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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
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Delaware 75-2243266
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer identification No.)
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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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $0.01 par value.
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 if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $ 16,996,886
As of March 31, 1999 the issuer had 5,916,527 of shares of Common
Stock, par value $0.01 per share, outstanding. On that date, the aggregate
market value of the voting stock held by persons other than those who may be
deemed affiliates of the issuer was $1,450,764 (based on the average of the
reported closing bid and ask price on such date).
Check whether the issuer has 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 .
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OF REGISTRANT. Franklin Credit Management Corporation ("FCMC",
and together with its wholly-owned subsidiaries, the "Company") is a specialty
consumer finance and asset management company primarily engaged in the
acquisition, servicing and resolution of performing, sub-performing and
non-performing residential mortgage loans and residential real estate. The
Company's portfolio consists primarily of non-conforming subprime assets.
Mortgage loans are purchased at a discount relative to the aggregate unpaid
principal balance of the loans and real estate is acquired in foreclosure or
otherwise at a discount relative to the appraised value of the asset.
During 1998, the Company took advantage of market opportunities to
increase its volume of loan acquisitions and adopted a strategy of acquiring
primarily higher coupon, non-investment grade performing loans. As a result the
proportion of its portfolio comprised of such loans significantly increased
during 1998. The Company expects to continue this strategy, as well as an
increase in both the pace and amount of acquisitions, during 1999.
The Company believes it has built a servicing infrastructure and
developed a servicing expertise, which permits the expansion of the Company's
portfolio with a minimal increase in incremental costs. In addition, the Company
believes that its ability to service and rehabilitate loans reduces its reliance
on secondary marketing of portfolios and may provide an advantage as compared to
competitors that rely on the secondary market as their primary resolution
strategy.
In January 1997, the Company formed a wholly-owned subsidiary, Tribeca
Lending Corp. ("Tribeca"), to originate primarily subprime residential mortgage
loans made to individuals whose credit histories, income and other factors cause
them to be classified as non-conforming borrowers. Management believes that
lower credit quality borrowers present an opportunity for the Company to earn
superior returns for the risks assumed. Tribeca provides first and second
mortgages, originated on a retail basis through marketing efforts including
utilization of the FCMC data base. Tribeca is currently licensed as a mortgage
banker in Connecticut, District of Columbia, Florida, Georgia, Kentucky,
Maryland, Massachusetts, Missouri, New York, New Jersey, North Carolina,
Oklahoma, South Carolina, and Virginia, and is a Department of Housing and Urban
Development FHA Title I and Title II approved lender. Tribeca originated loans
are typically expected to be sold in the secondary market through whole-loan,
servicing-released sales. Tribeca anticipates holding certain of its mortgages
in its portfolio when it believes that the return from holding the mortgage, on
a risk-adjusted basis, outweighs the return from selling the mortgage in the
secondary market.
Since commencing operations in 1990 the Company has purchased, in
aggregate, approximately 14,579 loans with a face value of approximately $345
million. Approximately $175 million, or 51%, of these loans were purchased from
the Resolution Trust Company ("RTC") and, when the RTC ceased to function, the
FDIC. The remaining $170 million of these loans were purchased from private
institutions. The Company seeks to develop relationships with mortgage bankers,
banks, and other specialty finance companies which may, through on-going
purchase arrangements, provide additional sources of mortgage portfolios,
individual mortgage assets and real estate assets.
During the year ended December 31, 1998, the Company purchased 4,174
loans with an aggregate face value of $84 million and five real estate owned
("OREO") properties at an aggregate purchase price of $1.1 million which
represented a substantial growth in loan acquisitions over prior years. As of
December 31, 1998, the Company's portfolio included approximately 6,182 loans
with an aggregate face value of $164.4 million. An allowance for loan losses of
$22 million has been recorded against this face value. At December 31, 1998
approximately 91% of the Company's loan portfolio consists of first mortgages,
home equity/home
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improvement and second mortgages collateralized by real estate, 7% consist of
loans collateralized by other assets and 2% consisted of unsecured loans.
Although the Company attempts to collect on all loans in its portfolio, it is
unlikely that the Company will be successful in collecting the full amount due
for each loan in its portfolio. In addition, significant administrative and
litigation expenses are often incurred in its collection efforts. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 7. Financial Statements".
