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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-22681
FINANTRA CAPITAL, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 13-3571419
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
150 SOUTH PINE ISLAND ROAD, SUITE 500
PLANTATION, FLORIDA 33324
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(Address of Principal Executive Offices) (Zip Code)
(954) 577-9225
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(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE
---------------------------------------------------
(Title of Class)
COMMON STOCK PURCHASE WARRANTS
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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. [X]
State issuer's revenues for its most recent fiscal year: $11,604,014.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days: $36,274,894.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 11,670,040 shares of Common
Stock, $.01 par value per share, at March 29, 2000.
Transitional Small Business Disclosure Format (Check One):
YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of this Form 10-KSB is hereby
incorporated by reference to the Issuer's definitive proxy statement to be
disseminated to stockholders in connection with the Issuer's 2000 Annual Meeting
of Stockholders, which definitive proxy statement will be filed with the
Commission not later than April 29, 2000.
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB may contain certain "forward-looking
statements" relating to the Company which represent the Company's current
expectations or beliefs, including, but not limited to, statements concerning
the Company's operations, performance, financial condition and growth. For this
purpose, any statements contained in this Annual Report on Form 10-KSB that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may", "will", "expect", "believe", "anticipate", "intend", "could", "estimate",
or "continue", or the negative or other variation thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, such as
credit losses, dependence on management and key personnel and variability of
quarterly results, ability of the Company to continue its growth strategy and
competition, certain of which are beyond the Company's control. Should one or
more of these risks or uncertainties materialize or should the underlying
assumptions prove incorrect, actual outcomes and results could differ materially
from those indicated in the forward looking statements.
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PART I
ITEM 1. BUSINESS
GENERAL
Finantra Capital, Inc. (the "Company") is a diversified, multi-faceted
specialty finance company principally engaged, in lending activities related to
accounts receivable factoring, equipment leasing, mortgage banking, consumer
finance and other types of specialty financing. The Company also provides
accounting and collections services to other entities.
The Company's business is operated principally through two wholly-owned
holding company subsidiaries, Ameri-Cap Business Finance Group, Inc. ("ABFG")
and Ameri-Cap Consumer Finance Group, Inc. ("ACFG"). ABFG, which spearheads the
Company's business finance operations, specializes, principally, in accounts
receivable factoring and equipment leasing. ACFG, which spearheads the Company's
consumer finance operations, specializes, principally, in mortgage banking,
consumer finance and other types of specialty financing. In addition, the
Company has formed Finantra Internet Services.com, Inc. ("FIS"), a platform for
the distribution of financial products and services, in particular, residential
mortgages, through the Internet.
Since the consummation of the Company's initial public offering of
securities (the "IPO")during January 1998, the Company's operations have focused
primarily on growing an operation base and establishing a market presence in
each of the aforementioned businesses. The Company's primary strategy for
achieving its necessary growth and market presence has been, among other things,
to pursue acquisitions of existing enterprises which, in the Company's opinion,
have management experience, earnings potential and long-term growth
possibilities, and obtaining institutional lines of credit for each financing
business line.
Effective September 30, 1999, the Company, through its Travelers
Acquisition Co. subsidiary ("TAC"), consummated its largest acquisition to date,
Travelers Investment Corporation, a California-based provider of specialty
consumer financing ("Travelers"). Travelers has been engaged for over 25 years
in the acquisition, management, servicing and collection of individual consumer
contracts. At the time of its acquisition, Travelers had an established loan
portfolio of approximately $36 million in gross consumer receivables. Travelers
operates under the Company's ACFG subsidiary.
In consideration for its purchase of all of the outstanding stock of
Travelers, the Company paid Travelers' stockholders an aggregate of $20 million,
$15 million in cash at closing, with the remaining $5 million taking the form of
three year 10% promissory notes of TAC. To secure TAC's obligations under the $5
million notes, TAC granted Travelers' former stockholders a subordinated
security interest in all of Travelers' assets and pledged, on a subordinated
basis, all of Travelers' stock. The Company has guaranteed all of TAC's
obligations under the $5 million notes.
While the Company has only a limited operating history in the accounts
receivable factoring and traditional financing business lines, the Company has
more seasoned experience in the equipment leasing business.
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The Company was incorporated under the laws of the State of Delaware on
May 2, 1990. In August 1998, the Company changed its name to Finantra Capital,
Inc. The Company's principal executive offices are located at 150 South Pine
Island Road, Suite 500, Plantation, Florida 33324, and its telephone number is
(954) 577-9225.
AMERI-CAP BUSINESS FINANCE GROUP OPERATIONS
FACTORING OPERATIONS
The Company's factoring operations are conducted through its
Ameri-Cap Factors Group, Inc. subsidiary ("Ameri-Cap Factors"). Ameri-Cap
Factors' business consolidates the operations of the Company's Ameri-Cap
Commercial Asset Finance Group, Inc., American Factors Group, Inc. and AmeriCap
Retail Factors, Inc. subsidiaries, and focuses on the discounted purchase of
approved accounts receivable. These receivables are limited, principally, to
credit insured and other relatively low-risk accounts receivables. Ameri-Cap
Factors recently has expanded operations to include traditional factoring, i.e.,
providing small-to-medium sized companies with capital through the discounted
purchase of their accounts receivable.
Ameri-Cap Factors' business consists, generally, of Ameri-Cap Factors
entering into an accounts receivable factoring and security agreement with a
client which obligates the client to sell to Ameri-Cap Factors a minimum amount
of accounts receivable each month (or a minimum amount of receivables during the
term of the agreement), usually has a term of not less than one year, and is
automatically renewable. When making an advance collateralized by inventory,
equipment, real estate or other assets, Ameri-Cap Factors enters into such
additional agreements with the client, and, if appropriate, third parties, as
Ameri-Cap Factors deems necessary or desirable based on the type of collateral
securing the advance. Ameri-Cap Factors purchases accounts receivable from its
clients at a discount from face value and usually requires the client's
customers to make payment on the receivables directly to Ameri-Cap Factors.
Ameri-Cap Factors also takes a lien on all accounts receivable of the client
and, whenever available, blanket liens on all of the client's other assets (some
or all of which liens may be subordinate to other liens) to secure the client's
obligations. When making an advance, Ameri-Cap Factors generally takes a first
lien on the specific collateral securing the advance. Ameri-Cap Factors almost
always requires personal guaranties (either unlimited or limited to the validity
and collectibility of purchased accounts receivable) from each client's
principals. Although AmeriCap Factors obtains, when available, credit insurance
underwritten by credible insurance companies, and as much collateral as
possible, there can be no assurance that the collateral obtained will be
sufficient to protect Ameri-Cap Factors against loss.
For purposes of providing Ameri-Cap Factors with the capital necessary
to finance its factoring operations, the Company, through its American Factors
Group, Inc. subsidiary, entered into a $7 million credit facility (the
"Factoring Facility") with FINOVA Capital Corporation ("FINOVA"). Advances under
the Factoring Facility are secured by the pledge to FINOVA of all of American
Factors Group, Inc.'s receivables, all other Ameri-Cap Factors' receivables
acquired with advances under the Factoring Facility and the Company's guaranty.
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LEASING OPERATIONS
The Company's equipment leasing operations, i.e., the business of
acquiring, originating, selling and servicing equipment leases, are conducted
through its Ameri-Cap Leasing Corp. subsidiary ("Ameri-Cap Leasing"). The
equipment leased by Ameri-Cap Leasing generally has a purchase price of less
than $250,000. As such, Ameri-Cap Leasing's leases are commonly referred to as
"small ticket leases." Ameri-Cap Leasing currently funds the acquisition or
origination of its leases from its working capital. Ameri-Cap Leasing has
established strategic alliances with a network of independent leasing companies,
lease brokers and equipment vendors, each of which acts as a source from which
Ameri-Cap Leasing obtains access to equipment leases. Ameri-Cap Leasing
customizes lease financing products to meet the specific equipment financing
needs of its sources.
The Company believes that the small ticket segment of the equipment
leasing business is a rapidly growing industry due, in part, to (i) the
consolidation of the banking industry, which has eliminated many of the smaller
community banks that traditionally provided equipment financing for small to
mid-size businesses, forcing these businesses to seek alternative financing
rather than deal with the approval process of large commercial banks; (ii)
stricter lending requirements of commercial banks; (iii) a trend toward instant
approvals at the point of sale made possible by improved technology; (iv) the
decline in the price of computer hardware and software and increasing demand
therefor; and (v) the adoption of accounting pronouncements concerning the
accounting treatment of transactions with captive finance company subsidiaries,
which has caused a number of manufacturers to eliminate their finance companies,
resulting in an increased demand for independent financing.
Substantially all equipment leases acquired or originated by Ameri-Cap
Leasing are non-cancelable. During the term of the lease, Ameri-Cap Leasing
generally receives scheduled payments sufficient, in the aggregate, to cover
Ameri-Cap Leasing's borrowing costs and the costs of the underlying equipment,
and to provide Ameri-Cap Leasing with an appropriate profit margin. The initial
non-cancelable term of the lease is equal to or less than the equipment's
estimated economic life and a small portion of Ameri-Cap Leasing's leases
provide Ameri-Cap Leasing with additional revenues based on the residual value
of the equipment financed at the end of the initial term of the lease. Initial
terms of the leases in the Ameri-Cap Leasing's portfolio generally range from 12
to 60 months.
AMERI-CAP CONSUMER FINANCE GROUP OPERATIONS
RETAIL SPECIALTY FINANCE OPERATIONS
The Company's emergence into the retail specialty finance industry was
solidified by the Company's acquisition, through its TAC subsidiary, of
Travelers during late 1999. Travelers conducts business, principally, through
four operating subsidiaries, Travelers Acceptance Corporation ("Acceptance"),
Travelers Leasing Corporation ("TLC"), Trace Credit Service ("Trace") and
Traveler's Data Services ("TDS"). Acceptance, generally, purchases, services and
collects installment consumer contracts from originators. Acceptance currently
services approximately 200 organizations, with a total portfolio value of
approximately $40 million in consumer promissory notes, comprising over 21,000
individual accounts. TLC, generally, provides niche based leasing solutions to a
variety of businesses. Trace, generally, provides debt collection services to
third-party clients. Trace currently serves approximately 100 clients and has in
its portfolio approximately $50 million in recoverable and collectible
non-performing receivables. TDS, generally,
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provides for the billing and servicing of individual consumer accounts for
third-party clients. TDS currently services approximately $80 million of
consumer promissory notes.
The Company believes that Travelers' resources have been, historically,
underutilized and that, with the implementation of certain marketing and
operating strategies, Travelers' financial performance could be increases
materially. Management further believes that the acquisition of Travelers will
result in numerous marketing and operating synergies that will result, on a
consolidated basis, in revenue and earnings increase for the Company. Management
of the Company believes that the acquisition of Travelers should be accretive as
a result of both cost savings and revenue expansion. The Company intends to
effect initial Travelers' cost reductions by combining Travelers' three existing
offices into one location and by updating Travelers' information systems and
transitioning it to an Internet access portal. In addition, management of the
Company anticipates that the Company can eliminate approximately $1 million
annually from Travelers' operating expenses as a direct result of the
elimination of certain salary and consulting fees historically paid to certain
of Travelers' former stockholders. Management of the Company further anticipates
that Travelers' revenues should be enhanced as a result of cross-selling and
marketing efforts between Travelers and the Company's other operating divisions.
In order to provide Travelers with the capital necessary to fund its
operations, the Company has entered into a separate $32.5 million credit
facility with FINOVA (the "Travelers/FINOVA Facility"). The Travelers/FINOVA
Facility has a five year term and bears interest at the rate which, from time to
time, is 2% above FINOVA's stated prime rate. Advances under the
Travelers/FINOVA Facility are limited, generally, to an amount not to exceed 80%
of Travelers' eligible receivables and inventory. Obligations thereunder have
been secured by Travelers' grant of a first lien on, and security interest in,
all of Travelers' assets and a pledge, on a subordinated basis, of all of the
capital stock of Travelers. At the closing of the Company's acquisition of
Travelers, approximately $15 million of advances under the Travelers/FINOVA
Facility were applied to satisfy indebtedness then owing to Travelers' senior
lenders. Each of the Company and TAC has guaranteed all obligations and
liabilities under the Travelers/FINOVA Facility.
