqualified audit
opinion for these periods.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters & Control Persons;
Compliance with Section 16(a) of the Exchange Act.
There are currently no executive officers of the Company. The Director of the
Company and the Executive Officers of Resort Funding are as follows:
<TABLE>
<C>Name <C> Age <C>Principal Occupation
- ------------------------------- ----------- --------------------------
Thomas J. Hamel 39 President and Chief
Director of Equivest Finance, Operating Officer of Resort
Inc. Funding, Inc.
Gerald L. Klaben, Jr. 33 Chief Financial Officer and
Executive Vice-President of Chief Financial Officer
Resort Funding, Inc.
Lisa M. Henson 33 Vice-President of Resort
Vice-President Funding, Inc.
Eric C. Cotton 33 Secretary and General
Secretary of Resort Funding, Counsel
Inc.
</TABLE>
There are currently 4 vacancies on the Board of Directors, which the Trustee
has indicated he will nominate candidates to fill.
Thomas J. Hamel is a director of the Company and has been President
and Chief Operating Officer of Resort Funding since November 1996. From 1992
through October 1996, Mr. Hamel served as Executive Vice-President of Resort
Funding and was responsible for business development.
Gerald L. Klaben Jr. has been Executive Vice President and Chief
Financial Officer of Resort Funding since July 1996. From November 1989
through July 1996, he served as a financial officer of The Pyramid Companies,
one of the largest developers of shopping malls in the Northeastern United
States.
Lisa M. Henson has been Vice President of Resort Funding since July
1996. From June 1995 through July 1996, she served as Treasurer of Resort
Funding. From 1991 through June, 1996, she served as Assistant Treasurer of
Resort Funding.
Eric C. Cotton has been General Counsel of Resort Funding since June
1997. From July 1990 through June 1997, he served as Assistant General
Counsel of The Pyramid Companies, one of the largest developers of shopping
malls in the Northeastern United States.
The Company does not have an audit, nominating or compensation
committee. During the twelve months ended December 31, 1996, the Company's
Board of Directors met one time.
All directors of the Company will hold office until the next annual
stockholders' meeting and until the election and qualification of their
successors. Officers hold their respective positions until their successors
are duly qualified or they resign or are removed by the Board of Directors.
<PAGE>
Section 16 of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and persons who own
more than 10% of a registered class of the Company's equity securities to
file various reports with the SEC concerning their holdings of, and
transactions in, securities of the Company. Copies of these filings must be
furnished by the Company.
Based solely on its review of the copies of such forms received by it
with respect to the year ended December 31, 1996, the Company believes that
all filing requirements applicable to its directors, executive officers and
persons who own more than 10% of a registered class of the Company's equity
securities have been complied with by such persons.
Item 10. Executive Compensation
On December 21, 1995 the Company changed its fiscal year-end from
August 31 to December 31. No compensation was paid by the Company for the
four months ended December 31, 1995 or, except as set forth herein, during
the fiscal year ended December 31, 1996 to any executive of the Company. The
table below provides information concerning compensation paid by the Company
for the fiscal years ended August 31, 1995, 1994 and 1993 to each executive
officer of the Company. Mr. Hamel's total cash compensation in 1995,
consisting of salary and commissions, was $244,000. Mr. Hamel's cash
compensation in 1996 was $212,000.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term Compensation
Annual Compensation Awards Payouts
(f)
(a) (e) Restricted (i)
Name & Other Annual Stock (g) (h) All other
Principal (b) (c) (d) Compensation Awards Number of LTIP Compen-
Position Year Compensation bonus (2) Options Payouts sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Murray
Bacal 1995 $141,750 $ 0 (4) 0 0 $0 $0
Chairman,
CEO 1994 $405,500 $ 0 (4) (3) 0 $0 $0
(1), (4),
(5) 1993 $285,333 $ 0 (4) 0 0 $0 $0
Joseph
Mooney 1995 $148,749 $ 10,000 $ 14,500 0 0 $0 $0
Senior
Exec., V.P. 1994 $ 98,554 $ 15,000 $ 6,000 12,500 12,500 $0 $0
(6), (7) 1993 $ 86,540 $ 0 $ 6,000 0 0 $0 $0
James
Rothman 1995 $ 0 $ 0 0 0 $0 $0
Executive
V.P. 1994 $110,665 $ 5,000 $ 6,000 0 0 $0 $0
(8) 1993 $ 73,154 $ 0 $ 6,000 0 20,000 $0 $0
</TABLE>
(1) Includes consulting fees pursuant to a contract with MBS Investments,
Inc. (see description below)
(2) Does not include reimbursements for out-of-pocket expenses incurred
on behalf of the Company or amounts charged to a loan account.
(3) On June 11, 1993, Atlantic Investment Partners purchased 5,000,000
shares of the Company's Common Stock for $2,000,000. Atlantic was a
general partnership formed under the laws of the State of New York.
The partners of Atlantic were Queensgate Holdings, Ltd.
("Queensgate") and BMDC. Mr. Bacal had indirectly owned 245,833
shares of the Company's common stock by virtue of his 20% ownership
of Queensgate. During fiscal 1994, Queensgate sold its interest in
the Company to BMDC.
(4) See description below under "Employment/Consulting Agreements."
(5) Mr. Bacal resigned in May 1995.
(6) Mr. Mooney resigned in May 1995.
(7) Mr. Mooney exercised his option to purchase 1,000 shares in May 1995.
(8) Mr. Rothman resigned in July 1994.
<PAGE>
Total salaries for the three executives listed in fiscal 1995, 1994 and 1993
were $314,999, $614,219, and $445,027 respectively.