In 1996 the Company began to sell portfolios of performing and
reperforming loans on a whole loan basis. During 1997, the Company sold 289
performing loans with an aggregate face value of $7.7 million. During 1998 the
Company sold 74 performing loans with a face value of $6.5 million. The Company
expects to continue this strategy, if opportunities to do so continue to present
themselves.
As of December 31, 1998 the Company owed an aggregate of $131.9 million
("Senior Debt") to a bank (the "Senior Debt Lender") which was incurred in
connection with the purchase of, and is secured by, the Company's loan and OREO
portfolios. In December 1998, in connection with continuing increases in the
availability extended to the Company, the Company's Senior Debt agreement was
amended to provide that interest on Senior Debt incurred to finance portfolio
acquisitions after December 1, 1998 accrues at the prime rate plus .50%. At
December 31, 1998 the weighted average interest rate on Senior Debt was 8.32%.
The Senior Debt Lender has advised the Company that as of December 31, 1998
there was $ 82.1 million of Senior Debt available to be used by the Company to
purchase additional portfolios of mortgage loans and OREO. The continued
willingness of the Senior Debt Lender to provide funding is a critical component
of the Company's acquisition strategy, although there can be no assurance that
such willingness will continue.
In March 1997, certain ongoing service fees payable on Senior Debt were
replaced with a 1% exit fee applicable to Senior Debt outstanding as of December
31, 1996, for a total fee payable of $700,000. Such fee will be payable after
repayment, in full, of the related 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 employs standardized in-house servicing procedures in the
acquisition, origination, and collection of loans. The Company is divided into
five operating departments, which are described below:
Acquisition Department. The Acquisition Department identifies
opportunities to purchase portfolios of mortgage loans, individual mortgage
loans or real property, performs due diligence, and assists in the integration
of the acquired assets into the Company's existing portfolio. The due diligence
process, with respect to loan purchases, includes an analysis of the majority of
loans in a portfolio, evaluating, among other things, lien position and value of
collateral, debt-to-income ratios, the borrower's creditworthiness, employment
stability, years of home ownership, education, credit bureau reports and
mortgage payment history. The due diligence process, with respect to OREO
purchases, includes an analysis of the majority of properties in a portfolio,
verification of appraised values, and analysis of liens, taxes and other
encumbrances on such properties. The Acquisition Department conducts on-sight
reviews of the loan files comprising the portfolio rather than relying strictly
on the statistical digests of information provided by the seller, and where
appropriate performs an on-site evaluation of the seller's loan servicing
department. This process often provides the Company additional information
critical to properly evaluating the portfolio. The information derived from due
diligence is compared to the Company's historical statistical data base, and
coupled with the Company's cumulative knowledge of the sub-prime mortgage
industry enables the Acquisition Department to project a collection strategy and
estimate the collectibility and timing of cash flows with respect to each loan
or a marketing strategy in cases of OREO acquisitions. Based upon this
information the Acquisition Department prepares a bid which meets the Company's
established pricing and yield guidelines. When loans are acquired the
Acquisition Department, with the assistance of the Management Information
Systems staff ("MIS"), monitors the electronic transfer of loan data into the
Company's data management system.
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Service Department. The Service Department manages the Company's
performing loans and seeks to provide quality service to customers and secure
full payment of the total face value and accrued charges, by monitoring monthly
cash receipts, maintaining customer relations and, where appropriate, entering
into extension and modification agreements. The Service Department is
responsible for the maintenance of real estate tax and insurance escrow
accounts. Service Department members continuously review and monitor the status
of collections and individual loan payments in order to proactively identify and
solve potential collection problems as well as identify potential loans for sale
to third parties or refinance though Tribeca. Upon acquisition of loan
portfolios, the Service Department, in conjunction with MIS: (i) issues
introductory letters with information regarding the change of ownership of the
loan, payment information and a toll-free Company information telephone number;
(ii) conducts internal audits of newly acquired loans to identify and address
any disputes or problems relating to the accounting for these loans; and (iii)
issues an audit letter advising the borrower of the outstanding balance, last
payment date and remaining term of the loan. As Of December 31, 1998, the
Service Department managed approximately 5,204 loan accounts, with a total
principal outstanding balance of approximately $164.4 million.