In an effort to further solidify the Company's emergence into the
retail specialty finance industry, the Company, through its Acceptance and
T.A.C. Technology Finance Corp. subsidiaries, during January 2000, entered into
a Consumer Finance Contracts Program (the "Program") with Gateway Companies,
Inc., a Delaware corporation and New York Stock Exchange company ("Gateway").
Pursuant to the Program, among other things, Gateway has agreed to assign to the
Company Gateway customer contracts (the "Contracts") for computers, software,
accessories, certain warranties and other related goods and services sold by
Gateway or any of its vendors in the ordinary course of Gateway's business
(collectively, the "Goods") to consumers for individual, family, personal or
household use, and the Company has agreed to accept such assignments of
Contracts and finance loans to Gateway's customers to pay Gateway for the Goods
being purchased under the Contracts. In general, the Company has agreed to pay
Gateway for Contracts for Goods assigned under the Program by Gateway to the
Company at a purchase price per Contract equal to the total principal amount to
be financed by the Company under such Contract less a negotiated discount.
Pursuant to the Program, Gateway has agreed to make commercially reasonable
efforts to assign to the Company, and the Company has agreed to make
commercially reasonable efforts to accept assignments of Contracts, of not less
than a fixed amount per month.
Pursuant to the Program, Gateway shall offer to the Company all
Contracts for Goods involving Gateway customers who satisfy a certain credit
profile, subject, however to existing financing programs of Gateway and other
limitations and guidelines that Gateway has instituted. The Company, in its sole
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discretion, shall make all credit decisions as to those Contracts the Company
agrees to accept and fund. The Company shall accept an assignment of a Contract
approved for funding by the Company in accordance with the Company's credit
procedures and the obligation to accept the assignment from Gateway of such
Contract shall be in the Company's sole discretion. The Program has a limited
term during which time the Company has agreed, in general, not to acquire
consumer finance contracts from any other manufacturer of personal computers
other than Gateway. Certain exceptions to this prohibition do apply, however.
Similarly, Gateway has agreed that during the term of the Program, Gateway will
not offer consumer finance programs involving consumer finance contracts on
substantially the same terms and conditions and involving substantially the same
credit profile to other finance companies, provided that Gateway credit
financing programs existing at the effective date of the Program will not be
limited or otherwise affected by the Program.
The Company has further agreed that it shall service, process,
administer and collect all amounts due under assigned Contracts with reasonable
care, consistent with accepted servicing practices of prudent lending
institutions, at its own expense and without reimbursement from Gateway. The
Company shall be responsible for mailing monthly periodic statements to
customers whose Contracts have been assigned to, and financed by, the Company,
and collecting all amounts due on such Contracts. Pursuant to the Program,
Gateway shall be responsible for any marketing or advertising of the Goods and
of the Program. The Company has guaranteed all the obligations of the Company
under the Program.
MORTGAGE BANKING OPERATIONS
The Company's mortgage banking operations are conducted through its
Ameri-Cap Mortgage Group, Inc. subsidiary ("Ameri-Cap Mortgage"). Ameri-Cap
Mortgage's business consolidates its operations with the operations of the
Company's Ameri-Cap Mortgage Lending Corp. and Ameri-Cap Mortgage Services, Inc.
subsidiaries.
Ameri-Cap Mortgage is a licensed mortgage lender engaged in both
residential and commercial lending. Ameri-Cap Mortgage's operations focus
primarily on conforming and non-conforming loans, subprime credits, home
improvement loans, sales finance contracts and debt consolidations.
In order to provide Ameri-Cap Mortgage with the financial capacity to
originate its mortgage loans, the Company has obtained a $10 million warehouse
line of credit from Suntrust Bank and a $10 million warehouse line of credit
from Republic Bank. The Company anticipates that these warehouse lines will be
utilized to fund residential and commercial mortgages.
INTERNET AND E-COMMERCE OPERATIONS
During the fourth quarter of the year ended December 31, 1999 and
continuing through the first quarter of the year ending December 31, 2000
("Fiscal 2000"), the Company expended considerable efforts and capital in
developing and marketing its e-commerce enablement operations and creating
Internet portals. In this regard, the Company, for nominal consideration,
acquired an approximate 49.5% interest in FunU.com, an unaffiliated entity
engaged in the development of Internet portals primarily targeted to major
university students. In addition, the Company, in conjunction with its
acquisition of Travelers and its entering into the Program with Gateway, has
continued its development of its on-line, instantaneous credit approval and loan
processing capabilities.
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COMPETITION
The factoring, finance and equipment leasing businesses are highly
fragmented. The Company competes, and in the future, will compete, for customers
with a number of national, regional and local finance and factoring companies,
including those which, like the Company, specialize in particular segments of
the overall market. In addition, the Company's competitors include, and will
include, those equipment manufacturers which finance the sale or lease of their
products themselves, other traditional types of financial services companies,
such as commercial banks and savings and loan associations, and conventional
leasing and factoring companies. The Company's future profitability will be
directly related to the Company's ability to access capital funding and to
obtain favorable funding rates as compared to the capital and costs of capital
available to its competitors. Accordingly, there can be no assurance that the
Company will be able to continue to compete successfully in its targeted
markets.
EMPLOYEES
The Company, on a consolidated basis, currently employs approximately
165 full-time employees. Approximately ten of these employees are executive
officers, approximately 25 are administrative staff, approximately 50 are sales
and marketing personnel and approximately 80 are support staff. None of the
Company's employees are represented by a union or subject to any collective
bargaining agreements. The Company believes that its workforce is adequate to
meet the Company's reasonably foreseeable requirements and that its relationship
with its employees is good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company currently owns no real property and conducts its business
from facilities leased to it by unaffiliated third parties in Plantation, Boca
Raton and Lake Worth, Florida, Carlsbad, California and Bainbridge Township,
Ohio. The Company's principal place of business is located in Plantation,
Florida. Pursuant to its lease for the Plantation property, which has an initial
term expiring in 2004, the Company rents approximately 9,800 square feet of
office space in consideration for annual rents currently set at approximately
$16,750 per year, gradually escalating over the lease term to approximately
$18,850 during the last year of the initial lease term. The Company is also
obligated to pay the landlord for these premises the Company's proportionate
share of all operating costs, expenses and taxes. The Company believes these
premises are well maintained and adequate to meet the Company's needs for the
foreseeable future.
The Company's subsidiaries do not own any real property and conduct
their respective businesses from facilities leased to them, at market rates, by
unaffiliated persons. The Company believes that such leased facilities are
adequate for its subsidiaries' reasonably foreseeable operations.
The following table highlights the monthly rent payable by the Company
for its other leased facilities and the amount of space rented:
<TABLE>
<CAPTION>
LOCATION MONTHLY RENT SQUARE FOOTAGE RENTED
- -------- ------------ ---------------------
<S> <C> <C>
Boca Raton, Florida $ 5,225 2,200
Lake Worth, Florida $ 5,256 3,500
Carlsbad, California $30,518 19,438
Bainbridge Township, Ohio $ 2,700 2,400
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
At this time, the Company is not a party to any pending or threatened
legal proceeding involving it or any of its assets, the resolution of which, in
management's opinion, would have a material adverse effect on the Company's
operations or financial condition, other than ordinary, routine litigation
incidental to its business, none of which, individually, would have a material
adverse effect on the Company's operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise during the fourth quarter of
the year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since January 1998, the Company's Common Stock and Common Stock
Purchase Warrants (the "Warrants") have traded in the over-the-counter market
and been quoted on the OTC Electronic Bulletin Board maintained by NASDAQ under
the symbols "FANT" and "FANTW", respectively. Each Warrant entitles the holder
thereof to purchase one share of Common Stock at a price of $5.75 at any time
until July 22, 2002.
The following table sets forth the reported high and low bid quotations
on the Electronic Bulletin Board for the Common Stock and Warrants of the
Company, respectively, for the periods indicated. These quotations represent
prices between dealers and do not include retail mark-up, mark-down or
commissions or necessarily represent actual transactions.
COMMON STOCK HIGH LOW
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1998
January 1, 1998 - March 31, 1998 $7.25 $2.75
April 1, 1998 - June 30, 1998 5.13 1.00
July 1, 1998 - September 30, 1998 2.88 1.63
October 1, 1998 - December 31, 1998 3.00 2.00
1999
January 1, 1999 - March 31, 1999 $3.75 2.75
April 1, 1999 - June 30, 1999 5.13 2.88
July 1, 1999 - September 30, 1999 5.00 3.25
October 1, 1999 - December 31, 1999 4.00 2.00
WARRANTS
1998
January 1, 1998 - March 31, 1998 * *
April 1, 1998 - June 30, 1998 * *
July 1, 1998 - September 30, 1998 * *
October 1, 1998 - December 31, 1998 $0.10 $0.04
1999
January 1, 1999 - March 31, 1999 $0.19 $0.10
April 1, 1999 - June 30, 1999 0.81 0.19
July 1, 1999 - September 30, 1999 0.69 0.25
October 1, 1999 - December 31, 1999 0.38 0.19
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* The Warrants did not trade during this period.
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At March 29, 2000, there were approximately 420 holders of record of
the Company's Common Stock and approximately 80 holders of record of Warrants.
Since a substantial percentage of the Company's Common Stock and Warrants are
held in street name, the Company believes that there are substantial additional
beneficial holders of the Common Stock and Warrants.
The Company has never declared any cash dividends with respect to its
shares of Common Stock and does not anticipate that dividends will be declared
in the foreseeable future, as all available cash will be utilized to expand the
Company's business. The Company's future dividend policy will depend on the
Company's earnings, capital requirements, expansion plans, financial condition
and other relevant criteria.
During the fourth quarter of the fiscal year ended December 31, 1998,
management of the Company learned that certain circumstances relating to the
manner in which the Company's securities were offered in the IPO in Texas and
Florida may have been inconsistent with such states' respective blue sky laws.
In addition, management of the Company concluded that various procedural and
administrative matters relating to the IPO should have been disclosed during the
period that the IPO was being marketed, rather than following the consummation
of the IPO, as the Company did. These disclosures, relating principally to
non-cash IPO subscriptions and subscription loans made by an affiliate of the
Company, were made by the Company in the Liquidity and Capital Resources
subsection to the Managements' Discussion and Analysis of Financial Condition
and Results of Operations section to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997. As a consequence thereof, the Company,
during the 30-day period ended January 22, 1999, provided the purchasers of the
Company's securities in the IPO with the opportunity to rescind their IPO
purchase in consideration for, generally, their IPO investment price (the
"Rescission Offer"). At the expiration of the Rescission Offer, the Company had
received valid written acceptances from the holders of approximately 54,000
shares of Common Stock and approximately 20,000 Warrants acquired in the IPO,
resulting in a cash redemption obligation which was satisfied by the Company out
of its working capital of approximately $300,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a diversified, multi-faceted specialty finance company
principally engaged in lending activities related to accounts receivable
factoring, equipment leasing, mortgage banking, consumer finance and other types
of specialty financing. The Company also provides accounting and collections
services to other entities. The Company's business is conducted, generally,
through two principal operating arms - the Company's commercial asset business
finance group, and the Company's consumer finance group. The commercial asset
business finance group, operating under the umbrella of the Company's ABFG
holding company subsidiary, specializes, principally, in accounts receivable
factoring and equipment leasing. The consumer finance group, operating under the
umbrella of the Company's ACFG holding company subsidiary, specializes,
principally, in mortgage banking and other retail specialty financing lines.