Except as set forth above with respect to Mr. Hamel, and except for
payments to Mr. Klaben of $58,385 in 1996 pursuant to his employment
agreement with Resort Funding described below, no compensation was paid to
any executive officer of Resort Funding between May 1995 and December 31,
1996.
Resort Funding formed a Profit Sharing and 401(k) pension plan (the
"Plan") for its employees on January 1, 1997. The Plan qualifies under
Internal Revenue Code section 401(a) and the eligibility and contribution
requirements are not more favorable for highly compensated employees than for
other employees. Employees are allowed to contribute from 1% to 15% of their
annual compensation. The Plan provides that on an annual basis, Resort
Funding may provide matching contributions based upon the employee
contributions and is also able to make a voluntary profit sharing
contribution on behalf of each employee which will be allocated based upon
the employee's compensation. For 1997, Resort Funding will provide matching
funds for the first 4% contributed by each employee.
Employment and Consulting Agreements
Resort Funding entered into an employment agreement with Thomas Hamel
on May 29, 1997 pursuant to which he is serving as Resort Funding's President
and Chief Operating Officer for a three-year term and thereafter for
successive one-year renewal terms unless either party elects not to renew the
agreement, pursuant to the terms set forth therein. The agreement provides
for an annual base salary of $220,000 during the first year, increased
annually at the discretion of the Board of Directors of Resort Funding (but
not less than the percentage increase in the urban consumer price index).
The agreement also provides for a bonus of $80,000 in 1997, and a bonus each
year thereafter based on performance measures agreed to by the parties (but
not less than $80,000). The Trustee is a party to the agreement solely for
the purpose of agreeing (i) to recommend to the Board of Directors of the
Company the issuance of stock options ("Options") to Mr. Hamel covering
300,000 shares of Common Stock of the Company (the "Option Shares"); (ii) to
take related actions intended to facilitate issuance of the Option Shares;
and (iii) to seek the opinion of the Board of Directors of Resort Funding as
to the level and nature of stock incentives that should be provided to Mr.
Hamel thereafter (for the years after 1997, the agreement provides that Mr.
Hamel's total compensation should include an incentive component). The
agreement provides that the Options (i) shall have an exercise price of $1.00
per share; (ii) shall expire on the fifth anniversary of the date of grant;
(iii) shall vest as to 150,000 Option Shares 18 months following the date of
the agreement and, as to the remaining 150,000 Option Shares, on the third
anniversary of the agreement (provided Mr. Hamel is employed by Resort
Funding on each such date); and (iv) shall expire 60 days after Mr. Hamel's
employment terminates (if Mr. Hamel's employment terminates after the vesting
of such Options but before the exercise thereof). Mr. Hamel will be released
from his obligations under the agreement if the issuance of such Options is
not approved by the Board of Directors of Resort Funding within 90 days after
their initial meeting following reconstitution of such Board with at least
two duly elected members other than Mr. Hamel. In addition, the agreement
provides Mr. Hamel with employee benefits on the same terms as those
available to senior executive officers of Resort Funding. Resort Funding has
also agreed to provide at least $600,000 of life insurance for Mr. Hamel.
<PAGE>
Under the agreement, Resort Funding may terminate Mr. Hamel's employment at
any time for any reason, and Mr. Hamel may terminate his employment for any
reason at any time upon 90 days prior written notice. If, prior to the
agreement termination date then in effect, Mr. Hamel resigns for "Good
Reason" (as defined in the agreement) arising following a "Change of Control"
(as defined in the agreement), or is terminated by Resort Funding for any
reason other than for "Cause" (as defined in the agreement), then Mr. Hamel
(provided he executes a release) will be entitled to receive a cash severance
amount equal to 100% of the remaining then-current base salary and bonus due
through such agreement termination date (or due for the year of termination,
if the termination or resignation occurs subsequent to the third anniversary
of the agreement), plus the immediate vesting of all outstanding Options.
"Change of Control" is defined in the agreement so as to include the filing
by Resort Funding of a case under the Bankruptcy Code (other than a pre-
packaged bankruptcy filed on the motion of Mr. Breeden, in which it is
proposed that the agreement be continued), provided a bankruptcy trustee is
appointed for Resort Funding. In such event, prior to the filing of such
case, Resort Funding agrees to confess judgment in Mr. Hamel's favor in an
amount equal to the outstanding compensation then due under the agreement.
Resort Funding also has agreed that if it should entertain a formal offer for
the acquisition of a controlling stake of its voting shares or all or
substantially all of its assets, then it will inform Mr. Hamel of such offer
and invite him to submit a competing offer. Mr. Hamel has agreed to preserve
the confidentiality of information regarding Resort Funding. Mr. Hamel has
also agreed that, during the period commencing on the date of the agreement
and ending on the date of the later of the third anniversary of the date of
the agreement or the date his employment terminates (or one year following
such later date if he terminates his employment without Good Reason following
the second anniversary of the date of the agreement), he will not become
employed by, consult with or otherwise become involved with any "Prohibited
Entity" (as defined in the agreement). During such period, Mr. Hamel has
further agreed not to employ any employee, agent or representative of Resort
Funding or its affiliates, or to seek to influence any such individual to
terminate his or her relationship with such entity. Such non-compete and
non-solicitation covenants will become void, however, if, prior to the third
anniversary of the agreement, the Trustee ceases to be a member of the Board
of Directors of Resort Funding other than by reason of his death, disability
or voluntary resignation. In such event, Mr. Hamel may terminate his
employment upon 90 days' notice, but will not be entitled to any severance
payments. Resort Funding also has agreed to indemnify Mr. Hamel if he incurs
any liabilities as a result of his affiliation with Resort Funding.
