UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
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Commission File Number: 0-18201
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EQUIVEST FINANCE, INC.
----------------------
(Exact name of Registrant as specified in its charter)
Florida 59-2346270
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2 CLINTON SQUARE, SYRACUSE, NEW YORK 13202
------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (315) 422-9088
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act Of 1934 during the preceding 12 months (or for such shorter period
that the Company was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of August 31, 1997, 9,484,847 shares of common stock of Equivest
Finance, Inc. were outstanding.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I FINANCIAL STATEMENTS PAGE
Item 1. Financial Statements 3
Consolidated Financial Information:
Consolidated Balance Sheets - September 3
30, 1997(unaudited) and December 31, 1996
Unaudited Consolidated Income Statements 4
- Three Months Ended September 30, 1997
and 1996
Unaudited Consolidated Income Statements 5
- Nine Months Ended September 30, 1997
and 1996
Unaudited Consolidated Statement of 6
Equity Accounts
Unaudited Consolidated Statements of Cash 7
Flows - Nine Months Ended September 30,
1997 and 1996
Notes to Interim Consolidated Financial 8
Information
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 16
Submission of Matters to a Vote of Security 16
Item 4. Holders
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS (Unaudited)
--------------------- September 30, 1997 December 31, 1996
------------------------------- -----------------------------
Cash $2,452,676 $4,037,201
---------- ----------
Receivables:
Accounts Receivable 6,366,620 6,234,491
Notes and advance receivable 96,449,182 90,307,500
Less allowance for doubtful receivables (2,204,182) (1,979,182)
----------- -----------
100,611,620 94,562,809
----------- ------------
Accounts receivable - related parties 737,745 671,411
Notes receivable - related party 5,292,696 7,537,968
------------ ------------
Total Receivables 106,642,061 102,772,188
------------ ------------
Deferred financing costs, net 3,970,540 3,859,554
Cash - restricted 1,181,108 1,128,773
Accrued interest receivable 460,175 425,471
Deferred taxes 914,536 824,536
Other Assets 142,272 156,084
------------ ------------
$115,763,368 $113,203,807
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Accounts Payable and Other Liabilities:
Accounts payable $432,029 $715,698
Accounts payable - related parties 682,374 680,842
Accrued expenses and other liabilities 1,033,065 994,788
----------- -----------
Total Accounts Payable and Other Liabilities 2,147,468 2,391,328
----------- -----------
Notes payable 82,059,741 82,942,196
Notes payable - related parties 25,256,118 23,803,257
----------- -----------
109,463,327 109,136,781
----------- -----------
12.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
$3 par value; 1,000,000 shares authorized, 9,915
shares issued and outstanding 29,745 29,745
See Accompanying Notes To Consolidated Financial Statements.
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) (573,903) (2,806,918)
------------- ------------
6,270,296 4,037,281
------------ ------------
$115,763,368 $113,203,807
============ ============
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
3 Months Ended September 30,
-------------------------------------------------
1997 1996
----------------------- ------------------------
Revenues:
Interest $ 3,692,404 $ 3,148,023
Gain on Sales of Contracts -0- 184,657
Other Income 191,726 115,313
------------ ------------
3,884,130 3,447,993
------------ ------------
Costs and Expenses:
Provision for doubtful receivables 225,000 131,075
Interest 2,024,534 2,104,269
Debt related costs including amortization of financing costs 270,566 171,016
Selling, general and administrative 731,543 779,259
------------ ------------
3,251,643 3,185,619
------------ ------------
Income Before Provision for Taxes 632,487 262,374
Provision for Income Taxes
Current 90,000 40,000
Deferred (90,000) (36,000)
------------ ------------
Total Provision for Taxes -0- 4,000
------------ ------------
Net Income $ 632,487 $ 258,374
============ ============
Earnings Per Common Shares
Weighted average shares outstanding 9,512,708 9,512,708
Fully diluted average shares outstanding 17,012,708 17,012,708
Net income $ 632,487 $ 258,374
Preferred stock dividend requirement (196,429) $ (152,597)
------------ ------------
Net income after preferred stock dividends $ 436,058 $ 105,777
============ ============
Primary earnings per share $ 0.05 $ 0.01
============ ============
Fully diluted earnings per share $ 0.03 $ 0.01