The Company's emergence into the retail specialty finance industry was
solidified by the Company's acquisition, its largest to date, through the
Company's TAC subsidiary, of Travelers, as of September 30, 1999. Travelers is a
California-based specialty consumer finance company which, for the past 25
years, has been engaged, generally, in the acquisition, management, servicing
and collection of individual consumer contracts. Travelers operates under the
Company's ACFG consumer finance group umbrella.
In addition to its commercial asset finance and consumer finance arms,
the Company also
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established in Fiscal 1999 an Internet financial services company subsidiary,
FIS, as a platform for the distribution of financial products and
services, in particular, residential mortgages, through the Internet.
Since the consummation, during January 1998, of the Company's IPO, the
Company's operations have focused primarily on growing an operation base and
establishing a market presence in each of the aforementioned business segments.
The Company's primary strategy for achieving its necessary growth and market
presence has been, among other things, to pursue acquisitions of existing
enterprises which, in the Company's opinion, have management experience and
earnings potential and long-term growth possibilities, and obtaining
institutional lines of credit for each business line. Having established
operations in each of its commercial assets business finance and consumer
finance arms, the Company's current principal strategy for making its operations
more profitable is to bundle (or combine and package) financial products and
services. The Company believes that by bundling products and services, it will
be positioned to more effectively compete since, as the volume of the
transactions it handles increases, the more likely the Company will have access
to less costly leasing, factoring, mortgage banking and retail consumer
financing lines.
In an effort to further solidify the Company's emergence into the
retail specialty finance industry, the Company, during January 2000, entered
into the Program with Gateway. Pursuant to the Program, among other things,
Gateway has agreed to assign to the Company Contracts for Goods, and the Company
has agreed to accept such assignments of Contracts and finance loans to
Gateway's customers to pay Gateway for the Goods being purchased under the
Contracts.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
For the year ended December 31, 1999 ("Fiscal 1999"), the Company
generated revenues of $11,604,014, an increase of $1,869,074, or approximately
19%, from revenues of $9,734,940 for the year ended December 31, 1998
("Fiscal 1998"). This increase in revenues was primarily the result of the
fullscale initiation by the Company, during Fiscal 1999, and the resulting
approximately $2.7 million increase in broker fees and gains on sales of
mortgage loans, of the Company's mortgage banking operations. In addition, for
Fiscal 1999, the Company recorded an approximate $2.5 million increase in
finance income attributable to three months of Travelers' operations, and an
approximate $600,000 increase in each of factoring, servicing and consulting
revenues. During Fiscal 1998, the Company had not yet fully commenced its
mortgage banking operations or owned Travelers. These increases in mortgage
banking, finance, factoring, servicing and consulting revenues effectively
offset an approximate $3 million decrease from Fiscal 1998 results in revenues
generated from the Company's equipment leasing and other financial services
operations. These decreases are attributable principally to the shift in
emphasis in the Company's business during Fiscal 1999 and the restructuring of
the Company's equipment leasing operations into its factoring operations and its
downsizing the amount of business, and consequently, revenues , generated from
providing back office accounting operations to unaffiliated entities.
During Fiscal 1999, the Company incurred an increase of $2,807,759 , or
approximately 26%, in total operating costs and expenses over Fiscal 1998
figures. This increase was principally the result of the Company's expansion and
full-scale initiation, and the costs attendant thereto, during Fiscal 1999, of
the Company's overall business plan and, in particular, its accounts receivable
factoring, mortgage banking and retail consumer finance (Travelers) operations.
As a consequence thereof, the Company incurred an approximate $1 million
increase during Fiscal 1999 in interest and other expenses incurred as a result
of the Company's significantly greater utilization of its credit facilities to
generate factoring, financing and
- 12 -
<PAGE> 13
mortgage banking revenues. Theses increases in expenses more than offset the
approximate $624,000 decrease in the provision for credit losses recorded for
Fiscal 1999 as compared to Fiscal 1998. The decrease in the provision for
credit losses is due to the change in the composition of the finance
receivables during Fiscal 1999, including the receipt by the Company of
additional collateral for certain individually significant receivables.
As a consequence of the foregoing, the Company recorded a net loss of
$1,880,846 for Fiscal 1999, as compared to a net loss of $898,081 for Fiscal
1998. When combined with the provision for dividends with respect to shares of
the Company's Series A and Series C Convertible Preferred Stock, the Company
incurred a net loss applicable to common shareholders for Fiscal 1999 of
$2,358,396, or approximately $0.34 per share, as compared to a net loss
applicable to common shareholders for Fiscal 1998 of $1,192,685, or
approximately $0.32 per share.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had total assets of $66,535,520, as
compared to total assets of $13,618,188 at December 31, 1998. This significant
increase in total assets is directly the result of the acquisition of
Travelers. The acquisition of Travelers has been accounted for under the
purchase method of accounting. Approximately $47 million of assets included on
the Company's balance sheet at December 31, 1999 are Travelers' assets. Without
giving effect to the Traveler's acquisition, the modest increase in the
Company's assets for December 31, 1999 (approximately $5.9 million), is a
product of the increased number of other consumer retail loans, equipment
leases, factored accounts receivable, loans held for resale and related
financial instruments originated or underwritten by the Company during Fiscal
1999. The approximate $10.9 million of goodwill, net, recorded on the Company's
balance sheet at December 31, 1999 represents the premium over the fair value
of net assets acquired by the Company in connection with its acquisitions of
its operating divisions. Approximately $8.9 million of this goodwill figure was
generated from the Travelers' acquisition. The Company anticipates that the
future earnings of the acquired companies will offset the amortization
associated with the recording of this goodwill.
At December 31, 1999, the Company had total liabilities of $47,372,402,
as compared to total liabilities of $6,102,015 at December 31, 1998. This
significant increase in total liabilities was directly the result of the
Company's acquisition of Travelers. Approximately $37 million of the Company's
liabilities at December 31, 1999 are Travelers' liabilities or lines of credit
obtained by the Company to finance Travelers' operations. Without giving effect
to the Travelers acquisition, the increase in liabilities from December 31, 1998
(approximately $4 million) is a direct result of the Company's increased
borrowings under its other interest bearing credit facilities, including under
the Suntrust Bank and Republic Bank warehouse facilities and the Factoring
Facility, rather than financing internally out of its working capital, amounts
necessary to fund the Company's mortgage banking, consumer finance and accounts
receivables factoring operations.
At December 31, 1999, the Company had total stockholders' equity of
$19,163,118, as compared to total stockholders' equity of $7,499,084 at December
31, 1998. The increase from December 31, 1998 stockholders' equity is
attributable to the issuance by the Company of shares of its Common Stock and
Series C Preferred Stock, net of the net loss incurred.
The Company's anticipates, based on its current proposed plans and
assumptions relating to its operations and expansion, that it will be able to
satisfy its currently contemplated cash requirements for the next
12 months from working capital, cash flow and its interest-bearing credit
facilities,
- 13 -
<PAGE> 14
including the Travelers/FINOVA Facility. In the event that the Company's plans
change or its assumptions prove to be inaccurate, or working capital, cash flow
and availability under existing credit facilities prove to be insufficient to
fund the Company's operations and expansion (due to unanticipated expenses,
delays, problems or otherwise), the Company would be required to seek additional
funding. Depending upon the Company's financial strength and the state of the
capital markets, the Company may also determine that it is advisable to raise
additional equity capital. Except as set forth above or elsewhere in this Annual
Report on Form 10-KSB, the Company has no current arrangements with respect to,
or sources of, any additional capital, and there can be no assurance that such
additional capital will be available to the Company, if needed, on commercial
reasonable terms, or at all. The inability of the Company to obtain additional
capital would have a material adverse effect on the Company and could cause the
Company to be unable to implement its business strategy or proposed expansion or
to otherwise significantly curtail or cease operations.
As reported elsewhere in this Annual Report on Form 10-KSB and in the
Company's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1999, in consideration for its purchase of Travelers, the Company paid
Travelers' stockholders an aggregate of $20 million, $15 million of which was
paid in cash at closing of the acquisition (the "Closing"), with the remaining
$5 million purchase price taking the form of three-year 10% promissory notes
(the "Notes") of TAC. The Notes require a $500,000 principal payment during the
first year following the Closing amortized in twelve equal monthly installments,
a $500,000 lump sum payment during the 13th month following the Closing, with
the remaining $4 million being amortized over the next 24 months in equal
monthly installments. To secure TAC's obligations to Travelers' former
stockholders under the Notes, TAC granted such former stockholders a
subordinated security interest in all of Travelers' assets and pledged, on a
subordinated basis, all of the capital stock of Travelers. The Company has also
guaranteed all of TAC's obligations under the Notes.
The $15 million cash payment made to the stockholders of Travelers at
the Closing was funded by the Company as follows: approximately $5.4 million
from advances made under the Travelers/FINOVA Facility, $3.5 million from the
sale by the Company at the Closing, to certain accredited investors in an
arm'slength, privately negotiated transaction, of an aggregate of 3,500 shares
of the Company's Series C 6% Convertible Preferred Stock (the "Series C
Preferred Stock") and related Common Stock Purchase Warrants (the "Preferred
Warrants"), $3.65 million from a 12-month secured loan made to TAC by BH Interim
Funding, L. P., approximately $2.0 million from the sale by the Company, during
October 1999, of 860,000 shares of the Company's common stock at $2.33 per share
to two accredited investors in an arm's-length, privately negotiated
transaction, $500,000 from a 90-day unsecured loan, bearing interest at the rate
of 10% per annum, advanced to the Company in an arm's-length, privately
negotiated transaction from an unaffiliated person, and $150,000 from the
Company's working capital. The $500,000 90-day unsecured loan has been repaid by
the Company.
The Travelers/FINOVA Facility is in the principal amount of $32.5
million, has a five-year term and bears interest, payable monthly, at the rate
which, from time to time, is 2% above FINOVA's stated "prime rate." Advances
under the Travelers/FINOVA Facility are limited, generally, to an amount not to
exceed 80% of Travelers' eligible receivables and eligible inventory (each as
defined). TAC's obligations under the Travelers/FINOVA Facility have been
secured by TAC's grant of a first lien on, and security interest in, all of
Travelers' assets, and a pledge, on a subordinated basis, of all of the capital
stock of Travelers. In addition, the Company has guaranteed all of TAC's
obligations and liabilities under the Travelers/FINOVA Facility. At the Closing,
the Company and TAC applied approximately $15 million of advances under the
Travelers/FINOVA Facility to satisfy and discharge all indebtedness then owing
by Travelers to Travelers' senior lenders.
- 14 -
<PAGE> 15
Concurrently with the Closing, the Company also issued and sold, in an
arm's-length, privately negotiated transaction with certain accredited
investors, in consideration for $3.5 million, an aggregate of 3,500 shares of
the Company's Series C Preferred Stock. In connection therewith, the Company
also issued to the purchasers of the Series C Preferred Stock (or their
designees) Preferred Warrants entitling the holders thereof the right to
acquire, in the aggregate, up to 700,000 shares of the Company's Common Stock.
The Preferred Warrants are exercisable at any time within the five-year period
immediately following the Closing at an exercise price of $3.28 (such price
being the closing sale price for shares of the Company's Common Stock on the
Electronic Bulletin Board maintained by NASDAQ (the "Bulletin Board") on the
date of the Closing). The Preferred Warrants, generally, contain customary
terms and provide for adjustment in the number of shares of Common Stock
issuable upon the exercise of such Warrants in the event the Company takes any
action prior to the exercise of such Preferred Warrants that may be dilutive to
the holders of such Preferred Warrants.
Shares of the Company's Series C Preferred Stock accrue dividends,
payable quarterly (to the extent legally sufficient funds are then available to
the Company), at an annual rate of $60.00 per share. All regularly declared but
unpaid dividends cumulate. Holders of shares of Series C Preferred Stock are not
entitled to vote on any matter affecting the Company stockholders, except as may
be required by law. Holders of the Series C Preferred Stock are entitled to a
$1,000.00 per share liquidation preference (together with all accrued and unpaid
dividends) over the holders of the Company's Common Stock in the event of
liquidation, dissolution or winding up. The shares of Series C Preferred Rank
rank pari passu with the outstanding shares of Series A and Series B preferred
stock of the Company in the event of liquidation, dissolution or winding up.