Resort Funding entered into an employment agreement with Gerald
Klaben on July 15, 1996 pursuant to which he is serving as Resort Funding's
Executive Vice President and Chief Financial Officer for a three-year term
and thereafter for successive one-year renewal terms unless either party
elects not to renew the agreement at least 90 days prior to the end of the
original term or any renewal term. The termination provisions of Mr. Klaben's
contract are substantially similar to those contained in Mr. Hamel's
employment agreement described above. The agreement, as amended in January,
1997, provides for an annual base salary of $150,000 during the first year,
increased annually by the same percentage increase as the urban consumer
price index. In addition, the agreement provides for a bonus of $50,000 in
1997 and permits the board of directors of Resort Funding to grant bonuses,
incentive compensation and equity participation based on Mr. Klaben's
performance, and to provide other benefits on the same terms as those
available to senior executive officers of Resort Funding. The Trustee is a
<PAGE>
party to the agreement solely for the purpose of agreeing (i) to recommend to
the Board of Directors of Resort Funding the issuance of stock options
("Options") to Mr. Klaben covering 75,000 shares of Common Stock of the
Company (the "Option Shares"); (ii) to take related actions intended to
facilitate issuance of the Option Shares; and (iii) to seek the opinion of
the Board of Directors of Resort Funding as to the level and nature of stock
incentives that should be provided to Mr. Klaben thereafter. The Options set
forth in Mr. Klaben's contract, with the exception of number of shares, are
substantially similar to those set forth in Mr. Hamel's employment agreement.
Resort Funding has also agreed to provide at least $350,000 of life insurance
for Mr. Klaben. Mr. Klaben has agreed to preserve the confidentiality of
information regarding Resort Funding.
On June 11, 1993, the Company entered into a consulting agreement
with MBS Investments, Inc. ("MBS" or "Consultant"), a private company
controlled by Murray Bacal, which was to expire on June 11, 2003. Pursuant
to that agreement, MBS agreed to provide the services of Murray Bacal or such
other person acceptable to the Company to serve as Chairman of the Board of
Directors and Chief Executive Officer. The Consultant was to receive a
consulting fee of $40,000 per month through May 11, 1999, and $50,000
thereafter. Compensation for consulting could be increased by incentive
earnings based bonuses as approved by a majority of the Board of Directors
not having such incentives. The Consultant also received life insurance in
the amount of $2,000,000 on the life of Mr. Bacal payable to the Consultant's
designee as beneficiary, as well as disability insurance in an amount to
approximate his compensation. The Company was not obliged to pay more than
$25,000 for such disability insurance. The Company also paid $750 per month
to be applied by the Consultant to the costs of an automobile, and the
Company reimbursed MBS for the cost of one secretary-assistant, not to exceed
$25,000 per year. The Company agreed to use its best efforts to cause Mr.
Bacal to be nominated for election to the Board of Directors each year during
the term of the agreement. On April 21, 1994, the consulting agreement was
terminated by mutual consent. On May 1, 1994, the Company agreed to pay MBS
the sum of $15,000, per month plus $750 for auto expenses, on a month-to-
month basis. The Company also agreed to reimburse MBS for the cost of one
secretary-assistant, not to exceed $25,000 per year. Mr. Bacal resigned as
Chairman of the Board of Directors and as a Director on May 31, 1995.
Joseph Mooney resigned from the Company as Senior Executive Vice
President and Director in May 1995 pursuant to a termination agreement
effective May 19, 1995, the terms of which provided for Mr. Mooney to be
retained on a consulting basis through November 19, 1995 at the rate of
$2,500 per month. In addition, Mr. Mooney was to receive $75,000 in
severance pay, plus certain other benefits totaling approximately $7,000
through May 31, 1996.
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 as "Non-Statutory Stock Options." The
Plan also provides that no options may be granted after September 1, 1999.
<PAGE>
The Plan is administered by the Company's Board of Directors, which
has the authority to determine the persons to whom options shall be granted,
whether any particular option shall be an Incentive Option or a Non-Statutory
Stock Option, the number of shares to be covered by each option, the time or
times at which options will be granted or may be exercised and the other
terms and provisions of the options, except that the Plan prohibits the
exercise of an Incentive Stock Option unless the optionee has been
continuously employed by the Company from the date of grant to the date of
exercise. Accordingly, Incentive Stock Options are forfeited upon
termination of the optionee's employment with the Company. The Plan also
provides that (i) the exercise price of options granted thereunder shall not
be less than 100% (or in the case of an Incentive Option, 110% if the
optionee owns 10% or more of the outstanding voting securities of the
Company) of the fair market value of such shares on the date of grant, as
determined by the Board, and (ii) no option by its terms may be exercised
more than ten years (five years in the case of an Incentive Option, where the
optionee owns 10% or more of the outstanding voting securities of the
Company) after the date of grant. Any options which are canceled or not
exercised within the option period may become available for future grants.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of
August 31, 1997 on the Company's voting securities with
respect to the share ownership by beneficial owners of more
than 5% of the outstanding amount of such stock. No
director or executive officers of the Company own any voting
securities.
Title of Class Name and Address Amount and Nature of
Percent of Class(2) of Beneficial Owner(1) Beneficial Ownership
Common Stock Bennett Management & 7,121,285
74.4%(4) Development Corporation(3)
2 Clinton Square
Syracuse, NY 13202
Series 2 Preferred The Bennett Funding Group, 10,000
Stock Inc.