============ ============
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
9 Months Ended September 30,
-------------------------------------------------
1997 1996
----------------------- -----------------------
Revenues:
Interest $ 11,066,633 $ 9,455,132
Gain on Sales of Contracts 29,689 383,419
Other Income 497,959 660,183
------------ ----------
11,534,281 10,498,734
------------ ----------
Costs and Expenses:
Provision for doubtful receivables 225,000 162,719
Interest 6,301,626 5,977,240
Debt related costs including amortization of financing costs 768,977 509,381
Selling, general and administrative 1,825,663 2,537,189
---------- ----------
9,121,266 9,275,529
---------- ----------
Income Before Provision for Taxes 2,413,015 1,223,205
Provision for Income Taxes
Current 270,000 133,000
Deferred (90,000) -0-
---------- ----------
Total Provision for Taxes 180,000 133,000
---------- ----------
Net Income $ 2,233,015 $ 1,090,205
========== ==========
Earnings Per Common Shares
Weighted average shares outstanding 9,512,708 9,512,708
Fully diluted average shares outstanding 17,012,708 17,012,708
Net income $ 2,233,015 $ 1,090,205
Preferred stock dividend requirement (565,289) $ (377,789)
----------- ----------
Net income after preferred stock dividends $ 1,667,726 $ 712,416
=========== ==========
Primary earnings per share $ 0.18 $ 0.07
============ ==========
Fully diluted earnings per share $ 0.10 $ 0.04
============ ==========
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENT OF EQUITY ACCOUNTS
Redeemable
Additional Preferred Convertible Retained
Common Stock Paid in Stock-Series 2 Preferred Earnings
Total Shares Amount Capital Class A Stock-Series 2 (Deficit)
----------- ---------- --------- ----------- ------------- -------------- ------------
Balances at December 31, 1996 $ 4,037,281 9,484,847 $ 474,243 $ 6,330,956 $ 30,000 $ 9,000 $(2,806,918)
Net Income 2,233,015 2,233,015
---------- --------- -------- ---------- ------- -------- ----------
Balances at September 30, 1997 $ 6,270,296 9,484,847 $ 474,243 6,330,956 $ 30,000 $ 9,000 $ (573,903)
========== ========= ======== =========== ======= ======== ==========
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC. AND SUBSIDIARIES
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOW
9 months Ended September 30,
-------------------------------------------------
1997 1996
----------------------- -----------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net Income $ 2,233,015 $ 1,090,205
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 753,925 463,363
Provision for doubtful receivables 225,000 162,719
Provision for deferred taxes (90,000) -0-
Gains on sales of contracts 29,689 383,419
Changes in assets and liabilities:
Increase decrease in other assets (885,804) 119,496
Increase in accounts receivable - related parties (66,334) (452,061)
Increase in restricted cash (52,335) (1,022,869)
Decrease in accounts payable, cash overdraft and accrued
expenses (242,390) (746,712)
Increase (decrease) in accounts payable--related parties 1,532 (849,120)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,903,298 (851,560)
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of contracts -0- 6,927,972
Increase in receivables, net (12,849,468) (13,800,541)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (12,849,468) (6,872,569)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on loans payable--related party -0- (6,687,532)
Payments on notes receivable--related party 8,791,239 -0-
Proceeds on loans payable--related party 1,452,861 -0-
Proceeds from recourse notes payable 7,334,812 12,731,135
Payments on recourse notes payable (9,266,832) (15,114,865)
Proceeds from non-recourse notes payable 16,258,116 27,770,848
Payments on non-recourse notes payable (15,208,551) (11,120,285)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,361,645 7,579,301
----------- ----------
INCREASE (DECREASE) IN CASH (1,584,525) (144,828)
----------- ----------
Cash at beginning of period 4,037,201 1,302,934
----------- ----------
CASH AT END OF PERIOD $ 2,452,676 $ 1,158,106
=========== ==========
See Accompanying Notes To Consolidated Financial Statements.
EQUIVEST FINANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying consolidated interim financial statements as of
September 30, 1997 and for the nine-month period ended September 30,
1997 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September
30, 1997, are not necessarily indicative of the results expected for the
year ended December 31, 1997. For further information, please refer to
the consolidated financial statements and footnotes thereto included in
Equivest Finance, Inc.'s (the "Company") Form 10-KSB for the period
ended December 31, 1996.