After the satisfaction of all indebtedness of the Company, holders of Series C
Preferred Stock would then receive any remaining assets in priority to holders
of the Company's Common Stock and on a pari passu basis with the holders of the
Company's Series A and Series B preferred stock.
Shares of Series C Preferred Stock are convertible into shares of the
Company's Common Stock at any time at the option of the holder as follows: if
conversion is requested prior to the expiration of the 180- day period
immediately following the Closing, the holder shall be entitled to that number
of shares of Common Stock as equals the quotient of (i) the aggregate
liquidation preference (plus all accrued and unpaid dividends) attributable to
such holder's shares of Series C Preferred Stock DIVIDED BY (ii) $3.28 (such
price being the average closing price on the Bulletin Board for shares of the
Company's Common Stock for the three trading days immediately preceding the
Closing (the "Initial Conversion Price"); if conversion is requested at any time
following the 180-day period immediately following the Closing, the holder shall
be entitled to that number of shares of Common Stock as equals the quotient of
(y) the aggregate liquidation preference (plus all accrued and unpaid dividends)
attributable to such holder's shares of Series C Preferred Stock DIVIDED BY (z)
the lesser of (A) the Initial Conversion Price and (B) the product of (1) 80%
MULTIPLIED BY (2) the closing price on the Bulletin Board (or the exchange upon
which shares of the Company's Common Stock on the trading day immediately
preceding the date that conversion is requested are listed).
In addition, if, on the 180th day immediately following the Closing,
the closing price on the Bulletin Board (or the exchange upon which shares of
the Company's Common Stock may then be listed) for shares of the Company's
Common Stock is not equal to or greater than twice the Initial Conversion Price,
the Company will issue to each holder of the Series C Preferred Stock, such
number of shares of Common Stock of the Company as is equal to the difference
between (i) the quotient of (a) the aggregate liquidation preference (plus all
accrued and unpaid dividends) attributable to such holder's shares of Series C
Preferred Stock DIVIDED BY (b) the Initial Conversion Price and (ii) the
quotient of (A) the aggregate liquidation preference (plus accrued and unpaid
dividends) attributable to such holder's shares of Series C Preferred Stock
DIVIDED BY (B) the product of (1) 80% MULTIPLIED BY (2) the Initial Conversion
Price.
- 15 -
<PAGE> 16
Notwithstanding the foregoing, in the event a holder of Series C
Preferred Stock requests conversion at a time when the Per Share Market Value
(as defined) of the shares of the Company's Common Stock is less than $3.00, the
Company shall have the right but not the obligation, to redeem all such holder's
shares of Series C Preferred Stock by paying to such holder, in cash, a
redemption price equal to 120% of the aggregate liquidation preference
attributable to the shares of Series C Preferred Stock for which conversion has
been requested together with accrued and unpaid dividends.
Concurrently with the Closing, the Company also caused TAC to enter
into a loan and security agreement with BHC Interim Funding, L. P., an
unaffiliated entity ("BHC"), pursuant to which, among other things, BHC advanced
TAC $3.5 million (the "BHC Loan"). The BHC Loan has a term of 12 months and
bears interest at the rate of 13.5% per annum. The BHC Loan requires monthly
interest payments and one balloon payment of principal at maturity. TAC's
obligations to BHC under the BHC Loan have been secured by TAC's grant to BHC of
a first lien on, and security interest in, all of the capital stock of Travelers
and a subordinated security interest covering all of the assets of Travelers. In
connection with the BHC Loan, the Company issued to BHC a warrant entitling BHC
to purchase up to 4.28% of the common stock of the Company during the five year
period immediately following such warrant's issuance, at an exercise price of
$3.50 per share (such price being the average closing price on the Bulletin
Board for shares of the Company's Common Stock for the 20 trading day period
immediately preceding the Closing) (the "Finantra Warrant").
In addition, TAC issued to BHC warrants (the "TAC Warrants") which
provide that if the BHC Loan is not paid in full within the six-month period
immediately following the Closing, then BHC shall be issued additional TAC
Warrants entitling BHC to purchase up to an additional 3% of the common stock of
TAC at an exercise price of $.01 per share. In such event, the Finantra Warrant
similarly provides that BHC shall be issued additional Finantra Warrants
entitling BHC to purchase up to an additional 1% of the Common Stock of the
Company at an exercise price equal to the lesser of (i) $3.50 (the average
closing price on the Bulletin Board for shares of the Company's Common Stock for
the five trading day period immediately preceding the Closing) and (ii) the
average closing price for shares of the Company's Common Stock on the Bulletin
Board (or such exchange as shares of the Company's Common Stock may then be
listed) for the five trading day period immediately preceding the six-month
anniversary of the Closing. If the BHC Loan is not paid in full within the nine
month period immediately following the Closing, then BHC will further be issued
(a) TAC Warrants entitling BHC to purchase up to an additional 3% of the common
stock of TAC at an exercise price of $.01 per share and (b) Finantra Warrants
entitling BHC to purchase up to an additional 1.5% of the Common Stock of the
Company at an exercise price equal to the lesser of (i) $3.50 and (ii) the
average closing price on the Bulletin Board (or such exchange as shares of the
Company's Common Stock may then be listed) for shares of the Company's Common
Stock for the five trading day period immediately preceding the nine-month
anniversary of the Closing. In such event, TAC and the Company also will be
jointly and severally liable to BHC for an additional transaction fee in the
amount of $182,500.
The TAC Warrants further grant BHC the right to put back to TAC 25% of
BHC's then unexercised TAC Warrants upon the earlier of repayment in full of the
BHC Loan or the maturity of its term, for $100,000 if such put right is
exercised after the 180th day immediately following the Closing, but on or
before the 270th day immediately following the Closing, and $230,000 if such put
right is exercised after the 270th day following the Closing. In addition,
beginning on the second anniversary of the Closing, BHC has the right to put to
the Company the balance of its unexercised TAC Warrants in exchange for (i) the
higher of (a) a cash payment equal to $92,000 per 1% of Travelers' common stock
or (b) a cash payment representing the fair market value of such TAC Warrants or
(ii) registered shares of the Company's Common Stock valued at the lesser of
$3.50 and the average closing price on the Bulletin Board (or such exchange as
shares of the Company's Common Stock may then be listed) for shares of the
Company's Common Stock for the five trading day period immediately preceding the
exercise of the relevant put right described herein.
- 16 -
<PAGE> 17
The Company has granted BHC customary registration and other rights
with respect to the shares of the Company's Common Stock issuable upon the
exercise of the Finantra Warrant.
In addition, the BHC Loan contains significant monetary penalties in
the event it is not paid in full within the 12-month period immediately
following the Closing. The BHC Loan has not yet been repaid by the Company.
In addition, subsequent to December 31, 1999, the Company issued and
sold, in separate, privately negotiated transactions (at differing per share
purchase prices), to approximately 10 accredited investors, an aggregate of
approximately 1.9 million restricted shares of Common Stock of the Company in
consideration for an aggregate purchase price of approximately $5.4 million.
YEAR 2000 COMPLIANCE
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. In order to insulate itself from
suffering any such adverse effects after January 1, 2000, the Company, during
Fiscal 1999, purchased new software and hardware systems for itself and its
subsidiaries. These new systems all carry manufacturers' representations and
warranties concerning Year 2000 compliance. To date, all of these systems have
functioned properly and the Company has not been adversely impacted by any Year
2000 computer problems. No assurance can be given, however, that the Company's
software and hardware systems will not fail in the future. In such event, the
Company will be forced to expend such amounts of its working capital as may be
necessary to correct its software and hardware systems and implement contingency
plans.
- 17 -
<PAGE> 18
ITEM 7. SELECTED FINANCIAL DATA
The selected historical financial information of the Company set forth
below should be read in conjunction with the audited financial statements of the
Company and notes thereto contained elsewhere in this Annual Report on Form
10-KSB.
The statement of operations data for the year ended December 31, 1999
and 1998, and the balance sheet data as of December 31, 1999, are derived from,
and are qualified by reference to, the audited financial statements of the
Company which are included elsewhere in this Annual Report on Form 10-KSB. The
Company has never declared any cash dividends with respect to its shares of
Common Stock.
The required financial statements of the Company are included as part
of this Annual Report on Form 10-KSB beginning on page F-1.
STATEMENT OF OPERATIONS DATA :
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Total Revenues.................................. $11,604,014 $ 9,734,940
Total Costs and Expenses ....................... 13,494,991 10,687,232
Net Loss ....................................... (1,880,846) (898,081)
Net Loss Applicable
to Common Stockholders ....................... (2,358,396) (1,192,685)
Net Loss Per
Common Share ............................... (.34) (.32)
BALANCE SHEET DATA:
AT DECEMBER 31,
----------------------------
1999 1998
------------ ------------
Total Assets ................................... $ 66,535,520 $ 13,618,188
Total Liabilities .............................. 47,372,402 6,102,015
Stockholders' Equity ........................... 19,163,118 7,499,084
- 18 -
<PAGE> 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective January 24, 2000, the Company engaged PricewaterhouseCoopers
LLP as its principal accountants to replace its former principal accountants,
Daszkal, Bolton, Manela, Devlin & Co. The decision to change accountants was
approved by the Audit Committee of the Company. Neither of the reports of the
former principal accountants on the financial statements of the Company for the
fiscal year ended December 31, 1998 or 1997 contained an adverse opinion or
disclaimer of opinion, nor was either qualified or modified as to uncertainty,
audit scope or accounting principles.
During the fiscal years of the Company ended December 31, 1998 and 1997
and the subsequent interim period through January 24, 2000, there was no
disagreements with the Company's former accountants on any matter of accounting
principles or practices, financial statements disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of the
former accountants, would have caused them to make reference to the subject
matter of the disagreements in connection with their reports.
During the fiscal years of the Company ended December 31, 1998 and 1997
and the subsequent interim period through January 24, 2000, the Company did not
consult with PricewaterhouseCoopers LLP regarding any matter requiring
disclosure under Regulation S-K, Item 304(a)(2). Daszkal, Bolton, Manela, Devlin
& Co. has furnished the SEC with a letter stating that it agrees with the
statements made by the Company in this Item 8.
- 19 -
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant caused this Annual Report on Form 10-KSB to
be signed on its behalf by the undersigned, thereunto duly authorized.
FINANTRA CAPITAL, INC.
Date: March 30, 2000 BY: /s/ ROBERT D. PRESS
-----------------------------
Robert D. Press, President
In accordance with the Securities Exchange Act of 1934, as amended, this
Annual Report on Form 10-KSB has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ ROBERT D. PRESS Chairman of the Board March 30, 2000
- ------------------- of Directors and Chief Executive
Robert D. Press Officer
/s/ CHARLES LITT President and Director March 30, 2000
- ---------------------
Charles Litt
/s/ MAYNARD HELLMAN Director March 30, 2000
- ---------------------
Maynard Hellman
/s/ ARTHUR J. PRESS Director March 30, 2000
- ---------------------
Arthur J. Press
/s/ EVALDO F. DUPUY Director March 30, 2000
- ---------------------
Evaldo F. Dupuy
/s/ THOMAS W. DWYER Director March 30, 2000
- ---------------------
Thomas W. Dwyer
/s/ ALYCE B. SCHREIBER Executive Vice President, March 30, 2000
- --------------------- Secretary and Director
Alyce B. Schreiber
</TABLE>
- 20 -
<PAGE> 21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements:
Reports of Independent Certified Public Accountants F-2
Consolidated Balance Sheet at December 31, 1999 F-4
Consolidated Statement of Operations for each of the two years
in the period ended December 31, 1999 F-5
Consolidated Statements of Changes in Stockholders' Equity for
each of the two years in the period ended December 31, 1999 F-6
Consolidated Statements of Cash Flows for each of the two years
in the period ended December 31, 1999 F-7
Notes to Consolidated Financial Statements F-9
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Finantra Capital, Inc.
