FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
_____________ to _____________
Commission file number 0-17771
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 75-2243266
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
identification No.)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices, including zip code, and telephone
number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 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 whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes X No .
As of November 16, 1998 the issuer had 5,916,527 of shares of Common Stock, par
value $0.01 per share, outstanding.
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
September 30,1998
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 1998 (unaudited) and
December 31, 1997 3
Consolidated Statements of Income (unaudited) for the three months and nine
months ended September 30, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity September 30,
1998 (unaudited) 5
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1998 and 1997 6
Notes to consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22-23
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24-25
SIGNATURES 26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
- -----------------------------------------------------------------------------
30-Sept-98 31-Dec-97
-------------------- ------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 3,969,155 $ 2,783,920
RESTRICTED CASH 1,049,890 990,466
NOTES RECEIVABLE:
Principal 151,129,392 115,965,158
Joint venture partici (301,158) (321,460)
Purchase discount (18,979,309) (16,175,518)
Allowance for loan losses (24,128,049) (27,424,641)
-------------------- ------------------
Net notes receivable 107,720,876 72,043,539
LOANS HELD FOR SALE 4,591,258 3,702,723
ACCRUED INTEREST RECEIVABLE 1,763,084 929,908
OTHER REAL ESTATE OWNED 9,281,927 11,806,473
OTHER RECEIVABLES 6,993,979 695,471
DEFERRED TAX ASSET 2,036,774 1,479,939
OTHER ASSETS 2,018,516 735,075
BUILDING, FURNITURE& FIX- Net 669,230 729,285
DEFERRED FINANCING COSTS 1,542,298 1,161,437
-------------------- ------------------
TOTAL ASSETS $141,636,987 $ 97,058,236
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAY& ACCR EXP 3,379,130 2,938,340
LINES OF CREDIT 4,966,186 1,376,403
NOTES PAYABLE 127,082,293 83,643,550
203(K) REHAB ESCROWS PAYABLE 101,286 2,828,239
SUBORDINATED DEBENTURES 664,312 863,100
NOTES PAYABLE, AFFILIATES AND STKHO 405,913 311,484
DEFERRED TAX LIABILITY 2,116,833 1,559,998
-------------------- ------------------
TOTAL LIABILITIES 138,715,954 93,521,114
-------------------- ------------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
10,000,000 authorized shares;
issued and outstanding 1998 and 1997:
5,916,527, and 5,516,527 respectively 59,167 55,167
Additional paid-in capital 6,985,968 6,489,968
Accumulated deficit (4,124,102) (3,008,013)
-------------------- ------------------
Total stockholders' equity 2,921,033 3,537,122
-------------------- ------------------
TOTAL LIABIL AND STKHRS EQUITY $ 141,636,987 $ 97,058,236
==================== ==================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------------------------------------
Nine Months Ended Three Months Ended
30-Sept-98 30-Sept-97 30-Sept-98 30-Sept-97
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Interest Income 5,726,498 4,666,408 2,435,470 1,505,860
Pur disc earned 3,373,408 5,293,710 1,025,523 2,198,879
Gain on sale 815,503 1,402,687 815,503 429,352
Gain on sale orig 709,699 0 161,417 0
Gain on sale of REO 5,222 734,650 154,897 51,211
Rental Income 583,062 0 172,698 0
Other 636,787 533,020 218,367 410,634
------------ ----------- --------------- ---------------
11,850,179 12,630,475 4,983,875 4,595,936
------------ ------------ ------------- ---------------
OPERATING EXPENSES:
Int expense 7,207,323 6,209,639 2,647,779 2,085,835
Coll, Gen&Admin 5,401,817 3,746,062 2,009,105 1,565,531
Prov for ln loss 54,827 86,915 23,436 (16,938)
Bank sv fees 0 31,395 0 0
Amort of finan cst 223,541 435,337 85,779 126,007
Depreciation 78,758 47,266 29,960 15,922
------------ ------------- ----------- -----------
12,966,266 10,556,614 4,796,059 3,776,357
------------ ----------- ----------- ------------
OPER INC(LOSS) (1,116,089) 2,073,861 187,815 819,579
------------- ------------ ------------ ---------------
Special Charge (1,500,000) (1,500,000)
(LOSS)INC BPFIT (1,116,089) 573,861 187,815 (680,421)
--------------- ------------ ----------- --------------
BEN(PRO)FOR INC TAXES 0 41,765 0 (764,530)
--------------- ------------- ------------ ---------------
NET (LOSS) INCOME (1,116,089) 615,626 187,815 84,109
============= ============== =============== ===============
NET (LOSS) INCOME PER COMMON SHARE:
Basic (0.20) 0.11 0.03 0.01
Dilutive (0.20) 0.11 0.03 0.01
=============== =============== =============== ===============
WEIGHD AVG#SHRS 5,540,637 5,823,529 5,540,637 5,823,529
OUTSTANDING============== =============== =============== ===============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
Bal, Dec 31, 1996 1,102,077 11,022 6,534,113 (2,442,115) 4,103,020
Four-for-one Stk Div 4,414,450 44,145 (44,145)
Net Loss (565,898) (565,898)
-------------------------------------------------------------------------
Bal Dec 31,97 5,516,527 55,167 6,489,968 (3,008,013) 3,537,122
==========================================================================
Net Loss (1,116,089)(1,116,089)
Common Stock 400,000 4,000 496,000 500,000
===========================================================================
Bal, Sept 30, 98 5,916,527 59,167 6,985,968 (4,124,102) 2,921,033
=============================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- -----------------------------------------------------------------------------
30-Sept-98 30-Sept-97
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (1,116,089) 615,626
Adj to reconcile net inc(loss) to
Net cash prov(used) by oper act:
Special Charge 0 1,500,000
Depreciation 78,758 47,266
Amortization 223,541 435,927
Purchase discount earned (3,373,408) (5,293,711)
Gain on Sale of Assets (820,728) (1,402,685)
Provision for loan loss 54,827 86,915
Deferred tax provision 0 (359,892)
(Increase) decrease in:
Accrued interest receivable (833,176) 222,165
Foreclosures on real estate (3,715,252) (4,002,990)
Assets held for sale (856,459) 0
Other receivables (6,414,526) (220,610)
Other current assets (826,344) 293,714
Increase(decrease) in:
Accts pay and accr exp 474,259 1,694,422
203(k) rehabilitation escrow (2,726,954) 0
Due to affiliates 102,710 16,400
------------- -------------
Net cash prov (used) by oper act (19,748,842) (6,367,453)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions (0) 0
Additional capital contributed 500,000 0
Acquisition and loan fees (692,472) (289,277)
Acquisition of notes receivable (54,512,186) (19,986,365)
Acquisition of REO (271,879)
Proceeds from sale of Notes&REO 12,415,936 7,428,649
Foreclosures on real estate 469,025 2,127,308
Reclass of nts recei 2,452,472 0
foreclosures
Loans originated (575,223) 0
Acquisition of furn & equip (43,705) (104,403)
Participation interest (36,951) 6,486
Advances to subsidiaries 0 877,431
Principal coll on notes receiv 14,441,481 13,272,488
(Increase) decr in restricted cash (59,424) (306,169)
------------- -------------
Net cash prov(used)by invest act (25,912,928) 3,026,148
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on deben nts pay (198,788) (73,438)
Payments on line of credit (749,078) (395,606)
Proceeds from line of credit 4,365,046 533,458
Proceeds from notes payable 56,010,353 22,803,560
Payments on notes payable (12,580,528) (18,141,826)
------------- -------------
Net cash prov(used)by finan act 46,847,005 4,726,148
------------- -------------
NET INCREASE (DECREASE) IN CASH 1,185,235 1,384,843
CASH, BEGINNING OF PERIOD 2,783,920 1,967,965
CASH, ENDED 3,969,155 3,352,808
============= =============
</TABLE>
<PAGE>
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Franklin Credit Management Corporation (the
"Company" together with its subsidiaries), a Delaware corporation, acquires
non-performing,nonconforming and sub-performing notes receivable and promissory
notes from financial institutions, mortgage and finance companies and the
Federal Deposit Insurance Corporation ("FDIC"). The Company services and
collects such notes receivable through enforcement of terms of original note,
modification of original note terms and, if necessary, foreclosure on the
underlying collateral.