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, Equivest Capital Funding,
Inc., and Resort Funding, Inc. ("Resort Funding") and its subsidiary,
BFICP Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and costs and expenses during the reporting period. Actual results
could differ from the Company's estimates.
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 on the terms of the loan
agreements. The accrual of interest on an impaired loan is discontinued
when accrued and unpaid interest, together with the loan principal
outstanding, exceeds the loan's projected cash flow or the loan's net
collateral value.
Gains on sales of contracts result from periodic non-recourse sales
of consumer receivables. A gain is recorded to the extent the net
proceeds exceed the net investment in the consumer receivables sold.
Other income primarily represents fees, which are recognized as
income when Resort Funding performs the related service. These services
include billing services for developers, servicing of accounts
receivable sold under its financing facility (discontinued after April
1996), and loan commitment, chargeback and collection fees to its resort
developers.
Receivables have been reduced by an allowance for doubtful
receivables. The allowance is an amount which management believes will
be adequate to absorb possible losses on existing receivables. The
evaluation incorporates past loss experience, known and inherent risks
in the portfolio, adverse conditions that may affect the borrower's
ability to repay, the estimated value of underlying collateral, and
current economic conditions. Receivables are charged against the
allowance when management believes that collectibility is unlikely.
Because of uncertainties in the estimation process, it is at least
reasonably possible that management's estimate of loan losses inherent
in the loan portfolio and the related allowance will change in the near
term.
The Company follows Statement of Financial Accounting Standards No.
114 (SFAS 114) "Accounting by Creditors for Impairment of a Loan".
Under SFAS 114, the allowance for doubtful receivables for loans
identified as impaired is specifically determined using the loan's
projected discounted cash flow or its net collateral value.
In July 1997, a Las Vegas, Nevada developer and customer of Resort
Funding filed for bankruptcy court protection. As of October 31, 1997,
the developer had outstanding indebtedness on its acquisition and
development loans of approximately $6 million, which loans are secured
by first and third mortgages on the property. This amount owed includes
principal, accrued interest, and certain other fees relating to such
loans. Although 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 October 31, 1997, a resort property located in Hilton Head,
South Carolina was approximately four months delinquent in payment of
its obligations to Resort Funding under an acquisition and development
loan agreement. As of October 31, 1997, Resort Funding was owed
approximately $140,000 by the developer in overdue payments. On
November 3, 1997, Resort Funding reached an agreement with the developer
to settle the arrears. As part of the agreement, the developer paid
Resort Funding all past due amounts in full and remitted payment in
advance for installments due for October, November and December, 1997.
As additional security for future payments, the developer agreed to
grant Resort Funding a deed in lieu of foreclosure to be held in escrow
pending Resort Funding's receipt of all other payments as they become
due. The balance owed to Resort Funding under the referenced loan as of
October 31, 1997 was approximately $3.6 million.
Deferred financing costs represent unamortized expenses associated
with issuing certain debt and fees payable pursuant to certain bank
settlement transactions described below. Amortization of these costs is
computed on a straight-line basis over the term of the associated debt
and does not differ materially from that computed using the effective
interest method.
The 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 method
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future
tax consequences, the Company generally considers all expected future
events other than enactments of changes in tax laws or rates. A
valuation allowance reduces deferred tax assets when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Primary earnings per common share is computed by dividing net
income, less the preferred stock dividend requirements, by the weighted
average number of common shares and, as appropriate, common stock
equivalents outstanding for the period. Fully diluted earnings per
common share assumes conversion of convertible preferred stock,
elimination of the related preferred stock dividend requirements and the
issuance of common stock for all other potentially dilutive equivalents
outstanding.
The Financial Accounting Standards Board issued several new
pronouncements which became effective during 1997. "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" (SFAS 125) applies to transfers of assets after December
31, 1996. SFAS 125 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. SFAS 125
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company discontinued its operations as an insurance premium
financing company during 1995. Therefore, the following presentation and
discussion relates to Resort Funding and its operations.
THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------
Results of Operations
---------------------
Revenues increased 12.6% to $3,884,100 for the three months ended
September 30, 1997, from $3,448,000 for the same period in 1996. The
increase was due primarily to an increase in interest income as a result
of portfolio growth, interest income from notes receivable from a
related party and higher cash balances, as well as an increase in
commitment fees. Income before income taxes increased 141.1% to $632,500
and net income after taxes increased 144.8% to 632,500 for the three
months ended September 30, 1997, from $262,400 and $258,400,
respectively, for the same period in 1996. In both cases, the increase
was due primarily to an increase in interest income as a result of
growth in portfolios being held for investment and interest income from
notes receivable from a related party. The increase was offset in part
by an increase in debt issue costs, an addition of $225,000 to the
provision for doubtful accounts, and a decrease on the gain of sale of
contracts. Resort Funding's income before taxes increased 142.9% to
$647,900 for the three months ended September 30, 1997, compared to
$266,800 for the same period in 1996.
Interest Income
---------------
Interest on loans increased 17.3% to $3,692,400 for the three months
ended September 30, 1997, from $3,148,000 for the same period in 1996,
primarily due to growth in the portfolio held for investment, income
from notes receivable from a related party, and higher cash balances.
Interest on consumer notes increased 19.0% to $2,484,500 for the three
months ended September 30, 1997, from $2,087,300 for the same period in
1996, as a result of growth in the portfolio held for investment. The
growth in interest income on consumer notes was augmented by $159,700 in
interest income on notes receivable from a related party, which notes
did not exist in the same period a year earlier. This increase in
interest income more than offset a decrease of 5.2%, or $54,300, in
interest received on acquisition and development loans to developers,
due to lower than average balances outstanding compared to the same
period in 1996.
Gain on Sale of Contracts
-------------------------
Interest revenue was partially offset by a decrease of 100% on gains on
the sale of consumer contracts, to $0 for the three months ended
September 30, 1997, from $184,700 for the same period in 1996. This
decrease was caused by a portfolio purchased at a discount in 1996,
coupled with a prohibition by Resort Funding's primary lender, ING
(U.S.) Capital Markets, Inc. ("ING"), on sales of loans using ING's
commercial paper facility after April 1996.
Other Income
------------
Other income increased by 66.3% to $191,700 for the three months ended
September 30, 1997, from $115,300 for the same period in 1996,
primarily due to an increase in commitment fees.
Provision for Doubtful Accounts
-------------------------------
The provision for doubtful receivables increased 71.6% to $225,000 for
the three months ended September 30, 1997, from $131,100 for the same
period in 1996, as a result of an increased level in new originations.
Interest Expense
----------------
Interest expense decreased 3.8% to $2,024,500 for the three months ended
September 30, 1997, from $2,104,300 for the same period in 1996,
primarily due to lower interest rates on other bank notes. In the
quarter comparison, average outstanding bank debt increased
approximately 43% in 1997, but the interest expense on the related debt
decreased by 5.7% due entirely to lower interest rates on other bank
notes. The interest expense on the ING facility increased 20.6% to
$889,900 for the third quarter of 1997 from $737,700 for the third
quarter of 1996, due primarily to higher outstanding balances. Interest
expense on other bank notes decreased 28.7% to $602,300 for the three
months ended September 30, 1997, from $845,000 for the same period in
1996, due to a decrease in interest rates. The average interest rates
on other bank notes decreased to 5.8% for the third quarter of 1997,
from 10.3% for the same period in 1996. The decrease in interest rates
is entirely due to the addition of certain loans relating to the
settlement of the claims made by several lenders (the "Banks") in the
bankruptcy case of Bennett Funding Group, Inc. ("BFG") and its
affiliate, Aloha Capital Corporation (collectively, the "Debtors"),
arising out of lease-financing agreements pursuant to which the Banks
made loans to the Debtors. The settlements, which were approved by the
United States Bankruptcy Court for the Northern District of New York
(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"), ranging in term from 30 to 120 months, with an
average duration of 70 months. Additional such settlements have been
entered into from time to time with a total amount through October 31,
1997, of approximately $22,700,000. The weighted average interest rate
on the Settlement Loans is 2.1% compared with a rate as of September 30,
1997 of 10.5% on the ING facility. The beneficial effect of the
extremely low interest rates of the Settlement Loans is partially offset
by a 3% per annum arrangement fee paid by Resort Funding to BFG, which
fee is accounted for as a cost of debt issuance.
Selling, General and Administrative
-----------------------------------
Selling, General and Administrative costs decreased 7.6% to $716,100 for
the three months ended September 30, 1997, from $774,800 for the same
period in 1996, primarily due to a decrease in office-related expenses.