100.0% 2 Clinton Square
Syracuse, NY 13202
Convertible Preferred The Bennett Funding Group, 3,000
Stock(6) Inc.
2 Clinton Square
Syracuse, NY 13202
(1) Except as otherwise noted below, each person has sole voting power
and investment power with respect to the voting securities indicated
as owned beneficially by such person.
(2) Except as otherwise noted below, all voting securities listed are
owned both of record and beneficially.
(3) Includes 5,000,000 shares of Common Stock outstanding as of April 11,
1997 (without giving effect to the possible issuance of shares
upon conversion of the Convertible Preferred Stock).
(4) Based upon 9,434,280 shares of Common Stock outstanding as of April
11, 1997 (without giving effect to the possible issuance of shares
upon conversion of the Convertible Preferred Stock).
(5) The Series 2 Preferred Stock is entitled to 20% of the total number
of votes of the Company.
(6) Each share of Convertible Preferred Stock is immediately and
mandatorily convertible into 2,500 shares of Common Stock on the date
the Company first has a sufficient number of authorized and unissued
shares of Common Stock to permit conversion.
<PAGE>
Item 12. Certain Relationships and Related Transactions
Bankruptcy of Affiliated Companies. Effective February 16, 1996, the
Company entered into the Exchange Agreement, among the Company, 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 Series 2 Preferred Stock and 3,000 shares of the
Convertible Preferred Stock.
<PAGE>
PART IV
Item 13. Exhibits, Listed Reports on Form 8-K
(a) Index to Consolidated Financial Statements and Schedules
1. Financial Statements
The following financial statements of the Company are
included in Annex A:
Annex Page
---------
Report of Independent Certified Public Accountant's 1
Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 1996 and December
31, 1995
Consolidated Statement of Operations for the years ended 4
December 31, 1996 and December 31, 1995
Consolidated Statement of Operations for the years ended 5
December 31, 1996 and December 31, 1995
Consolidated Statement of Equity Accounts for the years ended 6-7
December 31, 1996 and December 31, 1995
Notes to Consolidated Financial Statements 9-15
2. All Schedules have been omitted because they are not applicable
or the required information is shown in the financial
statements.
3. Reports on Form 8-K. The Company filed no reports on Form 8-K
during the last quarter of the period
covered by this report.
4. The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation and Amendments thereto
(incorporated by reference to Exhibits 3(a), 3(b) and 3(d) to Registration
Statement on Form S-18, File No. 33-24855-A).
3.2 Certificate of Amendment to Certificate of
Incorporation (incorporated by reference to Exhibit 3(b) to Form 10-K for
the fiscal year ended August 31, 1989).
3.3 Form of Certificate of Amendment to Certificate of
Incorporation (incorporated by reference to Exhibit 3(d) in the Registrant's
Form S-1 Registration Statement, File No. 33-39758).
3.4 Statement establishing Series 2 Preferred Stock
(incorporated by reference to Exhibit 2 contained in the Company's Form 8-K
dated February 16, 1996).
3.5 Statement establishing Convertible Preferred Stock
(incorporated by reference to Exhibit 2 contained in the Company's Form 8-K
dated February 16, 1996).
<PAGE>
3.6 By-laws, as amended to date (incorporated by reference
to Exhibit 3(a) in the Company's Form S-18 Registration Statement, File No.
33-24855-A).
10.2 Form of Indenture (incorporated by reference to
Exhibit 4(e) filed with the Registration Statement on Form S-18, File No. 33-
24855-A).
11. Computation of earnings per share. See Notes to
Consolidated Financial Statements.
<PAGE>
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
<PAGE>
ANNEX A
Audited Consolidated Financial Statements
EQUIVEST FINANCE, INC.
AND SUBSIDIARIES
December 31, 1996 and 1995
<PAGE>
Audited Consolidated Financial Statements
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Equity Accounts . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Equivest Finance, Inc.
Syracuse, New York
We have audited the accompanying consolidated balance sheets of Equivest
Finance, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, equity accounts, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Equivest Finance, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
Firley, Moran, Freer & Eassa, P.C.
