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 June 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 August 15, 1998 the issuer had 5,516,527 of shares of Common Stock, par
value $0.01 per share, outstanding.
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
June 30,1998
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income (unaudited) for the three months and six
months ended June 30, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity June 30, 1998 (unaudited) 5
Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 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>
FRANKIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
30-Jun-98 31-Dec-97
------------------- -----------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS
$ 3,884,053 $2,783,920
RESTRICTED CASH 1,034,890 990,466
NOTES RECEIVABLE:
Principal 125,942,126 115,965,158
Joint venture participations (314,831) (321,460)
Purchase discount (16,455,338) (16,175,518)
Allowance for loan losses (24,447,544) (27,424,641)
------------------- -----------------
Net notes receivable 84,724,413 72,043,539
LOANS HELD FOR SALE 3,100,027 3,702,723
ACCRUED INTEREST RECEIVABLE 1,120,813 929,908
OTHER REAL ESTATE OWNED 9,255,949 11,806,473
OTHER RECEIVABLES 1,162,413 695,471
DEFERRED TAX ASSET 2,121,596 1,479,939
OTHER ASSETS 1,341,853 735,075
BUILDING, FURNITURE AND FIXTURES- Net 673,273 729,285
DEFERRED FINANCING COSTS 1,262,933 1,161,437
------------------- -----------------
TOTAL ASSETS $109,682,213 97,058,236
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,245,262 2,938,340
LINES OF CREDIT 3,645,246 1,376,403
NOTES PAYABLE 96,597,286 83,643,550
203(K) REHABILITATION ESCROWS PAYABLE 153,849 2,828,239
SUBORDINATED DEBENTURES 730,575 863,100
NOTES PAYABLE, AFFILIATES AND STOCKHOLDERS 375,386 311,484
DEFERRED TAX LIABILITY 2,201,391 1,559,998
------------------ -----------------
TOTAL LIABILITIES 106,948,995 93,521,114
------------------- -----------------
STOCKHOLDERS' EQUITY Common Stock, $.01 par value, 10,000,000 authorized shares;
issued and outstanding 1998 and
1997: 5,516,527 55,167 55,167
Additional paid-in capital 6,989,968 6,489,968
Accumulated deficit (4,311,917) (3,008,013)
------------------- -----------------
Total stockholders' equity 2,733,218 3,537,122
------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY $ 109,682,213 $ 97,058,236
=================== =================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Six Month Ended Three Months Ended
30-Jun-98 30-Jun-97 30-Jun-98 30-Jun-97
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Int Income 3,291,028 3,160,548 1,949,251 1,885,284
Purch discount earned 2,347,885 3,094,831 1,321,521 1,511,606
Gain on sale of portfolios 0 973,337 0 973,337
Gain on sale of loans 548,282 0 425,853 0
Gain or(Loss)on sale OREO(149,675) 683,439 (45,370) 649,172
Rental Income 410,364 0 249,813 0
Other 418,420 122,386 355,732 53,990
----------- ---------- ----------- -------------
Total Revenue 6,866,304 8,034,540 4,256,800 5,073,388
------------ ----------- ----------- -------------
OPERATING EXPENSES:
Interest expense 4,559,544 4,123,804 2,508,586 2,168,449
Collection, gen &admin 3,392,713 2,180,530 1,890,721 1,185,654
Prov for loan losses 31,391 103,853 ( 1,439) 7,841
Banking service fees 0 31,395 0 0
Amort of defer finan costs 137,762 309,329 84,976 254,070
Depreciation 48,798 31,344 18,412 15,672
----------- ---------- ----------- --------------
Total Expenses 8,170,208 6,780,256 4,501,256 3,631,687
----------- ---------- ----------- ---------------
OPERATING INCOME (LOSS)(1,303,904) 1,254,284 (244,456) 1,441,701
------------ ----------- ------------ --------------
(LOSS)INCOME BEFORE
PROVISION FOR INC TAX (1,303,904) 1,254,284 (244,456) 1,441,701
TAXES --------------- ------------- ------------ --------------
INCOME TAXES 0 (722,765) 0 (722,765)
--------------- ------------- ------------- ------------
NET (LOSS) INCOME (1,303,904) 531,519 (244,456) 718,936
=============== ============ ============= ============
NET (LOSS) INCOME PER COMMON SHARE:
Basic (0.22) 0.10 (0.04) 0.13
Dilutive (0.22) 0.10 (0.04) 0.13
=============== ============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,516,527 5,516,527 5,516,527 5,516,527
=============== ============= ============= =============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 30, 1998
- --------------------------------------------------------------------------------
Common Stock Additional Retained
------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Balance, December 31, 1996 1,102,077 11,022 6,534,113 (2,442,115) 4,103,020
Four-for-one Stock Div 4,414,450 44,145 (44,145)
Net Loss (565,898) (565,898)
------------------------------------------------------
Balance, December 31, 1997 5,516,527 55,167 6,489,968 (3,008,013) 3,537,122
======================================================
Net Loss (1,303,904)(1,303,904)
Capital Contribution 500,000 500,000