In January 1997, the Company formed a new wholly owned subsidiary, to
originate or purchase, non-traditional residential mortgage loans, including,
but not limited to,sub-prime loans to individuals whose borrowing needs are not
being served by traditional financial institutions.
A summary of the Company's significant accounting policies follows.
Basis of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Cash and Cash Equivalents -Cash and cash equivalents include all cash
accounts, with the exception of restricted cash, and money market funds. The
Company maintains amounts due from banks, which at times may exceed federally
insured limits. The Company has not experienced any losses from such
concentrations.
Notes Receivable and Income Recognition - The Company's notes
receivable portfolio consists primarily of secured consumer and real estate
mortgage loans purchased from financial institutions, mortgage and finance
companies and the FDIC. Such notes receivables are generally non-performing or
performing at the time of purchase and, accordingly, are usually purchased at a
discount from the principal balance remaining.
Notes receivable are stated at the amount of unpaid principal, reduced
by purchase discount and an allowance for loan losses. The Company has the
ability and intent to hold its notes until maturity, payoff or liquidation of
collateral.
In general, interest on the notes receivable is calculated based on
contractual interest rates applied to daily balances of the collectible
principal amount outstanding using the simple-interest method.
Accrual of interest on notes receivable, including impaired notes
receivable,is discontinued when management believes, after considering economic
and business conditions and collection efforts, that the borrowers' financial
condition is such that the timing and or the collection of interest is
unpredictable. When interest accrual is discontinued, all unpaid accrued
interest is reversed.Subsequent recognition of income occurs only to the extent
payment is committed to or received subject to management's assessment of the
collectibility of the remaining interest and principal. A non-accrual note is
restored to an accrual status when it is no longer delinquentand collectibility
of interest and principal is no longer in doubt and past due interest is
recognized at that time.
Loan purchase discount is amortized to income using the interest method
over the period to maturity. The interest method recognizes income by applying
the effective yield on the net investment in the loans to the projected cash
flows of the loans. Discounts are amortized if the projected principal payments
are probable of collection and the timing of such collections is reasonably
estimable.The projection of cash flows for purposes of amortizing purchase loan
discount is a material estimate,which could change significantly, in the near
term. Changes in the projected principal payments are accounted for as a change
in estimate and the periodic amortization is prospectively adjusted over the
remaining life of the loans. Should projected principal payments not exceed the
carrying value of the loan the periodic amortization is suspended and either
the loan is written down or an allowance for uncollectibility is recognized.
Allowance for Loan Losses - The allowance for loan losses, a material
estimate which could change significantly in the near-term, is initially
established through allocation of some or all of the purchase loan discount
based on the managements assessment of the portion of purchase discount some or
all of which represents uncollectable principal. Subsequently, increases to the
allowance are made through a provision for loan losses, which is expensed. The
allowance is maintained at a level that management considers adequate to absorb
potential losses in the loan portfolio.
Management's judgment in determining the adequacy of the allowance is
based on the evaluation of individual loans within the portfolio, the known and
inherent risk characteristics and size of the note receivable portfolio, the
assessment of current economic and real estate market conditions, estimates of
the current value of underlying collateral, past loan loss experience and other
relevant factors. Notes receivables, ncluding impaired notes receivable, are
charged against the allowance for loan losses when management believes thatthe
collectibility of principal is unlikely based on a note-by-note review. Any
subsequent recoveries are credited to the allowance for loan losses when
received.In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties, when
considered necessary.
The Company's real estate notes receivables are collateralized by real
estate located throughout the United States with a concentration in the
Northeast. Accordingly, the collateral value of a substantial portion of the
Company's real estate notes receivable and real estate acquired through
foreclosure is susceptible to changes in market conditions.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on notes
receivable, future additions to the allowance or write-downs may be necessary
based on changes in economic conditions.
Other Real Estate Owned - Other real estate owned consists of
properties acquired through or in lieu of, foreclosure acquisitions or other
proceedings.These properties are held for sale or rented and are carried at the
lower of cost or fair value less estimated costs of disposal. Any write-down to
fair value, less cost to sell, at the time of acquisition is charged to the
allowance for loan losses. Subsequent write-downs are charged to operations
based upon management's continuing assessment of the fair value of the
underlying collateral. Other real estate owned is evaluated regularly to ensure
that the recorded amount is supported by current fair values and valuation
allowances are recorded as necessary to reduce thecarrying amount to fair value
less estimated cost to dispose.Revenue and expenses from the operation of other
real estate owned and changes in the valuation allowance are included in
operations. Costs relating to the development and improvement of the property
are capitalized, subject to the limit of fair value of the collateral, while
costs relating to holding the property are expensed. Gains or losses are
included in operations upon disposal.
Building, Furniture and Fixtures -Building, furniture and fixtures are
recorded at cost net of accumulated depreciation. epreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 40 years. Gains and losses on dispositions are recognized upon
realization. Maintenance and repairs are expensed as incurred.
Deferred Financing Costs - Debt financing costs, which include loan
origination fees incurred by the Company in connection with obtaining financing
are deferred and are amortized based on the principal reduction of the related
loan.
Mortgage Servicing Rights -The Company allocates the total cost of the
mortgage loans purchased or originated, proportionately, to the mortgage
servicing rights and the loans based on the relative fair value. he servicing
rights capitalized are amortized in proportion to and over the period of,
estimated net servicing income including prepayment assumptions based upon the
characteristics of the underlying loans Capitalized servicing rights are
periodically assessed for impairment based on the fair valueof the rights with
any impairment recognized through a valuation allowance.
Pension Plan - The Company has a defined contribution retirement plan
(the "Plan") covering all full-time employees who have completed one year of
service. Contributions to the Plan are made in the form of payroll reductions
based on employees' pretax wages. Currently, the Company does not offer a
matching provision for the Plan.
Income Taxes - The Company recognizes income taxes under an asset and
liability method. Under this method, deferred tax assets are recognized for
deductible temporary differences and operating loss or tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
reduced by a valuation allowance when management determines that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of the enactment.
Earnings Per Common Share- In February 1997, the Financial Accounting
Standards Board ("FASB" issued Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS No. 128"), which requires dual presentation of
Basic EPS and Diluted EPS on the face of the income statement for all entities
with complex capital structures and the restatementof all prior period earnings
per share data presented. SFAS No. 128 also requires a reconciliation of the
numerator and denominator of Basic EPS and Diluted EPS computation.