Syracuse, New York
July 3, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS
Cash $ 4,037,201 $ 1,302,934
Receivables:
Accounts receivable 6,234,491 3,565,497
Notes and advance receivable 90,307,500 82,137,315
Less allowance for doubtful receivables (1,979,182) (1,850,724)
------------- ------------
94,562,809 83,852,088
Accounts receivable-related party 671,411 -0-
Notes receivable-related party 7,537,968 100,753
------------- ------------
102,772,188 83,952,841
Deferred financing costs, less amortization
of $922,702 in 1996 and $210,335 in 1995 3,859,554 1,585,794
Cash--restricted 1,128,773 264,478
Accrued interest receivable 425,471 314,371
Deferred taxes 824,536 658,536
Other assets 156,084 521,904
------------- ------------
$113,203,807 $88,600,858
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
-------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and other liabilities:
Accounts payable and cash overdraft $ 715,698 $ 3,719,859
Accounts payable--related parties 680,842 2,150,150
Accrued expenses and other liabilities 994,788 1,785,728
-------------- ------------
2,391,328 7,655,737
Notes payable 82,942,196 51,273,313
Notes payable--related party 23,803,257 27,265,027
-------------- ------------
109,136,781 86,194,077
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 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 30,000
Cumulative Convertible Preferred Stock--Series 2,
$3 par value; 3,000 shares authorized, issued
and outstanding 9,000 9,000
Common Stock, $.05 par value; 10,000,000 shares
authorized, 9,484,847 shares issued and
outstanding 474,243 474,243
Additional paid in capital 6,330,956 6,330,956
Retained earnings (deficit) (2,806,918) (4,467,163)
-------------- ------------
4,037,281 2,377,036
-------------- ------------
$ 113,203,807 $88,600,858
============== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUE
Interest $12,997,682 $11,022,331
Gains on sales of contracts 422,328 1,402,733
Other income 843,349 769,544
------------ ------------
14,263,359 13,194,608
COSTS AND EXPENSES
Provision for doubtful receivables 178,543 794,322
Interest 8,270,593 5,982,164
Debt related costs including
amortization of financing costs 903,613 847,507
Selling, general and administrative 3,221,365 3,449,267
------------ ------------
12,574,114 11,073,260
------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 1,689,245 2,121,348
PROVISION FOR INCOME TAXES
Current 195,000 1,132,992
Deferred (credit) (166,000) (537,602)
------------ ------------
29,000 595,390
------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,660,245 1,525,958
LOSS FROM OPERATIONS OF DISCONTINUED
SEGMENT (less applicable income taxes
of $-0-) -0- (2,186,065)
------------ ------------
NET INCOME (LOSS) $ 1,660,245 $ (660,107)
============ ============
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per Common Share:
Earnings from continuing operations $.11 $ .10
==== =====
Net earnings (loss) $.11 $(.13)
==== ======
Fully diluted earnings (loss) per Common Share:
Earnings from continuing operations $.06 $ .05
==== =====
Net earnings (loss) $.06 $(.07)
==== ======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF EQUITY ACCOUNTS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Redeemable
Preferred Convertible Additional
Stock-- Preferred Paid Retained
Series 2 Stock-- Common Stock in Earnings
Total Class A Series 2 Shares Amount Capital (Deficit)
------------ ------------ ------------- ----------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1994 $2,521,540 $ -0- $ -0- 9,344,810 $467,241 $6,158,241 $(4,103,942)
Acquisition of Resort
Funding, Inc. 304,680 30,000 9,000 (38,000) 303,680
------------ ------------ ------------- ----------- --------- ------------- -----------------
Restated balances,
December 31, 1994 2,826,220 30,000 9,000 9,344,810 467,241 6,120,241 (3,800,262)
Stock options exercised 2,500 1,000 50 2,450
Conversions of Debentures
to Common stock 162,050 90,230 4,462 157,588
Conversion of 12.5% Redeem-
able Preferred Stock 53,167 48,807 2,490 50,677
Preferred stock dividends (6,794) (6,794)
Net loss (660,107) (660,107)
------------ ------------ ------------- ----------- --------- ------------- -----------------
Balances, December 31,
1995 2,377,036 30,000 9,000 9,484,847 474,243 6,330,956 (4,467,163)
Net income 1,660,245 1,660,245
------------ ------------ ------------- ----------- --------- ------------- -----------------
Balances, December 31,
1996 $4,037,281 $30,000 $9,000 9,484,847 $474,243 $6,330,956 $(2,806,918)
============ ============ ============= =========== ========= ============= =================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES
Net income from continuing operations $ 1,660,245 $ 1,525,958
Net loss from discontinued segment -0- (2,186,065)
Adjustments to reconcile net income to net cash
(used in) from operating activities:
Depreciation and amortization 733,903 439,137
Provision for doubtful receivables 178,543 1,396,496
Provision for deferred taxes (166,000) (537,602)
Gains on sales of contracts (422,328) (1,402,733)
Changes in assets and liabilities:
Increase in other assets (2,754,358) (1,726,603)
Increase in accounts receivable--
related party (671,411) -0-
Increase in restricted cash (864,295) (229,225)
Decrease in accounts payable, cash
overdraft and accrued expenses (3,815,884) 2,746,468
Decrease in accounts payable-related parties (1,469,308) 2,150,150
--------------- ---------------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES (7,590,893) 2,175,981
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of contracts 6,966,882 18,568,111
Sale of equipment 22,951 -0-
Increase in receivables, net (17,433,818) (49,421,487)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (10,443,985) (30,853,376)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on loans payable--related party (3,461,770) (19,358,448)
Proceeds from (payments of) notes payable 280,156 (1,332,655)
Proceeds from recourse notes payable 26,096,575 32,868,261
Payments on recourse notes payable (15,944,991) (5,093,969)
Proceeds from subordinated debt--related party -0- 5,000,000
Proceeds from non-recourse notes payable 36,785,065 24,689,900
Payments on non-recourse notes payable (15,547,922) (7,183,411)
Loans to related party (12,482,296) (100,753)
Payments on notes receivable--related party 5,044,328 -0-
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,769,145 29,488,925
--------------- ---------------
INCREASE IN CASH 2,734,267 811,530
Cash at beginning of year 1,302,934 491,404
CASH AT END OF YEAR $ 4,037,201 $ 1,302,934
=============== ===============
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 124,682 $ 290,526
Interest paid $ 6,223,101 $ 4,581,982
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
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.
(inactive) 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 years ended December
31, 1996 and 1995 include Resort Funding and subsidiary as if the transaction
occurred on January 1, 1995.
Resort Funding and its subsidiary, BFICP Corporation, provide financing to
domestic and foreign 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, Inc. and its subsidiary, BFICP
Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates: The preparation of these consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and costs and expenses during the reporting
period. Actual results could differ from the Company's estimates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Allowance for Doubtful Receivables: Receivables have been reduced by an
allowance for doubtful receivables. The allowance is an amount which
management believes will be adequate to absorb possible losses on existing
receivables. The evaluation considers past loss experience, known and
inherent risks in the portfolio, adverse conditions that may affect the
borrower's ability to repay, the estimated value of underlying collateral,
and current economic conditions. Receivables 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.