======================================================
Balance, June 30, 1998 5,516,527 55,167 6,989,968 (4,311,917) 2,733,218
======================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
30-Jun-98 30-Jun-97
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (1,303,904) 531,519
Adjustments to reconcile net income
Net cash provided (used) by operating activities:
Depreciation 48,798 31,344
Amortization 137,762 309,329
Purchase discount earned (2,347,885) (3,094,831)
Gain on Sale of REO 149,675 (973,337)
Provision for loan loss 15,303 103,853
Deferred tax provision 0 0
(Increase) decrease in:
Accrued interest receivable 192,779) 194,027
Foreclosures on real estate (2,034,957) (2,689,979)
Assets held for sale 602,696 0
Other receivables (82,458) 28,386
Other current assets (1,237,610) (725,824)
Increase(decrease) in:
Accounts payable and accrued expenses 259,009 1,075,927
203(k) rehabilitation escrow (2,674,391) 0
Due to affiliates 59,230 (82,227)
------------- ------------
Net cash (used)by operating activities (8,601,511) (5,291,811)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions (0) 0
Additional capital contributed 500,000 0
Acquisition and loan fees (220,924) 0
Acquisition of notes receivable (20,127,336) (17,820,766)
Acquisition of REO (235,182) (2,041,230)
Proceeds from sale of REO 4,779,470 0
Foreclosures on real estate 90,272 0
Reclass of notes receivfor foreclosures 1,653,838 0
Loans originated (550,000) 0
Acquisition of furniture & equipment (15,080) 305,420)
Participation interest (20,130) (18,629)
Advances to subsidiaries 312,302 0
Principal collection on notes receivable 8,488,783 14,913,235
(Increase) decrease in restricted cash (44,424) (137,258)
------------- ------------
Net cash(used) by investing activities (5,388,411) 5,410,068)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debenture notes payable (132,525) (33,125)
Payments on line of credit (419,991) (407,803)
Proceeds from line of credit 2,688,834 388,608
Proceeds from notes payable 20,889,503 23,361,039
Payments on notes payable (7,935,766) (11,462,039)
------------- ------------
Net cash prov(used)by finan activ 15,090,055 11,846,680
------------- ------------
NET INCREASE (DECREASE) IN CASH 1,100,133 1,144,801
CASH, BEGINNING OF PERIOD 2,783,920 1,967,965
CASH, ENDING 3,884,053 3,112,765
</TABLE>
============= ============
<PAGE>
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Franklin Credit Management Corporation (the
"Company"), 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 receivables 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 delinquent and 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 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 management's assessment of the portion of purchase discount some or
all of that 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 portfolios, 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, including impaired notes receivable, are
charged against the allowance for loan losses when management believes that the
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 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 the carrying 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. Depreciation 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. The 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 value of 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 restatement of 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 About Fair Value of Financial Instruments
("Statement 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 portfolio
is estimated by discounting the future cash flows using the interest
method. The carrying amounts of the notes receivable approximate
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 are effective
for the Company's 1998 financial statements. The Company does not believe that
SFAS 130 will have any effect on the Company's computation or presentation of
net income. The Company will adopt SFAS 131 for its mortgage origination
subsidiary beginning in 1998.
<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 discussion and 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 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 six months ended June 30, 1998,
the Company purchased 1,302 loans and OREO properties in five portfolios with an
aggregate face value of $24,321,293 at an acquisition price of $20,127,336, or
83% of face value and OREO properties of $235,182. During the six months ended
June 30, 1997, the Company purchased loans in six portfolios with an aggregate
face value of $33,324,430 at an aggregate purchase price of $17,820,766 or 53%
of face value, and $2,041,230 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- Cash Flow from 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 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 were 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 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.