Legal Department. The Legal Department manages and monitors the
progress of defaulted loans requiring a legal action or other loss mitigation
strategy. These loans are identified and referred by the Acquisition or Service
Departments to the Legal Department, which prepares an analysis of each such
loan to determine a litigation or collection strategy to maximize the size and
speed of recovery and minimize costs. This strategy is based upon the individual
borrowers' past payment history, current ability to pay, collateral lien
position and current value of the collateral. The Legal Department sets the
collection strategy, negotiates settlements, modification and forbearance
agreements, and when appropriate retains outside counsel, manages their costs,
and monitors ensuing litigation to insure the optimal recovery of the remaining
principal and interest balance. The Legal Department monitors each defaulted
loan through the foreclosure process, recovery of a money judgment or other
settlement, and continues to monitor recovery of deficiency balances after a
foreclosure has been completed. As of December 31, 1998, the Legal Department
managed approximately 978 loans, with a total principal outstanding balance of
approximately $ 49.2 million.
Real Estate Department. The Real Estate Department manages all
properties in order to preserve their value, realize rental income and insure
that maximum returns are realized upon sale. The Real Estate Department is
responsible for both the sale of OREO as well as for OREO that are held as
rental properties until such time as an economically beneficial sale can be
arranged. As Of December 31, 1998, the Real Estate Department managed
approximately 243 OREO properties, of which 115 were rental properties. The
Company seeks to rent those properties for which it believes it can realize a
higher return from such rental than from the value expected to be realized in
the sale of the property.
Subprime Residential Lending. Tribeca provides first and second
mortgages to a target market of individuals who do not meet conventional
underwriting criteria due to their credit histories or other factors. Tribeca
focuses on developing an array of niche products to fulfill needs such as
rehabilitation, high LTV, sub-prime, non-conforming and second mortgages. Loans
are originated by a retail sales force, which utilizes telemarketers to generate
leads from the Company's database of serviced loans. The majority of loans are
expected to be sold by Tribeca in the secondary market. Tribeca's, staff,
processes, underwrites, and closes all loans in its own name.
During 1998 Tribeca originated 274 mortgages with an aggregate
principle balance of $22,375,063. In its four months of operations during 1997,
Tribeca originated 34 loans with an aggregate principle balance of $4,430,700.
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TRIBECA LOAN ORIGINATION VOLUME FOR 1998
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FHA 1st Mortgage 2nd Mortgage Total
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Face Value $429,400 $18,362,522 $3,583,141 $22,375,063
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Loans 5 157 112 274
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FORMATION OF THE COMPANY. The Company was organized in Delaware in
1990, by Thomas J. Axon, and Frank B. Evans, Jr., for the purpose of acquiring
consumer loan portfolios from the RTC and the FDIC. In March 1993, the Company
completed the private placement of $2,000,000 of 15% Debentures (the "15%
Debentures") and warrants for the purchase of the Company's Common Stock, the
proceeds of which were used to acquire interests in loan portfolios and for
operations. In December 1994, the Company merged with Miramar Resources, Inc., a
public oil and gas company organized in Delaware, that had emerged from
bankruptcy proceedings on December 6, 1993. In January 1995, the Company
completed the private placement of $705,000 of 12% Debentures (the "12%
Debentures"), the proceeds of which were used to fund the acquisition of a loan
portfolio, including amounts advanced by stockholders, service existing debt
obligations and for general working capital. Additionally, in late 1995, the
Company completed the private placement of $555,000 of 12% Debentures (the
"Harrison 1st Debentures"), the proceeds of which were used to fund the
acquisition of an additional loan portfolio. Prior to 1995 the Company purchased
all portfolios through funds raised through limited partnerships. In 1995 nearly
all of the remaining limited partnership interests were purchased by the
Company.
COMPETITION. The Company faces significant competition in the
acquisition of loan portfolios. Many of the Company's competitors have financial
resources, acquisition departments and servicing capacity considerably larger
than the Company's. Among the Company's largest competitors are Ocwen Financial
Corporation, EMC Mortgage Corporation and Bayview Financial Trading Group.
Competition for acquisitions is generally based on price, reputation of the
purchaser, funding capacity and timing. See "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations: General - Cost of
Funds".
The market for subprime loan origination is also highly competitive.