The decrease was slightly offset by higher outside services
expenditures. The results from the Company's administrative expenses
increased by 250.0% to $15,400 for the three months ended September 30,
1997, from $4,400 for the same period in 1996.
Debt Issue Costs and Amortization
---------------------------------
Debt issue costs and amortization increased 58.2% to $270,600 for the
three months ended September 30, 1997, from $171,000 for the same period
in 1996. The increase was primarily attributable to the amortization
of debt issue costs for the 3% per annum arrangement fee charged by the
bankrupt estate of BFG and other affiliated companies (the "Estate")
relating to the Settlement Loans. Resort Funding is obligated to pay the
arrangement fee to the Estate based on the unpaid principal balance of
the new term loans. The increases in amortization of debt issue costs
were offset by decreases in debt issue costs associated with other
lenders.
Provision for Income Taxes
--------------------------
The provision for income taxes for the three months ended September 30,
1997 decreased 100.0% to $0, from $4,000 for the same period in 1996.
The net decrease results from increased state income taxes during the
period being offset by the deferred taxes associated with the provision
for doubtful accounts. The income tax provision includes the
utilization of net operating loss carryforwards which shelter the
Company's book income from federal income taxes. The provision for
income taxes for the three months ended September 30, 1996 also reflects
the utilization of net operating loss carryforwards and the deferred tax
provision relating to the provision for doubtful accounts.
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------
Results of Operations
---------------------
Revenues increased 9.9% to $11,534,300 for the nine months ended
September 30, 1997, from $10,498,700 for the same period in 1996. The
increase was due primarily to an increase in interest income as a result
of portfolio growth, interest income from notes receivable from a
related party and higher cash balances, and an increase in commitment
fee income. This increase was partially offset by a one-time special
origination fee received in the first quarter of 1996, half of which was
discounted in the first quarter of 1997 when the asset was sold. Service
income, interest income on acquisition and development loans, and gains
on the sale of consumer contracts also had a negative impact on the
overall increase in revenues. Income before income taxes increased
97.3% to $2,413,000 and net income after taxes increased 104.8% to
$2,233,000 for the nine months ended September 30, 1997, from $1,223,200
and $1,090,200, respectively, for the same period in 1996. The increase
was due primarily to an increase in interest income as a result of
growth in portfolios being held for investment and decreased expenses
resulting from the discontinuance of fees paid to an affiliate of the
Company and administrative expenses from the Company. Resort Funding's
income before taxes increased 62.1% to $2,515,000 for the nine months
ended September 30, 1997 compared to $1,551,300 for the same period in
1996.
Interest Income
---------------
Interest on loans increased 16.4% to $11,006,600 for the nine months
ended September 30, 1997, from $9,455,100 for the same period in 1996,
primarily due to growth in the portfolio held for investment, income
from notes receivable from a related party, as well as higher cash
balances. Interest on consumer notes increased 20.0% to $7,368,800 for
the nine months ended September 30, 1997 from $6,142,400 for the same
period in 1996, as a result of growth in the portfolio held for
investment. The growth in interest income on consumer notes was
augmented by $518,700 in interest income on notes receivable from a
related party, which notes did not exist in the same period a year
earlier. This increase in interest income more than offset a decrease of
11.4% or $369,800 in interest received on acquisition and development
loans to developers, due to lower than average balances outstanding
compared to the same period in 1996.
Gain on Sale of Contracts
-------------------------
Interest revenue was partially offset by a decrease of 92.3% on gains on
the sale of consumer contracts, to $29,700 for the nine months ended
September 30, 1997 from $383,400 for the same period in 1996. This
decrease was caused by a portfolio purchased at a discount in 1996
coupled with a prohibition by Resort Funding's primary lender, ING
(U.S.) Capital Markets, Inc. ("ING"), on sales of loans using ING's
commercial paper facility after April 1996.
Other Income
------------
Other income decreased by 24.6% to $498,000 for the nine months ended
September 30, 1997, from $660,200 for the same period in 1996. The
year-to-date decrease was primarily due to a one-time special
origination fee received in the first quarter of 1996, half of which was
discounted in the first quarter of 1997 when the asset was sold. Other
income also decreased due to the elimination of service fees paid by ING
in the first quarter of 1996. The decrease was partially offset by an
increase in origination fees.
Provision for Doubtful Accounts
-------------------------------
The provision for doubtful receivables increased 38.3% to $225,000 for
the nine months ended September 30, 1997, from $162,700 for the same
period in 1996, as a result of an increase in new originations.