The Company recorded during 1997 a Special Charge of $1.5 million reflecting its
current 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 or 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 acquisition of additional portfolios including performing first
and second mortgages at a positive spread based upon the Company's 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. 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 additional loan portfolios were not 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 to fulfill needs such as high LTV,
non-conforming, rehabilitation, and second mortgages. Loans 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 Tribeca 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 June 30, 1998, Tribeca originated
$13,238,495 in mortgages, which compared with no originations during the three
months ended June 30, 1997, when Tribeca was in the organizational stage.
Tribeca Originations for the Three months ending June 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ----------------- ------------------------ ------------------------
FHA 1st Lien 2nd Lien Total
- ----------------- ------------------------ ------------------------
- ----------------- ------------------------ ------------------------
Face Value $ 119,950 11,036,640 $2,081,905 13,238,495
- ----------------- ------------------------ ------------------------
- ----------------- ------------------------ ------------------------
Loans 2 95 61 158
- ----------------- ------------------------ ------------------------
</TABLE>
During three months, ending June 30, 1998 Tribeca incurred an operating
loss of $165,000. 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 June 30, 1998,
Tribeca originated approximately $14.6 million face value of loans of which
$11.5 million were sold to investors, either in bulk sales or by individual loan
sales and the remaining $3.1 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 and
setting 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. See "Liquidity and Capital Resource-Tribeca Lines of
Credit." 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 be expected to 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% from 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 for subsequent
periods. As of June 30, 1998, the Company had 40 loans outstanding to its Senior
Debt Lender with an aggregate principal balance of $96,597,286 of which
approximately $52.1 million accrues interest at a rate of 1.75% over prime or
10.25% and approximately $36.8 million of which accrues interest at prime.
Additionally the Company has lines of credit, which had an outstanding balance
of $592,977 at June 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 $ 1,284,430 and $1,761,860,
as of June 30, 1998 these lines accrue interest at prime plus 2% and libor plus
2.5% respectively. 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 June 30, 1998 and December 31,
1997 was 9.46% and 9.56%, respectively. 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 are
calculated as a percentage of gross collections on four specific portfolios
while loan commitment fees are points based upon origination of Senior Debt.
Additionally, in March 1997, certain ongoing service fees payable on Senior Debt
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 will be
payable after repayment, in full, of such Senior Debt. If the funds collected
from the underlying notes receivable are insufficient to satisfy the related
Senior Debt any exit fee shortfall shall be forgiven. The Company believes that
its reduced cost of funds will have a material beneficial impact on the
Company's earnings.
The impact of inflation on the Company's operations during both the
three months ending June 30, 1998, and the three months ending June 30, 1997 was
immaterial.
Results of Operations
Three Months Ended June 30, 1998 Compared to Three Months Ended June 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, decreased by
$,816,588 or 16%, to $4,256,800 during the three months ended June 30, 1998,
from $5,073,388 during the three months ended June 30, 1997. Total revenue
(excluding gain on bulk sale of loans, OREO, and sale of originated loans)
during the three months ended June 30,1998 as a percentage of notes receivable,
net of allowance for loan losses and joint venture participation as of June 30,
1998 was 15.3% as compared with 13.9% for the three months ending June 30, 1997.
Interest income on note receivable increased by $63,967 or 3%, to
$1,949,251 during the three months ended June 30, 1998 from $1,885,284 during
the three months ended June 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 $ 7.6 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 three months ending
June 30, 1998.
Purchase discount earned decreased by $190,085 or 13%, to $1,321,521
during the three months ending June 30, 1998 from $1,511,606 during the three
months ending June 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 $1.1 million in face value of loans foreclosed, which reduces
purchase discount available to be earned.
Gain on bulk sale of notes receivable decreased by $973,337 to $0
during the three months ending June 30,1998 from $973,337 during the three
months ending June 30, 1997. This decrease reflected the timing of bulk sales of
notes during the three months ending June 30, 1997. There was one bulk sale
during the three months ended June 30, 1997 and none during the three months
ending June 30, 1998. The Company may consummate bulk sales 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 increased $425,853 during
the three months ending June 30, 1998 from $ 0 during the three months ending
June 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 decreased by $694,542 to a loss of $45,370 during
the three months ending June 30, 1998 from a gain of $649,172 during the three
months ending June 30, 1997. This decrease resulted primarily from the continued
liquidation, during the three months ending June 30, 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 $249,813 during the three months ending
June 30, 1998, as compared with immaterial income during the three months ending
June 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
currently.