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.
Deferred Financing Costs: Deferred financing costs represent unamortized
expenses associated with issuing certain debt and fees payable to the trustee
resulting from bank settlement transactions (see Note G). Amortization of
these costs is charged to operations on a straight-line basis over the term
of the associated debt and does not differ materially from that computed
using the effective interest method. The amortization of deferred financing
costs amounted to $712,367 and $210,335 for 1996 and 1995, respectively.
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.
The accrual of interest on an impaired loan is discontinued when unpaid
interest, together with the loan principal outstanding, exceeds the loan's
projected cash flow or the loan's net collateral value.
Gains on Sales of Contracts: Gains on sales of contracts result from
periodic sales of consumer receivables sold on a non-recourse basis. Gain is
recorded to the extent that net proceeds exceed the net investment in the
consumer receivables sold. Proceeds from the sales of consumer receivables
aggregated $6,966,882 and $18,568,111 in 1996 and 1995, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 charged to Resorts.
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.
Earnings (Loss) Per Common Share: Primary earnings (loss) 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.
Recently-Issued Accounting Standards: The Financial Accounting Standards
Board has issued several new pronouncements which were not effective for 1996
and 1995. A brief description of those pronouncements which may affect the
Company's accounting and disclosures follows:
- "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125") is effective for
transfers of assets after December 31, 1996. Earlier application
is not permitted. The Statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on
consistent application of a financial components approach that
focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Recently-Issued Accounting Standards--Continued:
- "Earnings per Share" ("SFAS 128") supersedes APB Opinion No. 15 and
is effective for periods ending after December 15, 1997. Earlier
application is not permitted, but prior periods presented will be
restated to conform to the new pronouncement. SFAS 128 requires
the presentation of earnings per share by all entities that have
common stock or potential common stock, such as options, warrants
and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are
required to present basic earnings per share amounts. All other
entities are required to present basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise
or issuance of all potential common stock instruments unless the
effect is to reduce a loss or increase the income per common share
from continuing operations.
The Company has two outstanding preferred stock issues that are
potential common stock under SFAS 128 because they are convertible
into the Company's Common Stock. These issues must be separately
evaluated to determine whether they are dilutive and whether
certain adjustments to income and share amounts must be computed.
Management has not completed its assessment of the effects that
application of SFAS 128 will have on the per share information
presented in the accompanying financial statements.
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. Resort Funding has outstanding notes (see Note E) and accrued interest
payable to BFG of $23,803,257 and $27,265,027 and accounts payable to its
affiliates of $680,842 and $2,150,150 as of December 31, 1996 and 1995,
respectively. Additionally, after the exchange described in Note A, BFG and
BMDC own 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--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE B--CONTINGENT LIABILITIES--Continued
The Company has been named with BFG and its affiliates in two class-action
type lawsuits 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--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE D--ACCOUNTS AND NOTES RECEIVABLE--Continued
The following are the components of notes and advance receivable as of
December 31:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Notes receivable--consumer contracts $94,047,861 $74,016,506
Unearned interest income (27,846,532) (22,196,546)
Holdbacks on consumer contracts (12,385,961) (9,125,831)
---------------- ----------------
Net consumer contract receivables 53,815,368 42,694,129
Notes and advance receivables--resorts 33,045,142 35,133,257
Retained interests in securitized receivables 3,446,990 4,309,929
---------------- ----------------
$90,307,500 $82,137,315
================ ================
</TABLE>
Substantially all consumer contracts are with full recourse to the Resorts.
Also, the Company's practice is to withhold approximately 15% 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 36 equal monthly payments, including interest at
12% per annum, provided there is sufficient cashflow from designated
timeshare sales. The advance was made under a five-year agreement which
provides for the Company to receive 50% 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 July 1997, the
Company restructured the financing arrangement with the resort in connection
with the financing of a new resort. The five-year agreement was canceled and
the outstanding advance was converted to a promissory note which bears
interest at 12% per annum. Principal is required to be paid in stipulated
amounts, as timeshare intervals are sold. The note is collateralized by
security interests in the unsold timeshare intervals at the date of the note
and is also guaranteed by the corporate partners of the developer.
The Company has classified one resort loan as impaired under SFAS 114. The
outstanding loan amounted to $5,315,117 at December 31, 1996 and the average
outstanding amount during 1996 was $5,147,591. The Company has no allowance
for loss related to this loan because it believes the market value of the
collateral significantly exceeds its loan investment including unpaid
interest. During 1996, the Company recorded interest income on this loan of
$666,850 which is unpaid and included in the outstanding loan balance. The
Company had no loans specifically valued under SFAS 114 at December 31, 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE D--NOTES AND ADVANCE RECEIVABLES--Continued
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.
Unearned interest income relates to consumer 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 years ended
December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Balance at beginning of year $1,850,724 $1,295,977
Provision for doubtful receivables 178,543 1,396,496
Charge-offs and recoveries, net (50,085) (841,749)
-------------- --------------
Balance at end of year $1,979,182 $1,850,724
============== ==============
</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 notes and advance receivables are due
during the years ending December 31 as follows: 1997--$29,594,515;
1998--$19,147,350; 1999--$20,083,166; 2000--$14,482,999; and
2001--$6,999,470.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE E--RELATED-PARTY TRANSACTIONS
Accounts Receivable: Accounts receivable--related parties of $671,411 at
December 31, 1996 represents non-interest- bearing advances made to
affiliated entities prior to their bankruptcy (see Note B). In 1997, the
bankruptcy court ruled that the bankrupt entities would be consolidated for
claims settlement purposes. As a result, these receivables will be realized
by offset against accounts and notes payable to related party.