Fair Value of Financial Instruments -Statement of Financial Accounting
Standards No. 107, Disclosures AboutFair Value of Financial Instruments ("SFAS
No.107"), requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet for which it is
practicable to estimate that value In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Such estimates are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excludes certain
financial instruments and all non-financial assets and liabilities from its
disclosure requirements. Accordingly, the aggregate fair value amounts do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company
in estimating the fair value of its financial instruments:
a. Cash, Restricted Cash, Accrued Interest Receivable, Other
Receivable
and Accrued Interest Payable - The carrying values reported in
the
balance sheet are a reasonable estimate of fair value.
b. Notes Receivable - Fair value of the net note receivable port-
folio
is estimated by discounting the future cash flows using the
interest
method. The carrying amounts of the notes receivable appro-
ximate
fair value.
c. Short-Term Borrowings - The carrying amounts of the line of credit
and other short-term borrowings approximate their fair
value.
d. Long-Term Debt - Fair value of the Company's long-term debt
(including notes payable,subordinated debentures and notes payable,
affiliate)is estimated using discounted cash flow analysis based on
the Company's current incremental borrowing rates for similar types
of borrowing arrangements. The carrying amounts reported in the
balance sheet approximate their fair value.
Recent Accounting Pronouncements - FASB has issued several new
accounting pronouncements, Including Statement No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), which establishes standards for reporting and
displaying of comprehensive income and its components and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131"), which establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about products and
services, geographic areas, and major customers.The two standards were adopted
for the Company's 1998 financial statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Forward-Looking Statements. When used in this report, press releases
and elsewhere by the Company from time to time, the words "believes",
"anticipates" and "expects" and similar expressions are intended to identify
forward-looking statements that involve certain risks and uncertainties.
Additionally, certain statements contained in this Quarterly Report on Form
10-QSB generally may be deemed forward-looking statements that involve a number
of risks and uncertainties.Among the factors that could cause actual results to
differ materially are the following: general economic and business conditions,
interest rates fluctuations, changes in the level of growth in the finance and
housing markets, the availability for purchases of additional loans,the success
of the Company'sorigination subsidiary in timely selling its loans at a premium
in the secondary market, the status of relations between the Company and its
primary sources for loan purchases, the status of relations between the Company
and its primary source of senior financing ("Senior Debt Lender") and the
availability of short and long term financing generally, unanticipated
difficulties in collections under loans in the Company's portfolio or new loans
purchased by the Company, accounting and regulatory changes, and other risks
detailed from time to time in the Company's SEC reports. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date thereof. The Company undertakes no obligation to release
publicly the results of any events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Loan and OREO Acquisitions. During the nine months ended September 30,
1998, the Company purchased 3,325 loans and OREO properties in nine portfolios
with an aggregate face value of $63,217,808 at an acquisition price of
$54,247,481 or 85% of face value and OREO properties of$235,182, included in
the purchases were two portfolios consisting of $29,391,018 face value of
performing loans which were acquired from a single seller. During the nine
months ended September 30, 1997, the Company purchased loans in nine portfolios
with an aggregate face value of $35,365,660 at an aggregate purchase price of
$17,503,609 or 49.5% of face value, and $3,911,840 in OREO properties.
Acquisition of these portfolios was funded through senior financing ("Senior
Debt") in the amount equal to the purchase price plus a 1% loan origination fee.
See "Liquidity and Capital Resources- Financing Activities- Senior Debt."
The Company believes these acquisitions will result in substantial
increases in interest income and purchase discount income during future periods.
During the initial period following acquisitions, the Company incurs the
carrying costs of the related Senior Debt and administrative costs related to
the new portfolios. Payment streams are only generated once the loans are
incorporated into the Company's loan tracking system and contact with the
borrower is made, and in some cases, non-performing loans are restructured or
collection litigation successfully concluded.
In May 1997,the Company purchased a portfolio of $3.7 million in face
value of notes receivable from Preferred Credit Corp ("PCC") for $1.8 million.
Although the Company conducted its own review of each loan file, it hascome to
believe since the closing of the acquisition, that certain information was
intentionally omitted or removed from such files or kept in another repository
of files which were not made available to theCompany and that PCC intentionally
and materially misrepresented the status and quality of the notes receivable
included in the portfolio. Although, its estimate will be refined if necessary,
as the purchased portfolio isseasoned, the Company currently believes that as
much as approximately 90% of the face value of the portfolio may be
uncollectable, due to debtor bankruptcies, in certain instances prior to the
execution of the Asset Purchase Agreement, or senior credit foreclosures of the
underlying collateral. he Company recorded during 1997 a Special Charge of $1.5
million reflecting its estimate of the uncollectable portion of the purchase
price of such portfolio.
The Company has initiated a suit and is seeking recision of the asset
purchase agreement and or damages incurred in connection with the purchase. The
Company's litigation counsel has advised the Company that it believes the
Company has a substantial probability of prevailing in such suit. See "Part
II-Item 1. Legal Proceedings".
In the ordinary course of business, the Company acquires properties
from portfolio acquisitions r and foreclosures. Such properties are classified
as OREO and are evaluated regularly to ensure that recorded amounts are
supported by current fair market values.
Management intends to continue to expand the Company's earning asset
base through the acquisitionof additional portfolios including performing first
and second mortgages at a positive interest rate spread based upon the Companys
cost of funds, non-performing real estate secured loans and OREO properties.The
Company believes that its current infrastructure is adequate to service
additional loans without any material increases in collection, general and
administrative expenses excluding personnel. There can be no assurance the
Company will be able to acquire any additional loans or that it may do so on
favorable terms. While management believes that the acquisition of additional
loan portfolios would be beneficial, management does not believe that current
operations would be materially impacted if no additional loan portfolios were
acquired during 1998.
Tribeca Lending Corporation. The Company, through its wholly owned
subsidiary Tribeca Lending Corporation ("Tribeca"), provides first and second
mortgages to a target market of sub-prime borrowers. This market includes
borrowers who do not meet conventional underwriting criteria.Tribeca focuses on
developing an array of niche products such as high LTV, non-conforming,
rehabilitation, and second mortgages. oans are originated through a network of
affiliates, including mortgage brokers,banks, and through a retail sales force.
The majority of loans originated are ultimately expected to be sold by in the
secondary market. Tribeca processes, underwrites, and closes loans in its name,
or in some circumstances in a correspondent's name, in which case, the loan is
purchased immediately after closing by the Company.
During the three months ended September 30, 1998, Tribeca originated
$5,082,758 in mortgages, which compared with no originations during the three
months ended September 30, 1997, when Tribeca was in the organizational stage.
Tribeca Originations for the three months ended September 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------ ------------------------ ------------------------ ---------
FHA 1st Lien 2nd Lien Total
- ------------------ ------------------------ ------------------------ ---------
- ------------------ ------------------------ ------------------------ ----------
Face Value $ 0 $4,114,282 $968,476 $5,082,758
- ------------------ ------------------------ ------------------------ ----------
- ------------------ ------------------------ ------------------------ ----------
Loans 0 39 31 70
- ------------------ ------------------------ ------------------------ ---------
</TABLE>
During the three months, ended September 30, 1998 Tribeca incurred
an operating loss of $427,132. This loss reflected expenses in excess of
revenue associated in the start-up of the new business, which are expected
to result in corresponding revenues in future periods. From inception through
September 30,1998, Tribeca originated approximately $19.6 million face
value of loans of which $15.0 million were sold to investors, either
in bulk sales or by individual loan sales and the remaining $4.6 million
face value of loans are held for sale. Revenues related to such loans,
other than periodic interest payments and fee income are realized upon
sale of such loans.
A substantial portion of Tribeca's costs related to the staffing
andsetting up of its New York operations and processing center and several
regional sales offices. Management believes that Tribeca's current
infrastructure is sufficient to support substantially increased originations.