Other income increased by $301,742 or 559%, to $355,732 during the
three months ended June 30,1998 from $53,990 during the three months ended June
30, 1997. This increase resulted primarily from the recovery through PMI
(Private Mortgage Insurance) of the amount in receipt of a deficiency balance on
certain notes, and receipt of late fees in connection with a settlement of a
single large note, and from various loan fees such as credit report, appraisal
and application fees associated with Tribeca's originations and a settlement
payment on payment on the Miramar Litigation (see-Legal Miramar)during the three
months ending June 30, 1998.
Total operating expenses increased by $869,569 or 24% to $4,501,256
during the three months ending June 30, 1998 from $3,631,687 during the three
months ending June 30, 1997. Total operating expenses includes interest expense,
collection, general and administrative expenses, provisions for loan losses,
service fees, amortization of loan commitment fees and depreciation expense.
Interest expense increased by $340,137 or 16%, to $2,508,586 during the
three months ending June 30, 1998, from $2,168,449 during the three months
ending June 30, 1997. This increase resulted primarily from increased warehouse
borrowing to fund Tribeca's loan originations, increase of Senior Debt
reflecting the acquisition of notes receivables and the measure in the Company's
costs of funds as a result in the increase in the prime rate during 1997.
Tribeca's interest expense was $118,588 for the three months ended June 30,
1998. Total debt increased by $9,366,965 or 10.2%, to $101,348,492 as of June
30, 1998 from $91,981,527 as of June 30, 1997. Total debt includes Senior Debt,
debentures, and lines of credit and loans from affiliates.
Collection, general and administrative expenses increased by $705,067
or 59% to $1,890,721 during the three months ending June 30, 1998 from
$1,185,654 during the three months ending June 30, 1997. Collection, general and
administrative expense consists primarily of personnel expense, OREO related
expense, litigation expense, and miscellaneous collection expense.
Personnel expenses increased by $391,526 or 120% to $717,418 during
the three months ending June 30, 1998 from $325,892 during the three months
ending June 30, 1997. This increase resulted largely from the staffing of
Tribeca, which accounted for $332,460 of this increase, and the remainder
reflected increases in staffing and the experience level of personnel in the
Company's core business. OREO related expenses increased by $354,928 or 288% to
$477,973 during the three months ending June 30, 1998 from $123,045 during three
months ending June 30, 1997. This increase is primarily due to the increase in
the size of the Company's rental portfolio and a concurrent increase in related
expenses, and the initial cost associated with foreclosed assets for the three
months ending June 30, 1998. Litigation expenses decreased by $132,495 or 52%,
to $122,821 during the three months ending June 30, 1998 from $201,818 during
the three months ending June 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 the
borrower to avert foreclosure. All other collection expenses increased by
$91,107 or 19% during the three months ending June 30, 1998 to $572,509 from
$481,402 during the three months ending June 30, 1997. This increased reflected
the increase size of Company's portfolio of notes receivable.
Provisions for loan losses decreased by $9,280 or 118%, to $(1,439)
during the three months ending June 30 1998 from $7,841 during the three months
ending June 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 ending June 30, 1998 and 1997 was approximately immaterial and 0.03%,
respectively.
Amortization of deferred financing costs decreased by $169,094 or 67%
to $84,976 during the three months ending June 30, 1998, from $254,070 during
the three months ending June 30, 1997. This decrease resulted from the bulk sale
of notes receivable during the three months ending June 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. On June 30, 1998 and June 30,
1997 deferred financing costs as a percentage of Senior Debt outstanding was
1.31% and 1.45%, respectively.
Depreciation expense increased by $2,740 or 17%, to $18,412 during the
three months ending June 30, 1998, from $15,672 during the three months ending
June 30, 1997. This increase resulted from the purchase buy the Company of
computer equipment, and a new accounting software package.
Operating income decreased by $1,686,157 or 117%, to a loss of $244,256
during the three months ending June 30, 1998 from a gain of $1,441,701 during
the three months ending June 30, 1997.