Tribeca competes with savings banks, mortgage brokers, and wholesale originators
for the origination of mortgages. Among the largest of these competitors are
Chase Manhattan Bank, First Union, NationsBank, Money Store Inc., Norwest, Ocwen
Financial Corporation, IMC Mortgage Corporation, FHB, Ditech Funding, Household
Financial Service and Champion Mortgage. Many of Tribeca's competitors possess
greater financial resources, longer operating histories, and lower costs of
capital than Tribeca. Competition for mortgage originations is based upon
marketing efforts, loan processing capabilities, funding capacity, loan product
desirability and the ability to sell the loans for a premium in the secondary
market.
The Company also experiences competition from mortgage and finance
companies in the sale of reperforming and newly originated loan portfolios. The
tightening of credit requirements in the capital markets that commenced during
the latter part of 1998 decreased both the demand for pools of performing
mortgages which may later be packaged in a securitization, as well as the prices
paid for portfolios offered for sale. Important characteristics which impact
competition in this market are price, loan-to-value, size of pools and the
integrity of portfolio data. The Company faces intense competition from numerous
companies seeking to re-sell mortgage portfolios in the marketplace. Nearly all
of the Company's competitors have greater experience and volume to supply to
buyers. The Company believes that its management information system and its
continuous review and monitoring of accounts, along with asset availability from
new portfolio acquisitions and originations should position the Company to
compete efficiently in the sale of loan portfolios.
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CUSTOMERS. The Company's revenue is derived from interest and purchase
discount recognized from the collection of loans, origination fees, rental
income, gains recorded from the bulk sale of performing and originated loans to
banks and other financial institutions, and the result recorded from the sale of
OREO. The Company's borrowers are a diverse population and no single borrower
represents a significant portion of the Company's loans. The Company will sell
bulk portfolios of performing loans, when such sales are economically beneficial
to the Company. Through March 31, 1999, the Company sold four portfolios of
performing mortgages, with aggregate principal balances of $19 million, to three
different institutions. While the Company has previously been successful in
marketing loan portfolios which it has sold, and believes there are sufficient
buyers for its products, there can be no assurance that the Company will be able
to successfully market loan portfolios in the future.
SUPPLIERS. The Company acquires its loans and purchased OREO through a
variety of sources including private and public auctions, negotiated sales,
ongoing purchase agreements, and joint-bids with other institutions. The supply
of assets available for purchase by the Company is influenced by a number of
factors including knowledge by the seller of the Company's interest in
purchasing assets, the general economic climate, financial industry regulation,
and new loan origination volume. While the Company continues to pursue
additional sources for purchasing assets, there can be no assurance that
existing and future sources will provide sufficient opportunities for the
Company to purchase assets at favorable prices. Prior to 1996 the RTC, and the
FDIC, represented the source of the majority of the Company's loan purchases.
During the past year, one institution supplied the Company with 58.9% of its
portfolio acquisitions, as measured by purchase price. The Company's sources of
loan acquisition have varied from year to year and the Company expects that this
will continue to be the case.
YEAR 2000 COMPLIANCE. The Year 2000 issue refers to the fact that many
computer systems were originally programmed using two digits rather than four
digits to identify the applicable year. When the year 2000 occurs, these systems
could interpret the year as 1900 rather that 2000. Unless hardware, system
software and applications software are corrected to be year 2000 compliant,
computers and the devices they control could generate miscalculations and create
operational problems. Various systems could be affected ranging from complex
information technology (ii) computer systems to non-IT devices such as an
individual machines programmable logic controller.
The Company has identified all of its significant applications that
will require modification to ensure Year 2000 compliance. The Company's loan
servicing and loan origination systems vendor is responsible for making the
required modifications and testing Year 2000 Compliance. This vendor has
informed the Company that the modification and testing processes were completed
prior to December 31, 1998, and the implementation process has been completed.
The total cost to the Company of its Year 2000 Compliance activities
has been estimated by management to be approximately fifteen thousand dollars
and not material to its financial position or results of operation in any given
year. Many of those costs have already been incurred. These costs and the date
on which the Company anticipates the Year 2000 Compliance modification and
testing processes to be complete are based on management's estimates, which
depend upon numerous assumptions relating to future events, including the
continued availability of certain resources, third party modification plans and
other factors. There can be no assurance that these estimates will be achieved
and that actual results will not differ from these estimates.