Tribeca is currently seeking to increase its available lines of credit in
order to facilitate such increased originations. Tribeca has and expects
to continue to accumulate newly originated loans for periodic sales in
bulk, which bulk sales it believes, result in receipt of a larger purchase
premium than would be available in sales of single loans. As a result, the
amount of credit drawn down and that remaining available to Tribeca may
vary considerably from time to time based upon the timing of bulk loan sales.
These variations may decrease as the amount of credit available, the volume
of originations and the frequency of bulk sales conducted
by Tribeca increase over time.
Cost of Funds. The increase in the prime rate from 8.25% to 8.50%, on March
26,1997, increased the benchmark rate for the interest on Senior Debt used to
fund loan portfolio acquisitions, thereby decreasing net income during the
applicability of such rate. As of September 30, 1998, the Company had 44 loans
outstanding to its Senior during the Debt Lender with an aggregate principal
balance of $127,082,293 of which $47,711,823 million accrues interest at a rate
of 1.75% over prime (10% at November 5, 1998) and $79,370,470 million of which
accrues interest at prime, (8.25% at November16,1998).Additionally the Company
has lines of credit, which had an outstanding balance of $513,812 at September
30, 1998 which was used to make advances to satisfy senior lien positions and
fund capital improvements in connection with foreclosures of certain real
estate loans financed by the Company.
Tribeca has two warehouse lines of credit which had an outstanding
balance of $3,486,514 and $959,881 these lines accrue interest at LIBOR plus 3%
and prime plus 2% respectfully. These warehouse lines of credit are drawn upon
to fund Tribeca's loan originations.
The majority of the loans purchased or originated by the Company bear
interest at a fixed rate; consequently, there is little corresponding change in
interest income due to changes in market interest rate conditions. The weighted
average interest rate on the Senior Debt as of September 30, 1998 and December
31, 1997 was 9.11% and 9.56%, respectively. The Company (including Tribeca
Lending) has a 12% weighted average interest rate on it's performing portfolio,
for the period ended September 30,1998,as compared to a weighted average
interest rate on Senior Debt of 9.11%, for a 2.9% positive interest rate
spread. Management believes that any future increases in the prime rate will
negatively impact the net income of the Company while decreases may be expected
to positively impact such net income.
During a portion of 1997, the Company incurred additional financing
costs in the form of service fees and loan commitment fees. The service fees
were calculated as a percentage of gross collections on four specific portfolio
while loan commitment fees were points based upon origination of Senior Debt.In
March 1997, such ongoing service fees payable were replaced with a 1% exit fee
applicable only to outstanding Senior Debt as of December 31, 1996, for total
fees payable of $700,000. Such fees are payable after repayment, in full, of
such Senior Debt.f the funds collected from the underlying note receivable are
insufficient to satisfy the related Senior Debt any exit fee shortfall shall be
forgiven. The Company believes that the reduction in its cost of funds,
resulting from the elimination of service fees and the premium over the prime
rate charged on new Senior Debt, has and will continue to have a material
beneficial impact on the Company's earnings.
The impact of inflation on the Company's operations during both the
three months ended September 30, 1998, and the three months ended September 30,
1997 was immaterial.
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997.
Total revenue, which is comprised of interest income, purchase discount
earned, gains recognized on the bulk sale of notes, gain on sale of notes
originated, gain on sale of OREO, rental income and other income, increased by
$387,939 or 8% to $4,983,875 during the three months ended September 30, 1998,
from $4,595,936 during the three months ended September 30, 1997. Total revenue
(excluding gain on bulk sales of loans, OREO, and sale of originated loans)
during the three months ended September 30, 1998 as a percentage of notes
receivable, netof allowances for loan losses and joint venture participation as
of September 30, 1998 was 3.6% as compared with 5.9% for the three months ended
September 30,1997.
Interest income on notes receivable increased by $929,610 or 62%, to
$2,435,470 during the three months ended September 30, 1998 from $1,505,860
during the three months ended September 30, 1997. The Company recognizes
interest income on notes included in its portfolio based upon three factors:(i)
interest on performing notes, (ii) interest received or committed with
settlement payments on non-performing notes and iii) the balance of settlements
in excess of the carried face value. This increase resulted primarily from the
acquisition of approximately $38.9 million of performing loans during the three
months ended September 30, 1998, with a weighted average interest rate of 13%,
with accrued interest during the nine months ended September 30,1998.
Purchase discount earned decreased by $1,173,356 or 53%, to $1,025,523
during the three months ended September 30, 1998 from $2,198,879 during the
three months ended September 30, 1997. This decrease reflected the Company's
implementation beginning in 1996 of a policy of selling re-performing loans,
which sales results in purchase discount which would otherwise be earned in
subsequent periods being in part accelerated as gain on sale of loans and in
part lost to the purchaser, a maturing of the Company's portfolio, and an
increase of $4.7 million in face value of loans foreclosed, during the three
months ended September 30,1998, which reduces purchase discount available to be
earned.
Gain on bulk sale of notes receivable increased by $386,151 or 90% to
$815,503 during the three months ended September 30,1998 from $429,352 during
the three months ended September 30, 1997. This increase reflected the larger
size and more favorable pricing of the bulk sale closed during the three months
ended September 30, 1998 as compared with that of the bulk sale closed during
the three months ended September 30, 1997. The Company may consummate bulksales
of notes from time to time as may be economically advantageous but because of
market conditions may not be expected to close on a regular basis.
Gain on sale of notes originated by Tribeca was $161,417 during the
three months ended September 30, 1998 as compared with no such increase during
the three months ended September 30, 1997. This increase reflected Tribeca's
initiation of its activities in September 1997,which resulted in sales of notes
in the secondary market at a premium during 1998.
Gain on sale of OREO increased by $103,686 or 202% to a gain of
$154,897 during the three months ended September30, 1998 from a gain of $51,211
during the three months ended September 30, 1997. This increase resulted
primarily from an increase in the number of REO properties sold and an increase
in the profit margin realized on the sale.
Rental income increased to $172,698 during the three months ended
September 30, 1998, as compared with immaterial rental income during the three
months ended September 30, 1997. This increase reflected an increase in the
number of properties in the Company's portfolio for which the Company believes
that renting produces a greater return than selling at the present time and
therefore holds for rental.
Other income decreased by $192,267 or 47%, to $218,367 during the three
months ended September 30,1998 from $410,634 during the three months ended
September 30, 1997. This decrease resulted primarily from a deficiency balance
on certain notes, and a decrease in late fees during the three months ended
September 30, 1998 as compared to the three months ended September 30, 1997.
Total operating expenses increased by $1,019,702 or 27% to $4,796,059
during the three months ended September 30, 1998 from $3,776,357 during the
three months ended September 30, 1997.Total operating expenses during the three
month period ended September 30, 1998 and 1997 includes interest expense,
collection, general and administrative expenses, provisions for loan losses,
amortization of deferred financing costs fees and depreciation expense.
Interest expense increased by $561,944 or 27%, to $2,647,779 during the
three months ended September 30, 1998, from $2,085,835 during the three months
ended September 30, 1997. This increase resulted primarily from an increase in
total debt, reflecting principally the incurring of additional Senior Debt to
fund the acquisition of notes receivables. Total debt increased by $46,924,167
or 54%, including an increase of approximately $25 million in Senior Debt,which
was funded in September 1998,to $133,118,704 as of September 30, 1998 from
$86,194,537 as of September 30, 1997. Total debt includes Senior Debt,
debentures, and lines of credit and loans from affiliates.