During the three months ending June 30, 1998 there was no provision for
income taxes due to the operating loss compared to a provision for income taxes
of $722,765 during the three months ending June 30, 1997.
Net income decreased by $963,392 to a loss of $244,456 during the three
months ending June 30, 1998 from a gain of $718,936 during the three months
ending June 30, 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 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 decreased by
$1,168,236 or 15%, to $6,866,304 during the six months ended June 30, 1998, from
$8,034,540 during the six months ended June 30, 1997. Total revenue (excluding
gain on bulk sales of loans, OREO, and sale of originated loans) during the
three months ended June 30, 1998 as a percentage of notes receivable, net of
allowance for loan losses and joint venture participation as of June 30,1998 was
12.8% as compared with 12.4% for the three months ended June 30, 1997.
Interest income on notes receivable increased by $130,480 or 4%, to
$3,291,028 during the six months ended June 30, 1998 from $3,160,548 during the
six months ended June 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 to 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 $7.6 million of performing loans with a weighted average interest
rate 13%, which was only partially offset by the decrease in settlements of
non-performing accounts with accrued interest during the six months ending June
30, 1998.
Purchase discount earned decreased by $746,946 or 24%, to $2,347,885
during the six months ended June 30, 1998 from $3,094,831 during the six months
ended June 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 in part loss to the purchaser),
a maturing of the Company's portfolio, and an increase of $2.3 million in face
of loans foreclosed, which reduces purchase discount available to be earned.
Gain on bulk sale of notes receivable decreased by $973,337 to $0
during the six months ended June 30, 1998, from $973,337 during the six months
ended 1997. This decreased reflected the timing of bulk sales of notes during
the six months ended June 30, 1997. There were three bulks sales during the six
months ended June 30, 1997, and none during the six months ending June 30,1998.
Gain on sale of notes originated by Tribeca was $548,282 during the six
months ending June 30, 1998, as compared with no such gain during the six months
ending June 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 decreased by $833,114 to a loss of $149,675 during
the six months ending June 30, 1998, from a gain of $683,439 during the six
months ended June 30, 1997. This decrease resulted primarily from the continued
liquidation during the six months ending June 30, 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 $410,364 during the six months ending June
30, 1998, as compared with immaterial rental income during the six months ending
June 30, 1997. This increase reflected an increase in the number of properties
in the Company's portfolio for which the Company currently believes that renting
produces a greater return than selling, at the present time and therefore holds
for rental.
Other income increased by $296,034 or 242%, to $418,420 during the six
months ended June 30, 1998 from $122,386 during the six months ending June 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 six months ended June 30, 1998 from $0, during the six
months ended June 30, 1997. This increase resulted primarily from the recovery
through PMI (Private Mortgage Insurance) of the amount in receipt of a
deficiency balance on certain notes, and receipt of late fees in connection with
a settlement of a single large note, and from various loan fees such as credit
report, appraisal and application fees associated with Tribeca's originations
and a settlement payment on the Miramar Litigation(See-Legal Miramar Litigation)
during the six months ended June 30, 1998.
Total operating expenses increased by $1,389,952 or 20%, to $8,170,208
during the six months ended June 30, 1998, from $6,780,256 during the six months
ended June 30, 1997.
Interest expense increased by $435,740 or 11%, to $4,559,544 during the
six months ending June 30, 1998 from $4,123,804 during the six months ended June
30, 1997. This increase resulted primarily from increased warehouse borrowing to
fund Tribeca's loan originations, increases reflecting Senior Debt associated
with the acquisition of notes receivable. Tribeca's interest expense was
$177,913 to $177,913 for the six months ended June 30, 1998. Total debt
increased by $9,366,965 or 10.2%, to $ 101,348,492 as of June 30, 1998, as
compared with $ 91,981,527 as of June 30, 1997.
Collection, general and administrative expenses increased by $1,212,183
or 56%, to $3,392,713 during the six months ending June 30, 1998 from $2,180,530
during the six months ended June 30, 1997.