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REGULATION. The Company's lending activities are subject to the Federal
Truth-in-Lending Act ("TILA") and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Equal Credit Opportunity Act of 1974, as
amended ("ECOA") and Regulation B, the Fair Credit Reporting Act of 1970, as
amended, the Real Estate Settlement Procedures Act of 1974, as amended ("RESPA")
and Regulation X, the Home Mortgage Disclosure Act ("HMDA") and Regulation C,
the Federal Debt Collection Practices Act and the Fair Housing Act, as well as
other federal and state statutes and regulations affecting the Company's
activities. Failure to comply with these requirements can lead to loss of
approved status, demands for indemnification or mortgage loan repurchases,
certain rights of recission for mortgage loans, class action lawsuits and
administrative enforcement actions.
The Company is subject to the rules and regulations of, and
examinations by, the Department of Housing and Urban Development ("HUD"), the
Federal Housing Administration and other federal and state regulatory
authorities with respect to originating, underwriting, funding, acquiring,
selling and servicing mortgage loans. In addition, there are other federal and
state statutes and regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for loans, prohibit discrimination, provide for
inspection and appraisals of properties, require credit reports on prospective
borrowers, regulate payment features and, in some cases, fix maximum interest
rates, fees and loan amounts. The Company is required to submit annual audited
financial statements to various governmental regulatory agencies that require
the maintenance of specified net worth levels.
TILA requires a written statement showing an annual percentage rate of
finance charges and requires that other information be presented to debtors when
consumer credit contracts are executed. RESPA requires written disclosure
concerning settlement fees and charges, mortgage servicing transfer practices
and escrow or impound account practices. It also prohibits the payment or
receipt of "kickbacks" or referral fees in connection with the performance of
settlement services. The Fair Credit Reporting Act requires certain disclosures
to applicants concerning information that is used as a basis for denial of
credit. HMDA requires collection and reporting of statistical data concerning
the loan transaction. ECOA prohibits discrimination against applicants with
respect to any aspect of a credit transaction on the basis of sex, marital
status, race, color, religion, national origin, age, derivation of income from
public assistance programs, or the good faith exercise of a right under the
Federal Consumer Credit Protection Act. The Fair Housing Act prohibits
discrimination in mortgage lending on the basis of race, color, religion, sex,
handicap, familial status or national origin.
The interest rates which the Company may charge on its loans are
subject to state usury laws, which specify the maximum rate which may be charged
to consumers. In addition, both federal and state truth-in-lending regulations
require that the Company disclose to its borrowers prior to execution of the
loans all material terms and conditions of the financing, including the payment
schedule and total obligation under the loans. The Company believes that it is
in compliance in all material respects with such regulations.
Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil and criminal penalties on
the Company, class action lawsuits and administrative enforcement actions. The
Company does not expend material amounts of financial resources complying with
federal, state or local laws and regulations.
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ENVIRONMENTAL MATTERS. In the course of its business the Company has
acquired, and may acquire in the future, properties securing loans that are in
default. It is possible that hazardous substances or waste, contamination,
pollutants or sources thereof could be discovered on such properties after
acquisition by the Company. In such event, the Company may be required by law to
remove such substances from the affected properties at its sole cost and
expense. There can be no assurance that (i) the cost of such removal would not
substantially exceed the value of the affected properties or the loans secured
by the properties, (ii) the Company would have adequate remedies against the
prior owner or other responsible parties, or (iii) the Company would not find it
difficult or impossible to sell the affected properties either prior to or
following such removal.
EMPLOYEES. As of December 31, 1998, the Company had 55 full-time
employees, including 5 in the Acquisitions Department, 20 in the Service
Department, 4 in the Legal Department , 3 in the Real Estate Department, 5 in
Accounting, 3 in MIS, 5 clerical employees, 4 managerial employees, and 6
employees in Tribeca.
The Company has never experienced a material work stoppage or slowdown
due to labor disagreements. The Company believes that its relations with all
employees are satisfactory. None of the Company's employees are covered by a
collective bargaining agreement.
BUSINESS AND SEGMENTS. The Company has two reportable segments (i)
portfolio asset acquisition and resolution;, and (ii) mortgage banking. The
portfolio asset acquisition and resolution segment acquires nonperforming,
nonconforming and subperforming notes receivable and promissory notes from
financial institutions, mortgage and finance companies and services and collects
such notes receivable through enforcement of terms of original note,
modification of original terms and, if necessary, liquidation of the underlying
collateral. The mortgage-banking segment, conducted through Tribeca, originates
sub prime residential mortgage loans for individuals whose credit histories,
income and other factors cause them to be classified as non-conforming
borrowers.