Collection, general and administrative expenses increased by $443,574
or 30% to $2,009,105 during the three months ended September 30, 1998 from
$1,565,531 during the three months ended September 30, 1997. Collection,general
and administrativeexpense consists of personnel expense, OREO related expense,
litigation expense, and all other collection expenses.
Personnel expenses increased by $553,008 or 127% to $987,444 during
the three months ended September 30, 1998 from $434,436 during the three months
ended September 30, 1997. he staffing of Tribeca accounted for $449,070 of this
increase, and the remainder reflected increases in staffing and the experience
level of personnel in the Company's core business in connection with the 50%
increase in our portfolio as of September 30, 1998. OREO related expenses
increased by $177,454 or 103% to $349,444 during the three months ended
September 30, 1998 from $171,990 during three months ended September 30, 1997.
This increase is primarily due to expenses associated with the increase in the
size of the Company's rental portfolio and increased initial cost associated
with foreclosed assets for the three months ended September 30, 1998.Litigation
expenses decreased by $286,579 or 69% to $128,372 during the three months ended
September 30, 1998 from $414,951 during the three months ended September 30,
1997.This decrease reflected an increase in the number of performing loans that
are now part of the Company's portfolio. ll other collection and general and
administrative expenses decreased to $543,845 during the three months ended
September 30, 1998 from $544,154 during the three months ended September 30,
1997.
Provisions for loan losses increased by $40,374 or 172%, to $23,436
during the three months ended September 30, 1998from $(16,238) during the three
months ended September 30, 1997. Bad debt expense expressed on an annualized
basis as a percentage of face value of notes receivable as of the last day of
the three months ended September 30, 1998 and 1997 was immaterial and 0.03%,
respectively.
Amortization of deferred financing costs decreased by $40,227 or 32% to
$85,779 during the three months ended September 30, 1998, from $126,006 during
the three months ended September 30, 1997. This decrease resulted from the bulk
sale of notes receivable during the three months ended September 30, 997, which
accelerated the amortization of loan origination fees associated with the loans
sold, and a decrease in the asset balance of deferred financing costs relative
to the Company's total Senior Debt outstanding. On September 30, 1998 and
September 30, 1997 deferred financing costs as a percentage of Senior Debt
outstanding was 1.17% and 1.30%, respectively.
Depreciation expense increased by $14,038 or 88%, to $29,960 during the
three months ended September 30, 1998, from $15,922 during the three months
ended September 30, 1997. This increase resulted from the purchase by the
Company of computer equipment and an accounting software package.
Operating income decreased by $631,764 or 77%, to $187,815 during the three
months ended September 30, 1998 from $819,579during the three months ended
September 30, 1997 for the reasons set forth above.
During the three months ended September 30, 1998 there was no provision
for income taxes due to an operating loss for the nine months ended compared to
a benefit if income taxes of $764,530 during the three months ended September
30, 1997.
Net income increased by $103,706 to $187,815 during the three months
ended September 30, 1998 from $84,109 during the three
months ended September 30, 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997.
Total revenue, decreased by $780,296 or 6%, to $11,850,179 during the
nine months ended September 30, 1998, from $12,630,475 during the nine months
ended September 30, 1997. Total revenue (excluding gain on bulk sales of loans,
OREO, and sale of originated loans) during the three months ended September 30,
1998 as a percentage of notes receivable, net of allowance for loan losses and
joint venture participation as of September 30,1998 was 8.1% as compared with
11.8% for the three months ended September 30, 1997.
Interest income on notes receivable increased by $1,060,090 or 23%, to
$5,726,498 during the nine months ended September 30, 1998 from $4,666,408
during the nine months ended September 30, 1997. This increase resulted
primarily from the acquisition of approximately $63,452,990 million of
performing loans with a weighted average interest rate of 13%, which was only
partially offset by the decrease in settlements of non-performing accounts with
accrued interest during the nine months ended September 30, 1998.
Purchase discount earned decreased by $1,920,302 or 36%, to $3,373,408
during the nine months ended September 30, 1998 from $5,293,710 during the nine
months ended September 30, 1997. This decrease reflected the Company's
implementation beginning in 1996 of a policy of selling re-performing loans
which sales result in purchase discount which would otherwise be earned in
subsequent periods being in part accelerated as gain on sale of loans and
the maturing of the Company's portfolio, and an increase of $4.7 million
in face of loans foreclosed, which reduces purchase discount available to be
earned.
Gain on bulk sale of notes receivable decreased by $587,184 or 42% to
$815,503 during the nine monthsended September 30, 1998, from $1,402,687 during
the nine months ended 1997. his decreased reflected the timing of only one bulk
sale of notes during the nine months ended September 30, 1998 as opposed to
three bulks sales during the nine months ended September 30, 1997, which was
only partially offset by the large size of the bulk sale during 1998.
Gain on sale of notes originated by Tribeca was $709,699 during the
nine months ended September 30, 1998, as compared with no such gain during the
nine months ended September 30, 1997. This increase reflected Tribeca's
initiation of itsactivities in September 1997, which resulted in sales of notes
in the secondary market at a premium during 1998.
Gain on sale of OREO decreased by $729,428 or 99% to $5,222 during the
nine months ended September 30, 1998, from a gain of $734,650 during the nine
months ended September 30, 1997. This decrease resulted primarily from the
continued liquidation, particularly during the first six months of 1998, of a
substantial number of the longest-held OREO properties in the Company's
portfolio. The Company believes that such properties were characterized by
carrying costs higher than those typical for properties in the Company's
portfolio as a result of their having been financed with Senior Debt incurred
prior to various reductions in the interest rates paid by the Company for new
Senior Debt, their higher incidence of defects in title, their higher
rehabilitation costs and their more remote locations than properties generally
in the Company's portfolio. As a result, the Company believes that its
disposition of such properties, while at a loss, will be beneficial to the
Company's long-term profitability.
Rental income increased to $583,062 during the nine months ended
September 30, 1998, as compared with immaterial rental income during the nine
months ended September 30, 1997. This increase reflected an increase in the
number of properties in the Company's portfolio for which the Company currently
believesthat renting produces a greater return than selling at the present time
and therefore holds for rental.
Other income increased by $103,767 or 19%, to $636,787 during the nine
months ended September 30, 1998 from $533,020 during the nine months ended
September 30, 1997.This increase resulted primarily from an increase in various
loan fees (credit, appraisal, application fees) associated with Tribeca Lending
Loan Originations, during the nine months ended September 30, 1998 from $0,
during the nine months ended September 30, 1997. This increase also resulted
from the receipt of late fees in connection with a settlement of a single large
note, during the three months ended September 30, 1998.
Total operating expenses increased by $2,409,652 or 23%, to $12,966,266
during the nine months ended September 30, 1998, from $10,556,614 during the
nine months ended September 30, 1997. Total operating expenses during the three
month periods ended September 30,1998 and 1997 included interest expense,
collection, general and administrative expenses, provisions for loan losses,
service fees,amortization of deferred financing costs and depreciation expense.
Interest expense increased by $997,684 or 16%, to $7,207,323 during the
nine months ended September 30, 1998 from $6,209,639 during the nine months
ended September 30, 1997. This increase resulted from an increase in total debt
reflecting principally the incurring of $25 million in Senior Debt to fund the
acquisition of notes receivables in September 1998. Total Senior Debt increased
by $43,438,742 or 52% to $127,082,293 as of September 30,1998, as compared with
$ 83,643,550 as of September 30, 1997.
Collection, general and administrative expenses increased by $1,655,755
or 44%, to $5,401,817 during the nine months ended September 30, 1998 from
$3,746,062 during the nine months ended September 30, 1997.