Personnel expenses increased by $736,482 or 113%, to $1,389,851 during
the six months ended June 30, 1998 from $653,369 during the six months ending
June 30, 1997. The staffing of Tribeca accounted for $566,136 of the increase,
and the remainder reflected increases in staffing and the experience level of
personnel in the Company's core business. OREO related expenses increased by
$541,890 or 309%, to $717,391 from $175,501 during the six months ended June 30,
1997. This increase is primarily due to the increase in the Company's rental
portfolio related expenses, and the initial cost associated with newly
foreclosed assets for the six months ending June 30, 1998. Litigation expenses
decreased by $201,818 or 35%, to $377,791 during the six months ending June 30,
1998, from $579,609 during the six months ending June 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 $135,628 or 18% during the six months ended June 30, 1998
to $907,680 from $772,052 during the six months ended June 30, 1997. This
increase reflected the increase size of the Company's portfolio of notes
receivable.
Provisions for loan losses decreased by $72,462 or 70%, to $31,391during
the six months ending June 30, 1998 from $103,853 during the six months ending
June 30, 1997.
Service fees decreased by $31,395 or 100%, to $0 during the six months
ending June 30, 1998 from $31,395 during the six months ending June 30, 1997.
This decrease resulted from the elimination of service fees charged by its
Senior Debt Lender effective March 1997. See "General- Cost of Funds."
Amortization of deferred financing costs decreased by $171,567 or 55%,
to $137,762 during the six months ending June 30, 1998 from $309,329 during the
six months ending June 30, 1997. This decrease resulted from the bulk sale of
notes receivable, during the six months ending June 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 $17,454 or 56%, to $48,798 during six
months ending June 30, 1998, from $31,344 during the six months ending June 30,
1997. This increase resulted from the purchase of new computer equipment, and a
new accounting software package.
Operating income decreased by $2,558,188 or 204%, to a loss of $1,303,904
during the six months ending June 30, 1998 from a gain of $1,254,284 during the
six months ending June 30, 1997.
During the six months ending June 30, 1998, there was no provision for
income taxes due to the operating loss compared to a provision for income taxes
of $722,765 during the six months ending June 30, 1997.
Net income decreased by $1,835,423 to a loss of $1,303,904 during the six
months ending June 30, 1998 from a gain of $531,519 during the six months ending
June 30, 1997.
Liquidity and Capital Resources
General. During the six months ended June 30, 1998 the Company
purchased 1,302 loans in five portfolios with an aggregate face value of
$24,321,293 at an aggregate purchase price of $20,127,336 or 83% of face value
and OREO properties of $235,182. During the six months ended June 30, 1997 the
Company purchased six portfolios with an aggregate face value of $33,365,660 at
an aggregate purchase price of $17,820,766 or 53% of aggregate face value, and
$2,041,230 in OREO properties. This increase, measured by purchase price,
reflected the increase in competitiveness of the Company's bids resulting from
the reduction in its cost of funds relative to the prime rate and the increase
in bidding opportunities associated with the Company's beginning to purchase
performing loans and well as non-conforming and sub-performing loans. The
increase in purchase price as a percentage of face value of the loans purchased
reflected the increased quality of the loans purchased.
The Company's portfolio of notes receivable at June 30, 1998 had a face
value of $125,942,126 and included net notes receivable of approximately
$84,724,413, as compared with a face value of $129,692,730 and net notes
receivable of approximately $78,027,509 as of June 30, 1997. Net notes
receivable are stated at the amount of unpaid principal, net of by 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 six months ended June 30, 1998, the Company used cash in the
amount of $8,601,511 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 $5,388,411 in its investing activities, primarily reflecting
purchases of notes receivable which purchases were only partially offset by
principal collections upon its notes receivable and proceeds from sales of OREO.
The amount of cash used in operating and investing activities was funded by
$15,090,055 of net cash provided by financing activities, including principally,
a net increase in Senior Debt of $20,889,503. The above activities resulted in a
net increase in cash at June 30, 1998 over December 31, 1997 of $1,100,133.
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 June 30, 1998 and 1997, the Company held OREO with a book value of
$9,255,949 and $9,566,536, respectively. OREO is recorded on the 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 six months ending June 30, 1998
Tribeca incurred an operating loss of $475,782. This loss stemmed from
substantial start-up costs and an increase in operating expenses was 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 $4.5 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 $7.0 million from an
other lending institutions, which accrues interest at Libor plus 2.5%,
additionally on August 19, 1998, Tribeca received a commitment for an additional
warehouse line of credit in the amount of $5.0 million which accrue interest at
prime plus 2%. 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. Management is currently seeking to increase the
warehouse lines of credit available to Tribeca to fund loan originations. In
order to obtain additional equity capital to support such increase, the Company
has arranged for the sale in a private placement of $500,000 of its equity
securities. Substantially all of such amounts have been deposited with the
Company and the offering is currently expected to be closed during the third
quarter of 1998.