Notes Receivable: Notes receivable--related party is comprised of $100,000
($100,753 at December 31, 1995) due from an affiliated entity (BMDC) which
bears interest at 8.75%; and $7,437,968 due from the bankruptcy trustee
("Trustee") in connection with the financing described in Note G. 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.
Notes Payable: 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 ($22,265,027 and $5,000,000,
respectively, at December 31, 1995). On March 5, 1997, the Trustee received
bankruptcy court approval for an amendment 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 G. 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 and
$4,004,211 for the year ended December 31, 1995.
Other: 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 non-cancelable lease term, excluding escalation, amounts to $161,213
($967,278 cumulatively through 2002). Rent expense under this lease amounted
to $161,213 in 1996 and $136,422 in 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE E--RELATED PARTY TRANSACTIONS--Continued
Other--Continued: Under an agreement which expired March 31, 1996, the
Company paid BFG $422,115 in 1996 and $1,335,020 in 1995 for various
administrative services including billing, collection, legal and management
services. Additionally, through August 31, 1995, salary and salary related
costs were based on an allocation of total BFG and affiliated entity costs.
These costs amounted to $904,220 in 1995. Beginning September 1, 1995, the
Company maintains its own payroll for its own employees.
The Company currently receives limited administrative services from BFG
related to billing consumer amounts due under timeshare interval contracts.
The expense amounted to $85,871 and $-0- during 1996 and 1995, respectively.
NOTE F--RESTRICTED CASH
Restricted cash includes $951,079 and $95,000 at December 31, 1996 and 1995,
respectively, on deposit with financial institutions in connection 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 G, 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 and $132,529 at December 31, 1996 and 1995, respectively. The
remaining restricted cash of $38,629 and $36,949 at December 31, 1996 and
1995, respectively, 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 G--NOTES PAYABLE
Notes payable consisted of the following as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Recourse notes $37,925,876 $27,774,292
Non-recourse notes 41,500,180 20,263,037
Other notes payable 3,516,140 3,235,984
--------------- ---------------
$82,942,196 $51,273,313
=============== ===============
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE G--NOTES PAYABLE--Continued
Recourse Notes: Recourse notes include (1) outstanding loans ($20,902,915--
1996 and $27,774,292--1995) due to banks in monthly installments through 2001
with interest ranging from 9% to 11% per annum; (2) outstanding loans of
$14,395,521 at December 31, 1996 due to banks and others in monthly
installments through 2003 with interest ranging from 1/2% to 4% per annum;
and (3) a fee to an affiliate of $2,627,440 at December 31, 1996 payable in
connection with arrangement of the notes described in (2) above. The recourse
notes are collateralized by security agreements and assignment of payments
due on consumer contract notes receivable, notes receivable from resorts and,
as further described below, third party leases.
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 ($12,482,296) from the Company in order to settle the
bankrupts' obligations with those creditors. The notes receivable from the
related bankrupts' are collateralized by third party leases owned by the
affiliated entities. As part of these financing arrangements, the Company
assigned its collateral interest in the third party leases to these
creditors. As consideration for the financing, the Company will pay a fee to
the bankrupt estates 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 various loan periods.
Non-recourse Notes: 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, $5,861,636 of credit is available under the facility
and $44,138,364 was the balance of funds outstanding under the facility
including a loan balance of $33,323,221. The remaining amount of $10,645,383
represents the balance of the facility resulting from the sales of consumer
contract notes receivable during 1995 and 1996. At December 31, 1995
$34,720,000 was the balance of funds outstanding under the facility including
a loan balance of $17,328,234 and $17,391,766 from the sales of consumer
contract notes receivable.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE G--NOTES PAYABLE--Continued
Non-recourse Notes--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 is at
the bank's prime rate plus 2%. Until that date, interest was at the bank's
commercial paper rate plus 2.45%. 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 nonrecourse notes payable, $8,176,959,
includes (1) outstanding loans of $6,441,959 ($2,934,803 at December 31,
1995) due to banks in monthly installments through 2001 which bear interest
at rates ranging from 9% to 11%; and (2) an outstanding loan of $1,735,000
($-0- at December 31, 1995) due to a bank in monthly installments through
2001 which bears interest at 3%. These notes have been collateralized by
security agreements on pledged receivables, assignments of payments due on
those receivables, and assignment of the Company's collateral rights under
loans to resorts.
Other Notes Payable: At December 31, 1996, other notes payable consisted of
unsecured promissory notes which mature December 1, 1998. The notes were
issued during 1996 in connection with a bond exchange agreement which allowed
the Company, after receiving more than 90% approval from the former
bondholders, to include the outstanding bond principal balance and unpaid
interest as of November 30, 1996 in the unsecured promissory note. The
outstanding balance at December 31, 1995 represented the exchanged unsecured
bonds payable which were in default. They were issued in May 1994 and
matured in August 1995. Both the promissory note and bond instruments bear
interest at 8% per annum.