In our opinion, based on our audit and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Finantra Capital, Inc. and its
subsidiaries at December 31, 1999, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
financial statements of Ameri-Cap Mortgage Group, Inc., an 80%-owned subsidiary,
which statements reflect total assets of $7.7 million at December 31, 1999 and
total revenues of $3.2 million for the year then ended. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Ameri-Cap Mortgage Group, Inc., is based solely on the report of the other
auditors. We conducted our audit of these statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Ft. Lauderdale, Florida
March 30, 2000
F-2
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Finantra Capital, Inc. and subsidiaries
We have audited the consolidated balance sheets of Finantra Capital, Inc.
and subsidiaries, as of December 31, 1998, and the related accompanying
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the management of Finantra Capital, Inc. and subsidiaries.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Finantra Capital, Inc. and
subsidiaries, as of December 31, 1998, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
Daszkal Bolton Manela Devlin & Co.
Boca Raton, Florida
March 12, 1999
F-3
<PAGE> 24
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $ 1,214,315
Certificate of deposit-restricted 1,450,000
Loans available for sale 6,065,166
Finance receivables, net 38,172,653
Lease receivables, net 1,232,854
Other receivables, net 668,661
Due from related parties 1,756,474
Property and equipment, net 573,810
Goodwill, net 10,998,940
Other assets 4,402,647
------------
Total assets $ 66,535,520
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 2,657,068
Client reserves 4,030,180
Client payouts 1,251,541
Credit balances of factoring clients 840,632
Lines of credit 29,843,029
Notes payable and other interest bearing obligations 8,610,309
Notes payable - related parties 30,000
Capital leases 109,643
------------
Total liabilities 47,372,402
------------
Commitments and contingencies (Note 20)
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
3,231,784 issued:
Series A redeemable convertible preferred stock,
2,728,004 shares issued and outstanding 27,279
Series B convertible preferred stock, $.01 par value,
500,000 shares authorized; 500,000 shares issued and outstanding 5,000
Series C 6% convertible preferred stock, $.01 par value,
3,800 shares authorized; 3,780 shares issued and outstanding 38
Common Stock, $.01 par value, 50,000,000 shares authorized;
9,329,114 shares issued and outstanding 93,291
Additional paid-in capital 25,388,036
Accumulated deficit (6,350,526)
------------
Total stockholders' equity 19,163,118
------------
Total liabilities and stockholders' equity $ 66,535,520
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 25
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Broker fees and gains on sales of mortgage loans $ 3,222,823 $ 529,137
Finance income 2,716,763 276,199
Factoring fee income 1,476,019 889,791
Leasing income 367,458 3,440,434
Servicing income 682,611 --
Consulting and advisory fees 972,000 308,470
Medical billing fees 531,025 709,521
Other income 1,635,315 3,581,388
------------ ------------
Total revenues 11,604,014 9,734,940
------------ ------------
EXPENSES:
Compensation and employee benefits 6,306,211 4,186,001
Consulting and marketing fees 1,443,738 230,031
Leasing and equipment cost -- 3,189,162
Occupancy and equipment 1,767,899 370,326
Legal and accounting 455,350 --
Interest expense 1,389,295 201,276
Provision for credit losses 482,727 1,107,269
Indirect loan expenses 420,006 --
Other expenses 1,229,765 1,403,167
------------ ------------
Total expenses 13,494,991 10,687,232
------------ ------------
Loss before income taxes and minority interest (1,890,977) (952,292)
Income tax benefit 355 65,960
Minority interest in net (income) loss of consolidated
subsidiaries 9,776 (11,749)
------------ ------------
Net loss (1,880,846) (898,081)
Preferred stock dividends (477,550) (294,604)
------------ ------------
Net loss applicable to common stockholders $ (2,358,396) $ (1,192,685)
============ ============
Net loss per basic and diluted common share
$ (.34) $ (.32)
============ ============
Weighted average common shares outstanding
6,944,692 3,691,956
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 26
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
------------------- ------------------- Treasury Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Stock Capital Deficit Equity
--------- ------- --------- ------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 2,958,817 $29,586 2,667,382 $26,674 $ -- $ 6,947,803 $(2,799,445) $ 4,204,618
Net loss -- -- -- -- -- -- (898,081) (898,081)
Preferred stock dividends -- -- -- -- -- -- (294,604) (294,604)
Common stock issued -- -- 30,000 300 -- -- -- 300
Common stock issued for
acquisitions -- -- 975,855 9,758 -- 3,167,588 -- 3,177,346
Common stock issued for
services -- -- 412,600 4,126 -- 574,854 -- 578,980
Preferred stock Series B
issued 500,000 5,000 -- -- -- 495,000 -- 500,000
Private placement, net of
issuance costs -- -- -- -- -- 400,578 -- 400,578
Repurchase of common stock -- -- -- -- (34,644) -- -- (34,644)
Repurchase and retirement
of common stock -- -- (10,000) (100) -- (54,900) -- (55,000)
Common stock rescission -- -- -- -- -- (100,000) -- (100,000)
Sale of common stock, net
of issuance costs -- -- 36,290 363 -- 19,226 -- 19,589
--------- ------- --------- ------- -------- ----------- ----------- -----------
Balance at December 31, 1998 3,458,817 34,586 4,112,127 41,121 (34,644) 11,450,149 (3,992,130) 7,499,082
Net loss (1,880,846) (1,880,846)
Preferred stock dividends -- -- -- -- -- -- (477,550) (477,550)
Exercise of warrants for
common stock -- -- 140,000 1,400 -- 198,170 -- 199,570
Common stock issued for
acquisitions -- -- 2,417,500 24,175 -- 5,858,105 -- 5,882,280
Common stock issued for
services -- -- 279,600 2,796 -- 520,098 -- 522,894
Common stock issued for
debt conversion 155,000 1,550 308,450 310,000
Preferred stock Series C
issued 3,780 38 -- -- -- 3,779,962 -- 3,780,000
Preferred stock Series A
converted to common stock (230,813) (2,307) 49,637 496 24,892 23,081
Private placement, net of
issuance costs 2,039,872 20,399 2,773,780 2,794,179
Sale of common stock, net
of issuance costs -- -- 135,425 1,354 -- 369,430 -- 370,784
Purchase of treasury stock (31,150) (31,150)
Issuance of treasury stock 65,794 65,794
Issuance of warrants 105,000 105,000
---------- ------- --------- ------- ---------- ----------- ----------- -----------
Balance at December 31, 1999 3,231,784 32,317 9,329,161 93,291 -- 25,388,036 (6,350,526) $19,163,118
========== ======= ========= ======= ========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 27
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,010,846) $ (898,081)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,432,176 228,253
Provision for credit losses 240,000 1,107,269
Decrease in due to factoring clients (194,498)
Common stock for services 578,880
Changes in assets and liabilities:
Purchase and origination of loans (6,065,166) (1,352,174)
Decrease in lease receivable (276,806) (286,290)
Increase (decrease) in accounts payable
and accrued expenses (2,913,790) 925,431
Increase in other receivables (183,322) (187,412)
Increase in other assets (799,633) (78,898)
Increase in finance receivables (436,937) (3,247,127)
------------ ------------
Net cash used by operating activities (11,208,822) (3,210,149)
------------ ------------
Cash flows from investing activities:
Purchase of subsidiaries (19,447,455) 46,044
Change in capital lease obligation 100,314 (76,511)
Notes acquired for cash -- (1,012,000)
Decrease in related party loans (107,854) (792,964)
Decrease in certificate of deposit 25,000 225,000
Purchase of fixed assets, net (1,240,309) --
------------ ------------
Net cash used by investing activities (20,670,304) (1,610,431)
------------ ------------
Cash flows from financing activities:
Proceeds from obligations under lines
of credit 12,249,458 2,643,571
Proceeds from debt 8,197,417 100,000
Repayment of preferred stock (322,361)
Proceeds from issuance of preferred stock 3,780,000
Repayments of debt 83,334 (166,297)
Preferred stock dividends (204,375) 420,268
Issuance of common stock, net 3,164,963 --
Exercise of warrants for common stock 199,570 300,000
Change in related party debt (270,000) 500,000
Stock issued for acquisitions 4,921,314 (89,644)
------------ ------------
Net cash provided by financing activities 32,121,681 3,385,537
------------ ------------
Net increase (decrease) in cash and cash equivalents 242,555 (1,435,043)
Cash and cash equivalents - beginning of period 971,760 2,406,803
------------ ------------
Cash and cash equivalents - end of period $ 1,214,315 $ 971,760
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE> 28
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Interest paid $ 1,003,933 $ 74,961
============ ============
Stock issued for acquisitions $ 3,177,346
============
Acquisition of businesses:
Fair value of assets acquired (34,465,209)
Liabilities assumed 10,498,113
Stock issued 2,728,530
------------
Cash paid (21,238,566)
Less cash acquired 1,791,111
------------
Net cash paid $(19,447,455)
============
Supplemental schedule of non-cash investing and
financing activities:
Exchange of debt obligations for common stock $ 310,000
Assets acquired for stock 150,000
Exchange of preferred stock for common stock 23,079
Exchange of stock for services 1,045,788
Issuance of treasury stock for notes receivable 34,644
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE> 29
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Finantra Capital, Inc., and subsidiaries (the "Company") is a Delaware
corporation headquartered in Plantation, Florida. The Company is a specialty
finance company, principally engaged in lending activities related to accounts
receivable factoring, equipment leasing, mortgage banking, consumer finance and
other types of specialty financing. The Company also provides accounting and
collections services to other companies.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
RECLASSIFICATION
Certain amounts included in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In the normal course of business, the Company encounters significant economic
risk: credit risk, market risk and concentration of credit risk. Credit risk is
the risk of default on the Company's receivables portfolios that results from a
borrowers' inability or unwillingness to make contractually required payments.
Market risk includes interest rate risk. The Company is exposed to interest
rate risk to the degree that its interest-bearing liabilities mature or reprice
at different speeds, or different bases, than its interest-earning
assets. Market risk also reflects the risk of declines in the valuation of
loans held for sale, and in the value of the collateral underlying loans.
Concentration of credit risk refers to the risk that, if the Company extends a
significant portion of its total outstanding credit to borrowers in a specific
geographical area or industry or on the security of a specific form of
collateral, the Company may experience disproportionately high levels of
default and losses if those borrowers, or the value of such type of collateral,
is adversely affected by economic or other factors that are particularly
applicable to such borrowers or collateral.
CASH AND CASH EQUIVALENTS
The Company considers unrestricted highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-9
<PAGE> 30
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LOANS AVAILABLE FOR SALE
Residential mortgage loans originated by the Company which the Company does not
presently intend to hold to maturity are designated as loans available for sale
and are stated at the lower of cost, after consideration of deferred loan fees
and costs, or aggregate market value. Loan origination fees and certain direct
loan origination costs are deferred and included in the carrying value. Upon the
sale of a loan, the deferred loan fees and costs are included in the gain or
loss on sale. Gains and losses on disposal of such loans are computed on a
specific identification basis.
FINANCE RECEIVABLES
The Company both originates and acquires finance receivables. Finance
receivables include interest-bearing and precompute discount receivables. The
face amount of an interest bearing receivable equals the amount of cash loaned
or paid to acquire the receivable; unearned interest is not recorded. In a
precompute discount receivable, the amount of the cash loaned or paid to acquire
the receivable is less than the face amount of the receivable; the difference
represents unearned income to be earned over the life of the receivable.
Receivables that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances, reduced by an allowance for credit
losses, unearned income and net of any deferred fees or costs on
originated receivables, or unamortized premiums or discounts on purchased
receivables.
Finance income includes origination, commitment, delinquency and rollover fees
and prepayment penalties. Origination and commitment fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
of the related receivable. Delinquency fees are recognized when charged, and
prepayment penalties are recognized when the receivable is prepaid.