Personnel expenses increased by $1,289,490 or 118%, to $2,377,295
during the nine months ended September 30, 1998 from $1,087,805 during the nine
months ended September 30, 1997. The staffing of Tribeca accounted for $985,761
of the increase, and the remainder reflected increases in staffing and the
experience level of personnel in the Company's core business in connection with
the 50% increase in our portfolio as of September 30, 1998. OREO related
expenses increased by $719,345 or 207%, to $1,066,835 from $347,490 during the
nine months ended September 30, 1997.his increase is primarily due to expenses
associated with the increased size of the Company's rental portfolio and
increased initial cost associated with more costly foreclosed assets for the
nine months ended September 30, 1998. Litigation expenses decreased by $488,397
or 49%, to $506,163 during the nine months ended September 30, 1998, from
$994,560 during the nine months ended September 30, 1997. This decrease
reflected an increase in the negotiated settlements of the Company's collection
actions, which it believes is related to the generally higher value of the
collateral securing the Company's newer notes receivable and the resulting
increased incentive for borrowers to avert foreclosure. All other collection
expenses increased by $64,084 or 6% during the nine months ended September 30,
1998 to $1,191,636 from $1,127,552 during the nine months ended September 30,
1997. This increase reflected the increased size of the Company's portfolio of
notes receivable.
Provisions for loan losses decreased by $32,088 or 37%, to $54,827
during the nine months ended September 30, 1998 from $86,915 during the nine
months ended September 30, 1997. This decrease is due to a decreasing number of
loans written off during the nine months ended September 30, 1998 that did not
have adequate reserves.
Service fees decreased by $31,395 or 100%, to $0 during the nine months
ended September 30,1998 from $31,395 during the nine months ended September 30,
1997, as a result of the elimination of service fees charged by the Senior Debt
Lender effective March 1997. See "General- Cost of Funds."
Amortization of deferred financing costs decreased by $211,796 or 48%,
to $223,541 during the nine months ended September 30, 1998 from$435,337 during
the nine months ended September 30, 1997. This decrease resulted from greater
bulk sale of notes receivable during the nine months ended September 30, 1997,
which accelerated the amortization of loan origination fees associated with the
loans sold, and a decrease in the asset balance of deferred financing costs
relative to the Company's total Senior Debt outstanding.
Depreciation expense increased by $31,492 or 67%, to $78,758 during
nine months ended September 30, 1998, from $47,266 during the nine months ended
September 30, 1997. This increase resulted from the purchase of new computer
equipment and an accounting software package.
Operating income decreased by $3,189,950 or 154%, to a loss of
$1,116,089 during the nine months ended September 30, 1998 from a gain of
$2,073,861 during the nine months ended September 30, 1997 for the reasons set
forth above.
During the nine months ended September 30, 1998, there was no provision
for income taxes due to the operating loss compared to income taxes of $41,765
during the nine months ended September 30, 1997.
Net income decreased by $1,731,715 to a loss of $1,116,089 during the nine
months ended September 30, 1998 from a gain of $615,626 during the nine months
ended September 30, 1997.
Liquidity and Capital Resources
General-Core Business. During the nine months ended September 30, 1998
the Company purchased 3,325 loans in eight portfolios with an aggregate face
value of $63,217,808 at an aggregate purchase price of $54,247,481 or 85% of
face value and OREO properties of $235,182. During the nine months ended
September 30, 1997 the Company purchased nine portfolios with an aggregate face
value of $33,365,660 at an aggregate purchase price of $17,503,609 or 49.5% of
aggregate face value, and $3,911,840 in OREO properties. The Company believes
the increase in face value of loans purchased reflect the Company's marketing
and advertising efforts to establish new business and competitive bidsfollowing
the reduction in its cost of funds, relative to the prime rate and from the
increase in bidding opportunities associated with the Company's beginning to
purchase performing loans as well as non-conforming and sub-performing loans,
which also accounted for the increase in purchase price as a percentage of face
value of the loans purchased.
The Company's portfolio of notes receivable at September 30, 1998 had a
face value of $151,129,392 and included net notes receivable of approximately
$107,720,876 as compared with a face value of $115,965,158 and net notes
receivable of approximately $72,043,539 as of September 30, 1997. Net notes
receivable are stated at the amount of unpaid principal, net of purchase
discount, an allowance for loan losses, and joint venture participation. The
Company has the ability and intent to hold its notes until maturity, payoff or
liquidation of collateral or, where deemed to be economically advantageous,
sale.
During the nine months ended September 30, 1998, the Company used cash
in the amount of $19,748,842 in its operating activities primarily for interest
expense, overhead associated with the ramp-up of Tribeca and increased
infrastructure in the Company's core business, litigation expense incidental to
its ordinary collection activities and for the foreclosure and improvement of
OREO. The Company used $25,912,928 in its investing activities, primarily
reflecting purchases of notes receivable which purchases were only partially
offset by principal collections on its notes receivable and proceeds from
sales of OREO.The amount of cash used in operating and investing activities was
funded by $46,847,005 of net cash provided by financing activities, including
principally, a net increase in Senior Debt of $52,867,079. The above activities
resulted in a net increase in cash at September 30, 1998 over December 31, 1997
of $1,185,235.
In the ordinary course of its business, the Company accelerates and
forecloses upon real estate securing non-performing notes receivable included
in its portfolio. As a result of such foreclosures and selective direct
purchases of OREO, at September 30, 1998 and 1997, the Company held OREO with
a book value of $9,281,927 and $11,197,788 respectively. OREO is recorded on th
financial statements of the Company at the lower of cost or fair market value
based on third party appraisals and broker price opinions at the time of
acquisition or foreclosure. There can be no assurance however, that such
amount would actually be realized upon liquidation of such OREO. The Company
generally holds OREO as rental property or sells in the ordinary course of
business when it is economically beneficial to do so.
Tribeca Operating Loss. During the nine months ended September 30, 1998
Tribeca incurred an operating loss of $902,914. This loss stemmed from
substantial start-up costs and increases in operating expenses associated with
the ramp-up of the new business and the lag time which may be expected before
the related revenues begin to be realized. The Company funded the start-up of
Tribeca with $1.1 million of proceeds from the refinancing of two loan
portfolios through its Senior Debt Lender. Additionally, such lender has
provided Tribeca with a warehouse line of credit of $5,000,000 to fund loan
originations, which accrues interest at prime plus 2%. The Company has secured
an additional warehouse line of credit for Tribeca's use of $7,000,000 million
from an other lending institutions, which accrues interest at LIBOR plus 3.0%.
Tribeca began originating mortgages on September 1, 1997 and has not yet
achieved profitability. Management believes that in order to achieve
profitability, Tribeca will be required to continue to increase its access to
credit, its originations and its volume of bulk sales of loans. There can be no
assurances that Tribeca will earn a profit in the future.
Private Placement. On September 9, 1998 in order to obtain additional
equity to support increases in the warehouse lines of credit available to
Tribeca to fund originations, the Company consummated a private placement under
Section 4(2) of the Securities Act of 1933, as amended (the "Act") of 400,000
shares of its Common stock, par value $ 0.01 per share (the "Shares"). The
purchasers of the shares represented to the Company that they were accredited
investors and that they received the information required by rule 502
promulgated under the Act and met the requirements of Rule 506(b)(ii) under the
Act. Purchases of the shares were granted certain piggyback registration rights
by the Company, subject to ordinary and customary conditions, exclusions and
cutbacks.