Subsequent maturities of recourse, nonrecourse and other notes payable for
years ending December 31 are: 1997--$10,126,617; 1998--$9,553,237; 1999--
$8,493,152; 2000--$38,687,766; 2001--$6,600,444; and thereafter--$9,480,980.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE H--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 consolidated provisions for income taxes included in the accompanying
Statements of Operations consist of the following for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current provision:
Federal $ -0- $ 852,508
State 195,000 280,484
------------ ------------
195,000 1,132,992
Deferred provision (benefit):
Federal 31,000 (537,602)
State (197,000) -0-
------------ ------------
(166,000) (537,602)
------------ ------------
$ 29,000 $ 595,390
============ ============
</TABLE>
<PAGE>
The provisions for income taxes from continuing operations for 1996 and 1995
are less than amounts computed by applying the statutory rate (34%) to income
before income taxes for the following reasons:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Income taxes at statutory rates $589,000 $720,000
State income taxes, net of federal income tax benefit 129,000 185,000
Reduction of valuation allowance (714,000) (268,000)
Other items 25,000 (41,610)
------------ ------------
Provision for income taxes $ 29,000 $595,390
============ ============
</TABLE>
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE H--INCOME TAXES--Continued
The change in valuation allowance in 1996 reflects a decrease of $534,000 for
the use of operating loss carryforwards and a decrease of $180,000 to
eliminate an allowance previously established for deferred state income
taxes. The valuation allowance changed in 1995 to reflect an increase of
$740,000 for the 1995 increase in the net operating loss carryforwards and a
decrease of $268,000 resulting from a revaluation of the recovery of other
temporary differences.
Net deferred tax assets included in the accompanying consolidated balance
sheets are comprised of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Receivable allowance $ 694,408 $ 633,703
Net operating loss carryforwards 1,539,195 2,073,195
Depreciation -0- 24,833
State income taxes, net of federal benefit 130,454 180,326
------------ ------------
2,364,057 2,912,057
Valuation allowance (1,539,521) (2,253,521)
------------ ------------
$ 824,536 $ 658,536
============ ============
</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.
NOTE I--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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE J--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 I. 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>
NOTE K--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 the
estimated fair value of on- and off-balance sheet financial instruments. A
financial instrument is defined by SFAS 107 as cash, evidence of an ownership
interest in an entity, or a contract that creates a contractual obligation or
right to deliver or to receive cash or another financial instrument from a
second entity on potentially favorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. SFAS 107 specifies that
fair values should be calculated based on the value of one trading unit
without regard to any premium or discount that may result from concentrations
of ownership of a financial instrument, possible income tax ramifications,
estimated transaction costs that may result from bulk sales or the
relationship between various financial instruments. Fair values for the
Company's financial instruments are based on judgments regarding current
economic conditions, interest rate characteristics, loss experience and other
factors. Many of these estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision. Therefore, the
calculated fair value estimates cannot always be sustained by comparison to
independent markets and in most cases, would not be realizable in a current
sale of the instrument. Changes in assumptions could significantly affect
the instruments.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE K--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
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, deferred financing costs
and accounts payable and accrued expenses. Accordingly, the estimated fair
value amounts of financial instruments do not represent the entire value of
the Company.
Cash and Restricted Cash: The carrying amounts reported in the balance
sheets are their estimated fair values since the amounts are payable on
demand.
Accounts and Notes Receivable: The estimated fair 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 values. The Company's
commitments to lend as disclosed in Note D also approximate their fair value
using the same methodology for estimating fair value.
Notes Payable: The fair values of notes payable are estimated using rates
available to the Company at December 31, 1996 and 1995 for similar debt and
remaining maturities. The carrying amounts and fair values of notes payable
is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Values Amount Values
------------ ----------- ----------- -----------
<S> <C> <C> <C>
$ 82,942,196 $77,229,196 $51,273,313 $51,273,313
</TABLE>
Notes Payable--Related Party: It is not practicable to estimate the fair
values of these notes because of the nature of the indebtedness and resultant
excessive cost to estimate their fair values.
12.5% Redeemable Convertible Preferred Stock: It is not practicable, because
of cost, to determine the estimated fair value of this relatively small
amount outstanding.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE L--STOCK OPTIONS
The Company has a stock option plan which reserves 100,000 shares of Common
Stock. The Plan provides that no options may be granted after September 1,
1998. The following table summarizes the status and activity of options
under the plan:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Number Number
of Option of Option
Shares Price Shares Price
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -0- $-0- 17,500 $2.50 - 5.00
Canceled -0- -0- (16,500) 2.50 - 5.00
Exercised -0- -0- (1,000) 2.50
----------- -------------
Outstanding at end of year -0- -0-
=========== =============
</TABLE>
NOTE M--DISCONTINUED SEGMENT
In May 1995 Equivest discontinued its insurance premium finance business.
Total 1995 revenues from the premium finance business have been included in
the caption "Net Loss From Operations of Discontinued Segment" and amounted
to $1,842,551. No income tax benefit resulted from the loss because it
occurred prior to the actual date of the exchange described in Note A,
Equivest and Resort were members of different consolidated groups for federal
income tax filing purposes, and Equivest had no prior year income available
for operating loss carryback purposes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
December 31, 1996 and 1995
NOTE N--EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share for the years ended December 31, 1996 and
1995 is based on the following:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
<S> <C> <C>
Weighted average shares outstanding:
Primary 9,484,847 9,484,847
==================== ====================
Fully diluted 17,012,708 17,012,708
==================== ====================
Income from continuing operations $ 1,660,245 $ 1,525,958
Preferred stock dividend requirements (603,718) (603,718)
-------------------- --------------------
Income from continuing operations
available to common stockholders 1,056,527 922,240
Loss from operations of discontinued
segment -0- (2,186,065)
-------------------- --------------------
Net income (loss) available to
common stockholders $ 1,056,527 $(1,263,825)
==================== ====================
</TABLE>
For purposes of the earnings (loss) per share computations, the preferred
stock issued in connection with the Resort Funding exchange described in Note
A and its related dividend requirements, is considered to be outstanding
since January 1, 1995.