Finance income also includes interest income and the accretion of the discount
recorded on discount loans. The discount is accreted into interest income as a
yield adjustment using the interest method over the contractual maturity of the
finance receivable. In general, when finance receivables become 90 days past
due, accretion of the discount and interest income recognition is discontinued.
Factoring fee income represents fees on purchased factoring receivables that are
earned over the period services are rendered based on rates stipulated in the
factoring agreement.
CONSULTING AND ADVISORY FEES
Consulting and advisory fees are generated by the Company for services rendered
in the area of structuring and obtaining financing for other companies.
LEASE RECEIVABLES
Lease receivables are reported as the sum of the minimum lease payments
receivable plus the estimated residual value of the leased property, less
unearned income and the allowance for credit losses.
Leasing income represents the unearned income which is amortized to income over
the life of the underlying lease term using the effective interest method to
produce a constant periodic rate of return on the net investment in the lease.
OTHER RECEIVABLES
Other receivables are reported at the contractual amount of the receivable.
Interest income is recognized on the accrual method.
F-10
<PAGE> 31
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level that management, based
upon an evaluation of known and inherent risks in the finance, lease and other
receivables portfolios, considers adequate to provide for credit losses.
Management's periodic evaluation of the allowance for credit losses is based on
an analysis of the portfolios, taking into consideration historical loss
experience, economic conditions and trends, collateral values and other relevant
factors. Future adjustments to the allowance for credit losses may be necessary
if actual experience differs from the assumptions used by management. Credit
exposures deemed to be uncollectible are charged against the allowance for
credit losses and recoveries of previously charged off amounts are credited to
the allowance for credit losses.
Specific valuation allowances are established for non-homogenous impaired loans
in the amount by which the carrying value, before any allowance for loan losses,
exceeds the fair value of collateral less costs to dispose on an individual
receivable basis. Impairment is evaluated on a pool basis for certain pools of
homogenous receivables. The Company considers a loan to be impaired when, based
on current information and events, it believes that it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impairment losses are recognized through an
increase in the allowance for credit losses and a corresponding charge to the
provision for credit losses.
REPOSSESSED ASSETS
Assets are classified as repossessed assets and included in other assets when
physical possession of the collateral is taken. Subsequent to repossession,
repossessed assets are carried at fair value less costs to sell.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets, ranging from
3 to 7 years.
GOODWILL AND OTHER INTANGIBLES
Net assets of companies acquired in purchase business combinations are recorded
at fair value at the date of acquisition. Identified intangibles are amortized
over the period benefited. Goodwill is amortized on a straight-line basis over a
period not to exceed 15 years. The recoverability of goodwill and other
intangibles is evaluated if events or circumstances indicated a possible
impairment. Such evaluation is based on various analyses, including undiscounted
future cash flow projections. Additionally, the Company periodically evaluates
the amortization periods to determine whether events or circumstances warrant
revised amortization periods.
The results of operations of purchased companies are included in the Company's
results of operations from the date of acquisition.
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company's investments in unconsolidated entities are accounted for under the
cost or equity method, generally based on the percentage of legal ownership in
the entity. Under the cost method, the Company owns less than 20% of the
outstanding shares of the entity and the Company does not have the ability to
exercise significant influence over the entity. Investments accounted for under
the cost method are carried at the amount of the Company's initial investment,
and are periodically reviewed for impairment.
F-11
<PAGE> 32
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under the equity method, the Company owns 20% or greater but less than 50% of
the outstanding shares of the entity and the Company has the ability to exercise
significant influence over the entity. Under the equity method, the investment
in the shares of the entity is initially recorded at the cost of the shares
acquired and thereafter is periodically increased or decreased by the Company's
proportionate share of the earnings or losses of the entity, and decreased by
the dividends or distributions received from the entity. Equity method
investments are also periodically reviewed for impairment.
CLIENT RESERVES
Client reserves represent amounts withheld on consumer installment contracts
purchased by the Company. Chargeoffs resulting from borrowers defaults may be
charged against the client reserves based on the underlying contract with the
client. If these charges result in a reduction of the client reserves to zero,
incremental charges are recorded through the allowance for credit losses. If the
charges do not exceed the client reserves, the client reserves are refunded to
the client based on an analysis of client delinquency and minimum reserve
requirements.
CLIENT PAYOUTS
Client payouts represent amounts collected on receivables serviced for third
parties and amounts payable by the Company for finance receivables purchased
which have not yet been funded.
The Company receives servicing fees from third parties for servicing finance
receivables. The servicing fees are generally collected from the underlying
borrowers' payments on a monthly basis.
TREASURY STOCK
Treasury stock acquired is recorded at cost.
INCOME TAXES
There are two components of income tax provision: current and deferred. Current
income tax expense approximates taxes to be paid or refunded for the applicable
period. Balance sheet amounts of deferred taxes are recognized on the temporary
differences between the bases of assets and liabilities as measured by tax laws
and their bases as reported in the financial statements. Deferred tax expense or
benefit is then recognized for the change in deferred tax liabilities or assets
between periods.
Recognition of deferred tax assets is based on management's belief that it is
more likely than not that the tax benefit associated with certain temporary
differences, tax operating loss carryforwards and tax credits will be realized.
A valuation allowance is recorded for those deferred tax items for which it is
more likely than not that realization will not occur.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss, plus dividends on
preferred stock, by the weighted average number of common shares issued and
outstanding. Diluted earnings per common share is computed by dividing net loss
available to common stockholders, adjusted for the effect of assumed
conversions, by the weighted average number of common shares issued and
outstanding and dilutive potential common shares, which include convertible
preferred stock and stock options. Dilutive potential common shares are
calculated using the treasury stock method. Potential dilutive common shares
are excluded from the diluted calculation when a net loss was incurred for the
period as they would be antidilutive.
F-12
<PAGE> 33
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK COMPENSATION
As allowed under SFAS No. 123, the Company accounts for stock based compensation
under APB No. 25, rather than under SFAS No. 123. Accordingly, the Company has
elected to provide the SFAS No. 123 disclosures as if the Company had adopted
the fair-value based method of measuring outstanding employee stock options.
LIQUIDITY
The Company's business requires substantial cash to support the growth of loan
production and operations. In general, the Company finances the purchase of
loans through various credit and wharehouse facilities. The Company funds
through these facilities between 70% and 90% of the principal balance of the
receivables and funds the remainder of the purchase price through its capital.
The Company generates negative cash flow from operations and expects to
continue to do so as long as it continues to experience significant growth in
its receivables portfolio. As the Company continues to increase the volume of
receivables purchased, it must secure additional capital to support its growth.
Failure to secure additional capital or to consummate securitizations and other
sales transactions may result in a significant adverse effect on the Company's
financial position and results of operations.
NOTE 2 - ACQUISITION AND DISPOSITION TRANSACTIONS
1999 ACQUISITIONS
Effective September 30, 1999, the Company acquired 100% of the outstanding
capital stock of Travelers Investment Corporation ("Travelers"). The total
purchase price was $23,600,000, including direct costs of the acquisition. The
acquisition was accounted for as a purchase and the purchase price was allocated
to Travelers assets and liabilities based on their fair values as follows:
Purchase price $ 23,600,000
Fair value of net assets acquired 14,614,000
--------------
Goodwill $ 8,986,000
==============
The following unaudited pro forma results of operations of the Company are
presented as if the acquisition of Travelers had occurred on January 1, 1998:
Years Ended December 31,
-----------------------------
1999 1998
----------- -----------
Revenues $19,650,881 $19,217,832
Expenses 20,987,386 19,192,953
Net (loss) income (1,365,574) 24,879
Loss per share (.20) -
The pro forma consolidated results of operations include adjustments to give
effect to the purchase accounting adjustments as if the acquisition occurred on
January 1, 1998. The unaudited pro forma information is not necessarily
indicative of the results of operations that would have occurred had the
acquisition occurred on January 1, 1998, or the future results of the combined
operations.
On May 11, 1999, through an 80% owned subsidiary of the Company, the Company
acquired the assets of Suntrust Financial Corporation ("Suntrust") for $50,000
in cash. Suntrust had no significant assets or results of operations at the
date of acquisition.
On January 1, 1999, through an 80% owned subsidiary of the Company, the Company
acquired 80% of the outstanding common shares of Sun Coast Title Company ("Sun
Coast") from an affiliate of the Company for 50,000 shares of the Company's
common stock. The Company is obligated to issue a total of 50,000 additional
shares of common stock to acquire the remaining 20% of Sun Coast common stock
over a 4 year period ending December 31, 2002. The acquisition was accounted for
as a purchase. Sun Coast had no significant assets or results of operations at
the date of acquisition.
1999 DISPOSITIONS
On December 31, 1999, the Company sold Medical Billings Services Systems, Inc.
("Medical Billings"), a 100% owned subsidiary of the Company and a company
engaged primarily in providing accounting and other financial administrative
services principally to the medical industry, to the original owner of the
company. Medical Billings was acquired by the Company on March 30, 1998.
F-13
<PAGE> 34
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On July 14, 1999, the Company sold American Investment Management ("AIM"), an
80% owned subsidiary, and a marketer and manager of a variety of financial and
insurance-related services, to the minority stockholder. The ownership interest
in AIM had been acquired by the Company on March 13, 1998. According to the
terms of the original acquisition agreement, the seller had the right to
reacquire the shares of AIM in 1999.
On May 17, 1999, the Company sold MFC Financial Corp ("MFC"), an 80% owned
subsidiary of the Company engaged in leasing activity, to an unrelated third
party. The ownership interest in MFC was acquired by the Company on June 30,
1998.
None of these companies had material assets or results of operations at
the date of disposition.
1998 ACQUISITIONS
On August 31, 1998, the Company, through a wholly owned subsidiary, acquired
approximately 91% of the outstanding capital stock of Ameritrust Holdings, Inc..
In consideration, the Company issued an aggregate of 381,000 shares of its
common stock to Ameritrust's stockholders. The remaining capital stock of
Ameritrust will be exchanged for shares of the Company's common stock at annual
intervals ending on June 30, 2002, if certain earning hurdles are met. The
maximum number of shares that could be issued under this agreement over the next
five years is 624,750 shares. No exchanges occurred during 1999 or 1998.
On March 30, 1998, the Company acquired 100% of Premier Provider Services and
PPS Staffing Systems, engaged primarily in providing accounting and other
financial administrative services. These companies did not have significant
assets or results of operations at the date of acquisition. The acquisitions
resulted in goodwill of $2,272,455.
NOTE 3 - LOANS AVAILABLE FOR SALE
At December 31, 1999, loans available for sale were comprised of residential
mortgage loans originated under flow agreements principally for sale to
government sponsored entities. The loans were sold in January 2000.
F-14
<PAGE> 35
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - FINANCE RECEIVABLES
Finance receivables are comprised of the following at December 31, 1999:
Consumer installment contracts:
Education tuition and seminary fees $12,238,094
Used automobiles 6,432,343
Leisure activity memberships 4,254,831
Fitness 1,579,000
Dating club memberships 3,987,608
Medical 2,103,911
Other 9,591,863
-----------
40,187,650
Unearned income (4,431,036)
-----------
35,756,614
-----------
Commercial finance receivables:
Loan receivable which is secured by
common stock of the borrower and the
pledge of certain assigned receivables of
the borrower. The note plus interest at
10% is due June 30, 2000. 1,120,461
Loan receivable which is secured by a
pledge of 125,000 shares of Finantra
common stock. The note plus
interest at 10% is due April 1, 2006. 208,969
Other 20,070
-----------
1,349,500
Factored receivables, partially insured 3,708,798
-----------
40,814,912
Allowance for credit losses (2,642,259)
-----------
$38,172,653
===========
At December 31, 1999, the Company had impaired loans of approximately $209,000,
with the related valuation allowance included in the allowance for credit
losses.