Interest Expense
----------------
Interest expense increased 5.4% to $6,301,600 for the nine months ended
September 30, 1997, from $5,977,200 for the same period in 1996,
primarily due to higher levels of borrowing (caused by ING's prohibition
on the sales of the loans by Resort Funding) and an increase in the
interest rate charged on the ING facility. The interest expense on the
ING facility increased 57.1% to $2,662,800 for nine months ending
September 30, 1997 from $1,695,100 for same period of 1996. Interest
expense on other bank notes decreased 25.6% to $1,985,700 for the nine
months ended September 30, 1997, from $2,668,400 for the same period in
1996, due to a decrease in interest rates. The average interest rates
on other bank notes decreased to 6.4% for the first three quarters of
1997, from 10.3% for the same period in 1996. The decrease in interest
rates is due entirely to the addition of certain loans relating to the
settlement of the claims made by several lenders (the "Banks") in the
bankruptcy case of Bennett Funding Group, Inc. ("BFG") and its
affiliate, Aloha Capital Corporation (collectively, the "Debtors"),
arising out of lease-financing agreements pursuant to which the Banks
made loans to the Debtors. The settlements, which were approved by the
United States Bankruptcy Court for the Northern District of New York
(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"), ranging in term from 30 to 120 months, with an
average duration of 70 months. The weighted average interest rate on the
Settlement Loans is 2.1% compared with a rate as of September 30, 1997
of 10.5% on the ING facility. The beneficial effect of the extremely low
interest rates of the Settlement Loans is partially offset by a 3% per
annum arrangement fee paid by Resort Funding to BFG, which fee is
accounted for as a cost of debt issuance.
Selling, General and Administrative
-----------------------------------
Selling, General and Administrative costs decreased 22.0% to $1,723,700
for the nine months ended September 30, 1997, from $2,209,100 for the
same period in 1996. The decrease was primarily a result of the
elimination of application, recording and processing fees paid to an
affiliate of the Company, as well as lower office-related costs in 1997.
The decreases were slightly offset by higher outside services
expenditures. The results from the Company's administrative expenses
decreased by 68.9% to $102,000 for the nine months ended September 30,
1997, from $328,000 for the same period in 1996.
Debt Issue Costs and Amortization
---------------------------------
Debt issue costs and amortization increased 28.5% to $769,000 for the
nine months ended September 30, 1997, from $598,400 for the same period
in 1996. The increase was primarily attributable to the amortization
of debt issue costs for the 3% per annum arrangement fee charged by the
bankrupt estate of BFG and other affiliated companies (the "Estate")
relating to the Settlement Loans. Resort Funding is obligated to pay the
arrangement fee to the Estate based on the unpaid principal balance of
the new term loans. The increases in amortization of debt issue costs
were offset by decreases in debt issue costs associated with other
lenders.
Provision for Income Taxes
--------------------------
The provision for income taxes for the nine months ended September 30,
1997 increased 35.3% to $180,000, from $133,000 for the same period in
1996. The increase was primarily attributable to the provision for the
state income taxes, since the current period tax provision includes the
utilization of net operating loss carryforwards which shelter the
Company's book income from federal taxes. The current portion of the
provision relates to currently payable state income taxes, and the
deferred portion of the provision relates to the provision for doubtful
accounts. The provision for income taxes for the nine months ended
September 30, 1996 also reflects the utilization of net operating loss
carryforwards (but only for the period after February 16, 1996).
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Bankruptcy of Affiliated Companies; Relationship to Bankruptcy
--------------------------------------------------------------
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, 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. Because
of the relationships among the parties, the Company accounted for the
transaction as if it were a pooling of interest.
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 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.
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.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Recent Developments
-------------------
On October 24, 1997, the Trustee received a proposal from the
Official Committee of Unsecured Creditors of BFG to exchange the entire
debt of approximately $25.3 million owed by Resort Funding to BFG, less
certain offsetting debt owed to Resort Funding and the Company, into
4,645,596 shares of the Company. This represents a conversion price of
$5.375 per share, which price was based on the average closing price of
the Company's stock for the ten trading days prior to the date of the
proposal. Such proposal was advanced to the Company by the Trustee on
behalf of BFG, subject to Bankruptcy court approval. The BFG proposal
was independently reviewed by the Company's Board of Directors on
October 29, 1997, with the Trustee not participating. The Board
approved the proposal with certain adjustments.