Cash Flow
Substantially all of the assets of the Company are invested in its
portfolios of notes receivable and OREO. Primary sources of the Company's cash
flow for operating and investing activities are collections on notes receivable
and gain on sale notes and OREO properties.
At September 30, 1998, the Company had unrestricted cash, cash
equivalents and marketable securities of $3,969,155 as compared to $ 2,783,920
at September 30, 1997.A portion of the Company's available funds may be applied
to fund acquisitions of companies or assets of companies in complementary or
related fields. Although the Company from time to time engages in discussions
and negotiations, it currently has no agreements with respect to any particular
acquisition. This may cause the Company to incur additional capital
expenditures, outside the acquisitions of additional notes receivable.
Management believes that sufficient cash flow from the collection of
notes receivable will be available to repay the Company's secured obligations,
and that sufficient additional cash flows will exist through collections of
notes receivable, the bulk sale of performing loan portfolios, sales and
rental of OREO, continued modifications to the secured debt credit agreements
or additional borrowing, to repay the current liabilities arising from
operations and to repay the long term indebtedness of the Company.
Financing Activities
Senior Debt. As of September 30, 1998, the Company owed an aggregate of
$127,082,293 to the Lender of Senior Debt, under 44 loans.
The Senior Debt is collateralized by first liens on the respective loan
portfolios for the purchase of which it was incurred and is guaranteed by the
Company. The monthly payments on the Senior Debt have been, and continue to be,
met by the collections from the respective loan portfolios. The loan agreements
for the Senior Debt call for minimum interest and principal payments each month
and accelerated payments based upon the collections during the preceding month
under the notes receivable securing the Senior Debt. The Senior Debt accrues
interest at variable rates ranging from the prime rate to prime plus 1.75%. The
accelerated payment provisions of the Senior Debt are generally of two types:
the first requires that all collections from notes receivable, other than a
fixed monthly allowance for servicing operations, be applied to reduce the
Senior Debt, and the second requires a further amount to be applied toward
additional principalreduction from available cash after scheduled principal and
interest payments have been made. As a result of the accelerated payment
provisions, the Companyis repaying the amounts due on the Senior Debt at a rate
faster than the minimum scheduled payments. While the Senior Debt remains
outstanding, these accelerated payment provisions may limit the cash flow,which
is available to the Company.
Certain of the Senior Debt credit agreements require establishment of
restricted cash accounts, funded by an initial deposit at the loan closing and
additional deposits based upon monthly collections up to a specified dollar
limit.The restricted cash is maintained in an interest bearing accounts held by
the Company's Senior Debt Lender.Restricted cash may be accessed by the Senior
DebtLender only upon the Company's failure to meet the minimum monthly payments
due if collections from notes receivable securing the loan are insufficient to
satisfy the installment due. istorically, the Company has not called upon these
reserves. The aggregate balance of restricted cash in such accounts was
$1,049,890 and $1,238,541 on September 30, 1998 and September 30, 1997,
respectively.
Total Senior Debt availability was approximately $150.0 million at
September 30, 1998, of which approximately $127 million had been drawn down as
of such date. Additionally the Senior Debt Lender has verbally informed the
Company that it will not deem approximately $21. million of Senior Debt that it
had syndicated to other banks as of such date as outstanding for purposes of
determining availability under of Senior Debt. As a result, the Company has
approximately $44 million available to purchase additional portfolios of notes
receivable and OREO.
12% Debentures. In connection with the acquisition of a loan portfolio
during 1994, the Company sold to investors $750,000 of subordinated debentures
("12% Debentures").As of September 30, 1998 and December 31, 1997, $220,312 and
$352,500, respectively, of these debentures were outstanding.The 12% Debentures
bear interest at the rate of 12% per annum payable in quarterly installments.
The principal is payable over four years in sixteen equal installments of
$44,062 that commenced March 31, 1996. The 12% Debentures are secured by a lien
on the Company's interest in certain notes receivable and are subordinated to
the Senior Debt encumbering such notes receivable.
Harrison First Corporation 12% Debentures. In connection with the
acquisition of a loan portfolio during 1995, the Company sold to investors
$555,000 of subordinated debentures. As of September 30, 1998 and December 31,
1997, $443,334 and $510,600, respectively, of these debentures were outstanding.
The Harrison 1st 12% Debentures bear interest at the rate of 12% per annum
payable in quarterly installments. The principal is payable over three years in
ten equal quarterly installments of $22,200, which payments commenced on
September 30, 1997 with the remaining balloon payment of $333,000 due on
September 30, 2000.The Harrison 1st 12% Debentures are secured by a lien on the
Company's interest in certain notes receivable and are subordinated to the
Senior Debt encumbering such notes receivable.
OREO Line of Credit. The Company has a line of credit with the Senior Debt
Lender permitting it to borrow a maximum of approximately $1,500,000 at a rate
equal to such lender's prime rate plus two percent per annum. Principal
repayment of cash advanceunder the line is due six months from the date of such
cash advance and interest is payable monthly. The total amounts outstanding
under the lines of credit as of September 30, 1998 and December 31, 1997, were
$543,519 and $583,916 respectively. Advances made under the line of credit were
used to satisfy senior lien positions and fund capital improvements in
connection with foreclosures of certain real estate loans financed by the
Company. Management believes the ultimate sale of these properties will satisfy
the related outstanding lines of credit and accrued interest,as well as surpass
the collectible value of the original secured notes receivable. Management has
reached an agreement in principal with its Senior Debt Lender to increase the
availability under this credit facility to cover additional properties
foreclosed upon by the Company which the Company may hold as rental property to
maximize its return.
Warehouse Lines-of Credit
As of September 30, 1998 Tribeca maintains warehouse lines of credit with two
financial institutions. Up to $12.0 million of funds, secured by notes held for
sale, are available to be advanced to the Tribeca. As of September 30, 1998 the
balances drawn down were $3,486,514 and $959,881 respectively. See
(`-General-Tribeca Operating loss')
Part II Other Information
Item 1. Legal Proceedings
Asset Purchase Agreement Dispute. On August 19, 1997 the Company
commenced a civil action in the United States District Court for the Southern
District of New York against Preferred Credit Corporation ("PCC"), alleging
fraud, breach of contract, and unjust enrichment in connection with the
purchase by the Company of $3.7 million in face value of notes receivable from
("PCC") for $1.8 million. The Company is seeking recision of the asset purchase
agreement or damages incurred concerning the purchase.
Although the Company conducted its own review of each loan file, it has
come to believe since the closing of the acquisition that certain information
was intentionally omitted or removed from such files or kept in another
repository of files which was not made available to the Company and that PCC
intentionally and materially misrepresented the status and quality of the notes
receivable included in the portfolio. Although, its estimate will be refined as
the purchased portfolio is seasoned, the Company currently believes that as
much as approximately 90% of the face value of the portfolio may be uncoll-
ectable, due to debtor bankruptcies, in certain instances prior to the
execution of the Asset Purchase Agreement, or senior credit foreclosures of
the underlying collateral.
PCC filed a motion to dismiss in FCMC's Amended Complaint on November
12, 1997 and FCMC responded to the motion to dismiss on December 9, 1997. On
May 8, 998 the United States District Court dismissed FCMC's Amended Complaint,
with leave to file an amended complaint. On June 5, 1998, FCMC filed its second
Amended Complaint alleging claims based on fraud and breach of contract.
On July 24, 1998, Defendants moved to dismiss the Second Amended Complaint.