NOTE 5 - LEASE RECEIVABLES
Lease receivables are comprised of the following at December 31, 1999:
Minimum lease payments receivable $1,345,688
Estimated unguaranteed residual value of leased equipment 101,686
----------
1,447,374
Unearned income (214,520)
----------
$1,232,854
==========
F-15
<PAGE> 36
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Future minimum lease payments receivable at December 31, 1999 are as follows:
2000 $ 801,128
2001 412,735
2002 131,825
----------
$1,345,688
==========
NOTE 6 - OTHER RECEIVABLES
Other receivables are comprised of the following at December 31, 1999:
Notes receivable bearing interest at 8% per annum
and maturing on May 17, 2001 $ 47,295
Various other demand receivables, unsecured and
non-interest bearing 621,366
--------
$668,661
========
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following at December 31, 1999:
Office equipment $1,013,351
Furniture and fixtures 326,964
Equipment under capital lease 88,611
----------
1,428,926
Accumulated depreciation (855,116)
----------
$ 573,810
==========
Depreciation expense on property and equipment for the years ended December 31,
1999 and 1998 was $95,280 and $60,824, respectively.
NOTE 8 - INVESTMENTS IN UNCONSOLIDATED ENTITIES
At December 31, 1999, the Company has a 19% ownership interest in Titan
Mortgage, Inc., a residential mortgage originator and telemarketer, in the
amount of $660,000, accounted for under the cost method.
At December 31, 1999, the Company has a 49.5% interest in FunU.com Corp., an
internet web-application catering to college students, in the amount of $316,000
accounted for under the equity method.
NOTE 9 - RECEIVABLES SERVICING
The Company services finance receivables for third parties. The face amount of
finance receivables serviced for others at December 31, 1999 was approximately
$102 million. Since the Company does not own these receivables, they are
excluded from the consolidated balance sheet.
Included in cash and cash equivalents at December 31, 1999 is approximately
$568,000 of cash collected on behalf of third parties.
F-16
<PAGE> 37
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - LINES OF CREDIT
Lines of credit were comprised of the following at December 31, 1999:
<TABLE>
<CAPTION>
Committed Outstanding Expiration Interest
Description Amount Amount Date Rate
----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
On May 11, 1998, the Company through $4,000,000 $ 1,993,396 5/11/00, Prime + 1.5%
an 85% owned subsidiary entered into a with
Loan and Security Agreement. annual
The proceeds of the loan automatic
are utilized to purchase renewals
accounts receivable. The loan contains thereafter
various debt covenants.
On March 26, 1999, the Company through 10,000,000 2,548,934 4/30/2000 LIBOR+2.25%
an 80% owned subsidiary entered into a
Mortgage Loan Warehousing and
Security Agreement. The loan
agreement contains various debt
covenants including, but not limited to,
an adjusted tangible net worth covenant,
the violation of which at December 31,
1999 was waived by the lender.
On September 23, 1999, the Company 32,500,000 21,841,416 8/31/2004 Prime + 2%
through a 100% owned subsidiary
entered into a Loan and Security
Agreement. The proceeds of the loan
are utilized to purchase consumer
finance contracts. The loan contains
various debt covenants.
On June 30, 1999, the Company through 5,000,000 3,459,283 6/30/2000 Prime - .25%
an 80% owned subsidiary entered into a
Credit and Security Agreement.
The proceeds of the loan
are utilized by the subsidiary to purchase
mortgage loan collateralized by
residential real estate, which loans are
then sold to various investors. The loan
contains various debt covenants.
----------- -----------
$51,500,000 $29,843,029
=========== ===========
</TABLE>
F-17
<PAGE> 38
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1999, the prime rate was 8.5% and LIBOR was 6.0%.
NOTE 11 - NOTES PAYABLE AND OTHER INTEREST BEARING OBLIGATIONS
Notes payable and other interest bearing obligations were comprised of the
following at December 31 1999:
Notes payable to financial institutions:
Note payable at 13.5% interest rate maturing November
2000. $3,580,000
Various notes at interest rates varying from 9% to
10.5%, due in monthly installments through 2001
collateralized by certain lease receivable. 34,246
Notes payable to individuals:
Notes payable at 10% interest. Notes were for
various amounts maturing November 2002. 4,916,666
8% note payable in sixty monthly
installments of $4,460 plus interest at 8%, secured
by certain furniture, fixtures and equipment,
maturity date July 15, 2001. 79,397
----------
$8,610,309
==========
NOTE 12 - INCOME TAXES
For the years ended December 31, 1999 and 1998, the Company had a tax benefit of
$355 and $65,960, respectively.
F-18
<PAGE> 39
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of the Federal statutory income tax rate of 35% to the
Company's effective income tax rate is as follows:
1999 1998
-------- ---------
Computed at the Statutory rates $(658,296) $(345,207)
(Increase) decrease resulting from:
Non-deductible expenses 161,000 258,220
State income taxes, net loss -- 9,620
Change in deferred tax asset
valuation allowance 496,941 11,407
-------- ---------
Actual benefit $ (355) $ (65,960)
======== =========
The components of the deferred tax asset were as follows at December 31, 1999:
Net operating loss carryforward $ 850,000
Allowance for credit losses 1,057,000
Basis difference in leases 150,000
Other 60,801
----------
2,117,801
----------
Deferred tax liabilities:
Depreciation expense (47,000)
----------
(47,000)
----------
2,070,801
Valuation allowance (2,033,000)
----------
Net deferred tax asset $ 37,801
==========
Management conducts periodic evaluations to determine whether it is more likely
than not that the deferred tax asset can be realized in future periods. Among
the factors considered in this evaluation are estimates of future earnings, the
future reversal of temporary differences and the impact of tax planning
strategies that can be implemented if warranted. As a result of this evaluation,
the Company included in its tax provision a valuation allowance for
substantially all of the deferred tax assets at December 31, 1999.
At December 31, 1999, the Company has unused net operating loss carryforwards of
approximately $2,125,000, expiring between in 2012 and 2019, which is available
for use on its future corporate Federal and State tax returns.
NOTE 13 - CONSULTING AND EMPLOYMENT AGREEMENTS
At December 31, 1999, the Company had outstanding various non-exclusive
consulting agreements with investment bankers and investment advisors which are
conditioned for payment upon the consultant introducing acceptable acquisition
transactions to the Company. The consultants will be compensated upon the
closing of an introduced transaction based upon the equity raised or the value
of the transaction, either in cash or stock depending upon the specific
agreement with the consultant.
At December 31, 1999, the Company had existing employment agreements with
certain key executives that expire between three and seven years. The employment
agreements generally include fixed base compensation, performance bonuses,
perquisites, stock options and stock grants.
F-19
<PAGE> 40
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
The Company commenced its initial public offering ("IPO") at December 24, 1997,
selling 1,285,135 shares of common stock and 1,566,500 warrants. The common
stock sold for $5.50 per share. The warrants sold for $0.15 each and consist of
one redeemable warrant to purchase one share of common stock for $5.75. The
common shares and warrants were purchased separately and are transferable
separately.
The Company received cash and subscriptions of approximately $6,893,000 for
securities and warrants sold from the IPO. Of this amount, there was a non-cash
portion approximating $1,234,000 in subscriptions, representing 223,933 shares,
that were issued to satisfy existing obligations by the Company to the
subscribers of the IPO. Included in this amount was approximately $290,000 due
to the President and Chairman of the Board of the Company and $361,000 due to a
former principal stockholder. Offering costs of approximately $958,000 were
charged to additional paid-in capital upon completion of the offering.
RESCISSION
Following the consummation of the IPO, management of the Company concluded that
various procedural and administrative matters relating to the IPO should have
been disclosed during the period that the IPO was being marketed, rather than
following the consummation of the IPO, as the Company did. As a consequence,
the Company provided purchasers of the Company's securities in the IPO
with the opportunity to rescind their IPO purchase in consideration for their
IPO investment price. The rescission offer expired January 22, 1998.
PREFERRED STOCK
Series A: In June 1996, the Company authorized and issued an aggregate of
2,958,817 shares designated as Series A 10% convertible preferred stock. At the
time the preferred stock was issued, the Company offered to certain note holders
the option to exchange their notes, approximating $972,000, to convertible
preferred stock of the Company at a ratio of approximately 1.03 shares to $1.00.
Note holders elected to convert $788,844 of notes and accrued interest to
convertible preferred stock. Dividends on the preferred stock are payable
quarterly and are cumulative. The preferred stock is convertible to common stock
of the Company at $4.68. Under the terms of the convertible preferred stock
issue the Company, at its sole discretion, may redeem the stock commencing on or
after the fifth anniversary of its issuance if the average trading price of the
common stock in the 20 trading days immediately preceding such anniversary,
exceeds the conversion price by 20%. At anytime after the fifth anniversary, the
Company has the right to redeem the convertible preferred stock, in whole or in
part, upon 30 days notice to the holders.
Series B: In November 1998, the Company authorized 500,000 shares of Series B
preferred stock. The preferred stock is convertible to common stock of the
Company at a rate of 2 1/8 shares of Series B preferred stock for each share of
common stock exchanged. The Series B preferred stock is neither redeemable nor
subject to dividends. Holders of the Series B Preferred Stock are subordinate to
Series A Preferred Stock and to senior all other equity securities of the
Company. In the event of a liquidation or dissolution, the holders of the Series
A and Series B Preferred Stock will be entitled on a pari passu basis to receive
all of the assets of the Company available for distribution to its stockholders
prior to the Company's common shareholders. The Series B Preferred Stock has a
liquidation value of $1 per share.
F-20
<PAGE> 41
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Series C: In November 1999, the Company authorized 3,800 shares and issued 3,780
shares of Series C Preferred stock. The Series C Preferred stock is convertible
into shares of the Company's common stock at any time at the option of the
holder within 180 days from the original issue date at a price of $3.28 per
share and thereafter the conversion price will be the lesser of (a) the initial
conversion price or (b) the product of (1) 80% multiplied by (2) the closing
price of the Company's common stock on the bulletin board (or the exchange upon
which the shares of the Company's common stock are traded) on the day
immediately preceding the date that conversion is requested. Notwithstanding the
foregoing, in the event a holder of Series C Preferred stock requests conversion
at a date when the per market share value (as defined) is less than $3.00 per
share, the Company will have the right, but not the obligation, to redeem all of
the shareholder's shares of Series C Preferred stock by paying to such holder,
in cash, a redemption price equal to 120% of the aggregate liquidation
preference attributable to the shares of the Series C Preferred stock ($1,000
per share) for which conversion had been requested. The Series C Preferred stock
pays a dividend at an annual rate of $60 per share. Holders of the Series C
Preferred stock rank pari passu with the outstanding shares of Series A and
Series B Preferred stock of the Company in the event of liquidation, dissolution
or winding up.
WARRANTS ISSUED
At December 31, 1999, warrants to purchase 2,176,131 common shares are
outstanding; 500,000 warrants exercisable until July 2001 at strike price of
$2.50 per share, and 1,566,500 warrants exercisable until December 2001 at
$5.75. In addition at December 31, 1999, the Company had other warrants
outstanding arising from various acquisitions and other financing activities to
acquire an aggregate of 2,154,375 shares of common stock at exercise prices
ranging from approximately $1.50 to approximately $5.75. These other warrants
are exercisable at various times through September 2004.
PRIVATE PLACEMENT
During 1998, the Company raised an aggregate of approximately $2,160,000
pursuant to a private placement of 216 units. Each unit consisted of 10,000
shares of the Company's common stock and 10,000 redeemable common stock purchase
warrants. Each warrant is exercisable into one share of common stock at $3.25
per share through November 2001.
NOTE 15 - STOCK OPTION PLAN
On January 9, 1997, the Company established an incentive compensation stock
option plan (the "Plan"). The Plan has 1,500,000 shares of Common Stock reserved
for issuance upon the exercise of options designated as either (i) incentive
stock options ("ISOs") under the Internal Revenue Code of 1986, or (ii)
non-qualified options. ISOs may be granted under the Plan to employees and
officers of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company.