The Company announced on October 2, 1997 that it had elected three
new directors to fill vacancies on its board of directors. The newly
elected directors are George W. Carmany III, John R. Petty, and Richard
C. Breeden.
George W. Carmany III is Chairman of the New England Medical Center
in Boston, Massachusetts. He is also President of The G.W. Carmany Co.,
Inc. in Boston, Massachusetts, which is an advisor of and investor in
small companies. A graduate of Amherst College, Mr. Carmany began his
business career with Bankers Trust Company as an officer in its
international Banking Department in New York, and later as Executive
Director of its merchant banking subsidiary in Australia. From 1975-
1995 he served in a variety of senior positions with American Express
Company, including Senior Vice President, Corporate Strategic Planning.
At American Express Bank, Mr. Carmany served as Senior Executive Vice
President and Chief Administrative Officer before joining American
Express Company's subsidiary The Boston Company as Senior Executive Vice
President, Treasurer and Director, a position he held until the sale of
that company to Mellon Bank Corporation. Mr. Carmany subsequently
served as Chairman of the Olympia and York Noteholder's Steering
Committee, and he is Chairman of the New England Medical Center, Inc.
Mr. Carmany serves as a director or trustee of numerous organizations,
including Ekco Group, Inc., Bentley College, the U.S.S. Constitution
Museum, and The South Street Seaport Museum.
John R. Petty, former Chairman and Chief Executive Officer of
Marine Midland Bank, is currently Chairman of Federal National Payables,
Inc. Bethesda, Maryland and TECSEC, Inc., Vienna, Virginia. Following
his graduation from Brown University, and a tour in the U.S. Navy, Mr.
Petty joined the Chase Manhattan Bank, where he worked until serving in
the U.S. Treasury Department from 1966-1972, primarily as Assistant
Secretary of the Treasury for International Affairs. After five years
as a partner of Lehman Brothers, Inc., Mr. Petty joined Marine Midland
Bank, as President and/or Chairman and Chief Executive Officer from
1976-1988. Since retiring from Marine Midland Bank, Mr. Petty has
pursued a variety of interests including serving as Chairman of the
Nippon Credit Trust Company. He has formed and managed finance
companies and is a principal in high technology ventures. Mr. Petty has
served as a director of numerous public companies, including Hongkong
and Shanghai Banking Corporation, RCA, NBC, Hercules, Inc., Anixter
International Corporation, ANTEC Corporation, and others. He is a
Trustee of American University, a member of the Council on Foreign
Relations and of the Inter-American Dialogue, and President of the
Foreign Bondholders Protective Council.
Richard C. Breeden is President and Chief Executive Officer of
Richard C. Breeden & Co., Inc., in Greenwich, Connecticut, which
provides consulting and management services in turnarounds, bankruptcies
and other corporate distress situations, as well as consulting on global
and domestic capital markets. An honors graduate of Stanford University
and Harvard Law School, Mr. Breeden served in the White House as a
senior economic and financial advisor to President George Bush. From
1989-1993 he served as Chairman of the U.S. Securities and Exchange
Commission following his appointment by President George Bush and
unanimous confirmation by the U.S. Senate. Mr. Breeden currently serves
as the Trustee of BFG and it's affiliated entities. Mr. Breeden has
served on numerous boards and commissions, including a consultative
commission including the Bank of England, Bank of Japan, Federal
Reserve Board and the S.E.C., the North American Advisory Board of
Daimler-Benz A.G., The Philadelphia Stock Exchange, Inc. (where he also
serves as Chairman of the Audit Committee), the German-American Chamber
of Commerce, and advisory commissions on capital markets in Italy, China
and Russia. Mr. Breeden is a Trustee of St. Paul's Cathedral Trust in
America and the National Policy Association in Washington, D.C. Mr.
Breeden has been elected Chairman of the Board and Chief Executive
Officer of the Company.
Item 6. (a) Exhibits
The following exhibits are filed herewith: None.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed
on its behalf by the undersigned, there unto duly authorized.
EQUIVEST FINANCE, INC.
BY: /s/ Gerald L. Klaben
-----------------------------------------------------------
Gerald L. Klaben, Jr., Executive Vice President and Chief
Financial Officer
Dated November 13, 1997