In a ruling dated September 22, 1998, the United States District
Court dismissed one of FCMC's fraud claims against Preferred Credit and all of
FCMC'S claims against the individual defendants. However, in its September
22,1998 ruling the District Court declined to dismiss FCMC's remaining claims
against Preferred Credit based on fraud and breach of contract. On October
22,1998, Preferred Credit filed a answer and counterclaim alleging a breach of
the purchase agreement and seeking its costs and fees incurred in connection
with the proceeding.
Letter Agreement Dispute. On November 17, 1997 K Mortgage Corporation
("K") filed a civil action in the United States District Court for the Southern
District Court of New York against the Company, Tribeca and Thomas J. Axon
alleging breach of contract, fraud, and unjust enrichment in connection with a
May 9, 1997 letter agreement (the "Letter Agreement") pursuant to which Tribeca
was to purchase certain assets of K, retain three principles of K as paid
consultants and employ a fourth, Jim Ragan ("Ragan"). In the suit K seeks to
recover for damages of $10 million for the alleged failure of the Company to
make certain payments to third parties, provide Ragan with an employment
agreement and provide the three other principals of with consulting contracts
pursuant to the terms of the Letter Agreement.
On December 22, 1997 the Company filed an answer and counterclaim
vigorously denying the allegations of the complaint and alleging fraud and
breach of contract against K and Ragan, and breach of fiduciary duty against
Ragan. In its counterclaim the Company seeks to recover damages of $1,000,000
for what it believes to have been Ragan's unjustified unilateral termination of
his employment in violation of the Letter Agreement. The Company intends to
vigorously assert its claims, defend itself against K's claims, and does not at
this time believe that the suit will have a material adverse impaction on its
operations or financial condition.The Court has directed all parties to proceed
with mediation, which is currently scheduled for the fourth quarter of 1998.
Legal Fee Dispute. On October 28, 1997 Rosen, Dainow & Jacobs ("Rosen")
filed a civil action against the Company in the Supreme Court of the State of
New York, County of New York alleging failure by the Company to pay fees due
Rosen in connection with certain matters in which it represented the Company
("Trademark Dispute") and seeking $145,000 in damages. Rosen was dismissed by
the Company,as counsel in such matters after it was disbanded and the Company's
lead attorney in the Trademark Dispute joined a firm that was representing the
Company's deputant in the Trademark Dispute. The Company plans to vigorously
defend itself in this matter and does not currently believe that the outcome
will have a material impact on its operations or financial condition.
Miramar Litigation. Since in July, 1991, the Company has been a
plaintiff in various actions ("Miramar Litigation") and party to settlements,
with the former directors and officers of Miramar Resources, Inc.("Miramar"), a
company which the Company merged with in 1994, based upon allegations relating
to certain pre-merger events. Information regarding such settlement and the
legal status of the Company's collection efforts in respect of such settlements
is incorporated herein by reference to "Item 3. Legal Proceedings" included in
the Company's Annual Reports on Form 10-KSB for the year ended December 31,
1994, 1996, and 1997.
<PAGE>
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Maters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on form 8-K
- -------------------- ---------------------------------------------------------
(a) EXHIBIT TABLE
- -------------------- ---------------------------------------------------------
Exhibit No. Description
3(a) Restated Certificate of Incorporation. Previously filed
with, and incorporated herein by reference to, the
Company's Annual 10-KSB for the fiscal year ended December
31,1997, filed with the Commission on May 14, 1998.
(b) Bylaws of the Company Previously filed with, and
incorporated herein by reference to, the Company's
Registration Statement on Form S-4, No. 33-81948, filed
with the Commission on November 24, 1994.
4(a) 15% Convertible Subordinate Debentures. Previously filed
with, and incorporated herein by reference to, the
Company's Registration Statement on Form S-4, No. 33-81948,
filed with the Commission on November 24, 1994.
(b) Warrants associated with principal repayment of the 15%
Convertible Subordinated Debentures. Previously filed with
and incorporated herein by reference to, the Company's
Registration Statement on Form S-4, No. 33-81948, filed
with the Commission on November 24, 1994.
10(d) Employment Agreement dated December 4, 1996, between the
Company and Joseph Caiazzo. Previously filed with and
incorporated herein by reference to, he Company's Annual
Report on Form 10KSB, for the fiscal year ended December
31,1996 filed with the Commission on March 31, 1997.
10(e) Agreement dated March 29, 1997 between the Company and
Citizens Banking Company. Previously filed with and
incorporated herein by refuse to, the Company's
10(f) Loan and Real Estate Purchase Agreement dated September
17,1998 by and among Franklin Credit Management Corp.
and Home Gold Financial Inc./k/a Emergent Mortgage Corp.
Previously filed with and incorporated herein by reference
to the Company's current Report on Form 8-k, dated
September 17,1998 filed with the Commission on October
2,1998.
10(g) Form of Subscription Agreement and Investor Representation
dated as of September 8,1998 between the Company and
certain subscribers.
11 Computation of earnings per share. Filed here with.
- -------------------- ---------------------------------------------------------
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FRANKLIN CREDIT MANAGEMENT
CORPORATION
By: THOMAS J. AXON
Thomas J. Axon
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
THOMAS J. AXON President, Chief Executive Officer Nov 16,1998
Thomas J. Axon and Director
(Principal executive officer)
FRANK B. EVANS, Jr. Vice President, Treasurer, Nov 16,1998
Frank B. Evans, Jr. Chief Financial Officer and Director
Secretary (Principal financial and accounting officer)
JOSEPH CAIAZZO Vice President, Chief Operating Nov 16,1998
Joseph Caiazzo Officer and Director
<PAGE>
Exhibit 11.
Computations of earnings per share 3rd quarter 1997.
No. of Shares Weight
12/31/96 Common stock 5,503,896
O/S warrants
(extended for 1 year) 110,133
Stock options 209,500
----------------
5,823,529 25% 1,455,882
3/31/97 Common stock 5,503,896
O/S warrants 110,133
(extended for 1 year)
Stock options 209,500
----------------
5,823,529 25% 1,455,882
6/30/97 Common stock 5,503,896
O/S warrants 110,133
(extended for 1 year)
Stock options 209,500
----------------
5,823,529 25% 1,455,882
9/30/97 Common stock 5,503,896
O/S warrants 110,133
(extended for 1 year)
Stock options 209,500
5,823,529 25% 1,455,882
-------------
----------------
23,294,116
================
Weighted average number of shares 5,823,529
Earnings per Common share:
Net Income $ $ 0.11
615,626
Footnote: This is a reflection of the stock split and the 4 for 1 stock
dividend.
Exhibit 11.
Computations of earnings per share 3rd quarter 1998.
No. of Shares Weight
12/31/97 Common stock 5,516,527
O/S warrants
(extended for 1 year) 110,133
Stock options 209,500
----------------
5,836,160 25% 1,459,040
3/31/98 Common stock 5,516,527
O/S warrants 110,133
(extended for 1 year)
Stock options 209,500
----------------
5,836,160 25% 1,459,040
6/30/98 Common stock 5,516,527
O/S warrants 110,133
(extended for 1 year)
Stock options 209,500
----------------
5,836,160 25% 1,459,040
7/1/98- Common stock 5,516,527
9/30/98 O/S warrants 110,133
(extended for 1 year)
Stock options 209,500
----------------
5,836,160 1,459,040
9/9/98- Issued 400,000 addt'l
shares of Common stock 400,000 24,000
9/30/98
-------------
----------------
23,744,640
================
Weighted average number of shares 5,540,637
Earnings per Common share:
Net Income $(1,116,089) $(0.20)
<PAGE>
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