Options issued for the years ended December 31, 1999 and 1998 carry exercise
prices equal to the fair market value on the date of the grant. The options vest
over a period of up to five years following the date of grant and the
unexercised portion of the options expires and ceases to be exercisable on the
earlier of the stated exercise period of the grant or specified date following
termination of employment. In certain circumstances, the exercise of stock
options may have an adverse effect on the market price of the Company's common
stock and/or warrants. There was no compensation expense for the years ended
December 31, 1999 and 1998 related to options granted.
F-21
<PAGE> 42
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Had compensation expense for the stock option plan been determined based on the
fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for Stock
Based Compensation," the Company's loss would have been increased by $729,960
and $251,287 in 1999 and 1998, respectively. The fair value of each option is
estimated on the date of grant using the fair market option pricing model with
the assumptions at December 31:
1999 1998
---- ----
Risk-free interest rate 6.50% 5.50%
Expected option life (years) 2-5 2-5
Expected stock price volatility 0.591 N/A
Expected dividend yield None None
Information related to options is summarized below:
<TABLE>
<CAPTION>
Weighted-
Average Range of Options
Options Exercise Exercise Options Forfeited/ Options Options
Granted Price Prices Exercised Terminated Outstanding Vested
------- --------- -------------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 418,000 $ 1.96 $1.20 to $3.30 25,000 12,000 381,000 381,000
1999 543,500 3.32 2.63 to 5.12 -- 15,000 528,500 264,500
------- ------ ------ ------- -------
961,500 25,000 27,000 909,500 645,500
======= ====== ====== ======= =======
</TABLE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
A majority of the Company's assets and liabilities are financial instruments.
For the majority of the Company's financial instruments, fair values are not
readily available since there are not available trading markets as characterized
by current exchanges between willing parties. Accordingly, fair values can only
be derived or estimated using various valuation techniques, such as computing
the present value of estimated future cash flows using discount rates
commensurate with the risks involved. However, the determination of estimated
future cash flows is inherently subjective and imprecise. The estimates are not
necessarily indicative of the amounts the Company could realize in a current
market exchange, and the use of different market assumptions or methodologies
could have a material effect of the estimated fair value amounts.
The fair values indicated below are indicative of the interest rate environment
at December 31, 1999, and do not take into consideration the effects of interest
rate fluctuations. The methodologies and key assumptions used by the Company in
estimating fair values of financial instruments are as follows:
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and cash equivalents,
and the certificate of deposit approximate the fair values.
FINANCE RECEIVABLES: Fair values were estimated for groups of similar loans
based on the type of loan, credit quality and maturity. The fair values for
factoring receivables approximate the carrying values given the contractual
interest rates and the relatively short-term duration of the receivables. Fair
values for consumer installment contracts and commercial finance receivables
were estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality.
F-22
<PAGE> 43
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LEASE RECEIVABLES, OTHER RECEIVABLES, DUE FROM RELATED PARTIES: The fair values
for interest bearing receivables were estimated using discounted cash flow
analysis, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The fair values of demand notes
approximate the carrying value.
LINES OF CREDIT: The fair values of the lines of credit approximate the carrying
values given the short term maturities and the variable interest rates.
NOTES PAYABLE AND OTHER INTEREST BEARING OBLIGATIONS AND NOTES PAYABLE - RELATED
PARTIES: The fair values for interest bearing receivables were estimated using
discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The fair values
of demand notes approximate the carrying value.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1999 are as follows:
Carrying Estimated
Value Fair Value
---------- -----------
Assets:
Cash and cash equivalents $ 1,214,315 $ 1,214,315
Certificate of deposit 1,450,000 1,450,000
Loans available for sale 6,065,166 6,065,166
Finance receivables 38,172,653 39,523,139
Lease receivables 1,232,854 1,232,854
Other receivables 668,661 634,495
Due from related parties 1,756,474 1,644,220
Liabilities:
Lines of credit 29,843,029 29,843,029
Notes payable and other interest bearing
obligations 8,610,309 8,680,309
Notes payable - related parties 30,000 30,000
F-23
<PAGE> 44
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - RELATED PARTY TRANSACTIONS
Due from related parties is comprised of the following at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Note receivable from Medley Group, Inc. The note has a stated interest
rate of 8% with principal and interest payable in full on December 30,
2000. $ 392,893
Note receivable from Medley Group, Inc. The note is payable in sixty
monthly installments of $3,754 plus accrued interest at 5%
beginning July 1, 1999. The remaining balance of $100,000 plus
any accrued interest is due July 1, 2004. 333,089
Note receivable from an affiliated company 8% interest rate, payable
on or before May 1, 2000. 250,000
Note receivable from Tract IV, Inc. The note is payable in monthly
installments of $3,500 plus accrued interest of 12% with the balance
due on May 31, 2001. 206,784
Note receivable due jointly from two employees, unsecured and non-interest bearing,
repayable out of future commissions earned from a subsidiary of the Company. 160,000
Note receivable, bears interest at 3% and matures December 2003. 100,449
Note receivable from employee, unsecured and bears interest at 6% and
matures on July 16, 2000. 99,791
Demand note. 80,000
Short term notes receivable from employees and affiliates. 28,192
6% interest-bearing note receivable from an employee, unsecured and
matures on October 27, 2002. 26,000
Note receivable, due May 2000 at 6%. 24,876
Note receivable from the Chief Executive Officer of the Company with an
original amount of $68,000. Interest accrues on the note at a rate of 10% with
maturity on May 5, 2001. The note was modified along with the employment
agreement whereby $68,000 in principal will be forgiven at a rate of
20% per year beginning in 1999. Interest revenue on this note was
$0 and $5,446 at December 31, 1999 and 1998. 54,400
----------
$1,756,474
==========
</TABLE>
At December 31, 1999, the Company has receivables totaling $725,982 from Medley
Group, Inc. whose management is substantially the same as that of the Company.
Medley Group has pledged 175,000 shares of common stock of the Company as
collateral.
F-24
<PAGE> 45
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1999, the Company has a $1,450,000 certificate of deposit with a
six month maturity, that is pledged as security for a letter of credit for
Medley Group, Inc. The Company's letter of credit was provided as a financial
accommodation to Medley Group, Inc. for a fee equal to $150,000 per annum. This
fee is payable each year the Company continues to extend such financial
accommodation. This letter of credit was posted for the purpose of securing the
performance of certain equipment leases sold by Medley Group to the Company in
1997 for 750,000 shares of the Company's Common Stock owned by Medley Group,
Inc., which common stock, for purposes of the pledge, has an agreed upon value
of $2.50 per share.
At December 31, 1999, the Company has a loan payable to a shareholder and
director of the Company for $30,000 which bears an interest rate of 12% per
annum and matured January 1, 1999.
Subsequent to December 31, 1999, the Chief Executive Officer of the Company
acquired, in a private transaction 1,532,127 shares of Series A Preferred stock.
During January 1999, the Company, through its Ameri-Cap Mortgage subsidiary,
acquired from a director of the Company, 80% of the outstanding capital stock of
Suncoast Title Company, Inc., a Florida title insurance company ("Suncoast"),
for 50,000 shares of the Company's Common Stock. The Company has agreed, through
2003, to acquire the remaining 20% of the outstanding capital stock of Suncoast
for an aggregate of 50,000 additional shares of the Company's common stock.
During February 1999, the Company, through its Ameri-Cap Factors subsidiary,
acquired from the same director, .6% of the outstanding capital stock of
Ameri-Med Financial Services, Inc., a Florida medical receivables financing
business ("Ameri-Med Financial"), for 140,000 shares of the Company's common
stock. Ameri-Cap Factors previously owned 80% of the outstanding capital stock
of Ameri-Med Financial. The Company has agreed beginning in February 2000 and in
February of each year thereafter, through 2004, to acquire .06% of the capital
stock of Ameri-Med Financial owned by the director in exchange for 35,000 shares
of the Company's common stock. The expense associated with the exchanges will be
accounted for at the dates the exchanges occur.
Also during February 1999, the Company acquired from the same director the right
to exchange the director's 7% of the outstanding common stock of Ameri-Cap
Mortgage for 400,000 shares of the Company's common stock. The Company has
agreed to exchange 1.4% of the director's common stock of Ameri-Cap Mortgage
annually beginning in February 2000 for 80,000 shares of the Company's Common
Stock. The Company currently owns 80% of the outstanding common stock of
Ameri-Cap Mortgage. The expense associated with the exchanges will be accounted
for at the dates the exchanges occur.
NOTE 18 - BUSINESS SEGMENTS
Management of the Company reports the results of operations of the Company
through two primary business segments: BUSINESS FINANCE, which specializes
principally in accounts receivable factoring and equipment leasing; and CONSUMER
FINANCE, which specializes principally in mortgage banking, consumer finance,
and other types of specialty finance.
F-25
<PAGE> 46
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes certain financial data for the Company's business
segments:
<TABLE>
<CAPTION>
Revenues Expenses Net Loss Total Assets
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1999:
Business Finance $ 4,109,291 $ 5,806,236 $ (679,490) $ 56,224,979
Consumer Finance 7,531,186 8,344,573 (807,082) 10,310,541
Corporate items and eliminations (36,463) (690,818) (394,271) --
------------ ------------ ------------ ------------
$ 11,604,014 $ 13,459,991 $ (1,880,846) $ 66,535,520
============ ============ ============ ============
December 31, 1998
Business Finance $ 9,391,071 $ 10,206,594 $ (815,323) $ 16,998,001
Consumer Finance 565,032 646,700 (81,668) 1,239,685
Corporate items and other (221,163) (166,062) (1,090) (4,619,499)
------------ ------------ ------------ ------------
$ 9,734,940 $ 10,687,232 $ (898,081) $ 13,618,187
============ ============ ============ ============
</TABLE>
NOTE 19 - CONCENTRATION OF CREDIT RISK
At December 31, 1999, the Company had outstanding several individually
significant finance and related party receivables, which represent significant
credit risk. The Company has obtained various forms of collateral to secure
certain of these receivables.
NOTE 20 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company acquired computers and equipment under the provisions of two leases
which, for financial reporting purposes, have been capitalized.
Future minimum lease payments for the Company's operating leases are as follows:
Year ending Operating
December 31, Leases
------------ ----------
2000 $ 419,158
2001 250,337
2002 256,702
2003 234,663
2004 37,004
----------
Total minimum lease payments $1,197,864
==========
Total rent expense for all operating leases for the years ended December 31,
1999 and 1998, was $428,135 and $141,530, respectively.
LITIGATION
The Company is involved in litigation in the normal course of business. This
litigation is not expected to have a material effect on the Company's results of
operations or financial condition.
F-26
<PAGE> 47
FINANTRA CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21 - SUBSEQUENT EVENTS (UNAUDITED)
On February 29, 2000, the Company entered into a letter of intent to acquire all
of the issued and outstanding common stock of Prime Capital Corporation
("Prime"), a publicly held commercial leasing company. The acquisition is
subject to a variety of conditions, including approval by Prime shareholders.
There are no assurances that the acquisition will be consummated, nor
consummated on the previously agreed to terms. Prime is principally engaged in
the structuring and funding of custom finance programs on behalf of developers,
manufacturers and distributors of commercial software, communication equipment
and medical devices. In 1999, Prime originated approximately $160 million of
such leases.
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,214,315
<SECURITIES> 0
<RECEIVABLES> 44,472,901
<ALLOWANCES> (2,642,259)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 573,810
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,535,520
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 24,992,545
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 66,535,520
<SALES> 0
<TOTAL-REVENUES> 11,604,014
<CGS> 0
<TOTAL-COSTS> 13,494,991
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 482,727
<INTEREST-EXPENSE> 1,389,295
<INCOME-PRETAX> (1,890,977)
<INCOME-TAX> 355
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,880,846)
<EPS-BASIC> (.34)
<EPS-DILUTED> 0
</TABLE>