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 June 30, 1998, the Company had unrestricted cash, cash equivalents
and marketable securities of $3,884,053. 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 June 30, 1998, the Company owed an aggregate of
$96,597,286 to the Lender of Senior Debt, under 40 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 principal reduction from available cash after scheduled principal and
interest payments have been made. As a result of the accelerated payment
provisions, the Company is 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
Debt Lender only upon the Company's failure to meet the minimum monthly payment
due if collections from notes receivable securing the loan are insufficient to
satisfy the installment due. Historically, the Company has not called upon these
reserves. The aggregate balance of restricted cash in such accounts was
$1,034,890 and $966,103 on June 30, 1998 and June 30, 1997, respectively.
Total Senior Debt availability was approximately $125.0 million at June
30, 1998, of which approximately $96.6 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 $10.0 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 $38.4 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 June 30, 1998 and December 31, 1997, $264,375 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 June 30, 1998 and December 31, 1997,
$466,200 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 June 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 advance under 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 June 30, 1998 and December 31, 1997, were
$592,977 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 be required to hold as
rental property to maximize its return.
Warehouse Lines-of Credit
As of June 30, 1998 the Company maintains warehouse lines of credit with two
financial institutions. Up to $11.5 million of funds, secured by owned mortgages
held for sale, are available to be advanced to the Company. See`General- Tribeca
loss'.
Part II Other Information
0
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 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.
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, 1998, 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. The
Defendants' Motion to Dismiss the Second Amended Complaint has been fully
briefed and is currently pending before the Court for disposition.
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 fall 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
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Maters to a Vote of Security Holders
On June 3, 1998 at the Company's annual meeting the shareholders voted to
reelect the following persons as Directors to the Company expiring upon the
election and qualification of their successors at the annual meeting of the
Company in the year 2001, and to ratify the appointment of Deloitte & Touche LLP
as the Company's independent public auditors for the fiscal year ending December
31,1998.
Director For Against Not Voting Total
Joseph Bartfield 4,392,101 2,180 1,117,014 5,511,295
Joseph Caiazzo 4,392,101 2,180 1,117,014 5,511,295
Robert M. Chiste 4,392,101 2,180 1,117,014 5,511,295
Independent Public Auditors For Against Abstain Not Voting Total
Deloitte & Touche LLP 4,391,676 210 3,510 1,158,879 5,511,295
Item 5. Other Information
None
Item 6. Exhibits and Reports on form 8-K
None
(a) EXHIBIT TABLE
Exhibit No. Description
3(a) Restated Certificate of Incorporation. Previously filed
with, and incorporated herein by reference to,the Company's
10-KSB, filed with the Commission on December 31 1994 and
as amended by the Company's 10-KSB, 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 referenceto, 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, the Company's Form
10K-SB, filed with the Commission on March 31, 1997.
10(e) Agreement dated March 29, 1997 between the Company and
Citizens Banking Company.
11 Computation of earnings per share. Filed here with.
21 Listing of subsidiaries. Filed here with.
(b) No reports on Form 8-K were filed during the first quarter of 1998.
<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.
September 3, 1998 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 September 3, 1998
- --------------- and Director -----------------
Thomas J. Axon
(Principal executive officer)
FRANK B. EVANS, Jr. Vice President, Treasurer September 3, 1998
- ------------------- -----------------
Frank B. Evans, Jr. Chief Financial Officer and Director
Secretary (Principal financial and accounting officer)
JOSEPH CAIAZZO Vice President, Chief Operating September 3, 1998
- -------------- -----------------
Joseph Caiazzo Officer and Director
<PAGE>
Exhibit 11.
Computation of earnings per share second quarter 1998.
No. of shares Weight
09/30/97 Common stock 5,516,527
--------- 25% 1,379,132
5,516,527
12/31/97 Common stock 5,516,527
--------- 25% 1,379,132
5,516,527
03/31/98 Common stock 5,516,527
--------- 25% 1,379,132
5,516,527
06/30/98 Common stock 5,516,527
--------- 25% 1,379,132
5,516,527
Weighted average number of shares 5,516,527
Earnings per Common share:
Net Income $(1,303,904) (0.22)