ITEM 2. DESCRIPTION OF PROPERTIES.
PROPERTIES. The Company owns a 6,600 square foot office condominium
unit located on the Sixth Floor of Six Harrison Street, New York, New York which
houses its principal offices. See "Item 12. Certain Relationships and Related
Transactions." In addition, the Company leases approximately 6,400 square feet
of office space at 99 Hudson Street, New York, New York which houses the Service
Department as well as Tribeca. The lease expires on January 31, 2009 and is at
an average approximate annual rent, of $129,000
OREO PROPERTIES. The Company owns OREO in various parts of the country
that were acquired through acquisition or foreclosure. The vast majority of
these properties are single family homes, with the remainder being comprised of
coops, condominiums and commercial property. The Company acquires or forecloses
on property primarily with the intent to sell such property at a profit, or,
where the Company feels that it would be more advantageous to do so rent the
property. If such a decision is made then a further investment in the property,
in the form of repairs and improvements, may be necessary. Any improvements to
OREO property are evaluated independently and decisions are made based on
whether a further investment would be economically advantageous.
ITEM 3. 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") and certain
individuals 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.
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The Company is seeking recission 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 continue to 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.
On November 12, 1997 PCC filed a motion to dismiss in the Company's
Amended Complaint and the Company responded to the motion to dismiss on December
1997. On May 8, 1998, the United States District Court dismissed the Company's
Amended Complaint, with leave to amend. On September 5, 1998, FCMC filed its
Second Amended Complaint alleging claims based on fraud and breach of contract.
By a ruling dated September 22, 1998, the court dismissed one of the Company's
fraud claims against PCC and all of the Company's claims against the individual
defendants and declined to dismiss the Company's remaining claims against PCC
based on fraud and breach of contract. On October 22, 1998, PCC filed a answer
and counterclaim alleging a breach of the purchase agreement and seeking its
cost and fees incurred in connection with the proceeding. It is currently
anticipated that trial in this matter will occur in the fourth quarter of 1999.
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, conversion 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 and retain three principals
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 K with consulting
contracts pursuant to the terms of the Letter Agreement.
On December 22, 1997, the Company, Tribeca and Mr. Axon filed an answer
and counterclaim vigorously denying the allegations of the complaint. In
addition, Tribeca filed a counterclaim alleging fraud and breach of contract
against K and Ragan, and breach of fiduciary duty against Ragan. During January
1999, the United States District Court struck Plaintiff's jury demand and
dismissed K's claims based on fraud, unjust enrichment and conversion. Trial on
the remaining claims is currently scheduled to commence in April 1999.
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 legal fees
allegedly due Rosen. Rosen, now dissolved, had represented the Company in a
federal trademark action which is no longer pending. Rosen withdrew from
representation of the Company when James Jacobs, the lead attorney for the
Company in the trademark action, joined a firm that was representing the
Company's adversary in other matters. The complaint seeks $145,000 in damages.
Rosen's motion for summary judgement was denied by the court. The Company plans
to continue its vigorous defense of this action. It is currently anticipated
that trial in this matter may occur during the first half of 2000.
OTHER LEGAL ACTIONS. Since 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,
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Inc. ("Miramar"), a company which the Company merged with in 1994, based upon
allegations relating to certain premerger events. Information regarding the
Miramar Litigation, as well as certain settlements (the "Schultz Settlements"),
and the legal status of the Company's collection efforts is incorporated herein
by reference to "Item 3. Legal Proceedings" included in the Company's Form
10-KSB for the year ended December 31, 1994, filed with the SEC on March 31,
1995 and included in the Company's 10-KSB for the year ended December 31, 1996,
filed with the SEC on March 31, 1997.
During 1997 the Company initiated efforts to foreclose on its Deed of
Trust on a 4,000-acre ranch owned by the parties to the original Shultz
Settlement. A judicial foreclosure is expected by management to be placed on the
Court's calendar for hearing in the second or third quarter of 1999. The Company
is a defendant in related matters in which the same parties are seeking quiet
title to the above mentioned ranch and thereby deny enforceability of the Deed
of Trust in favor of the Company. The Company will vigorously defend its
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE> 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. The Company's Common Stock is quoted on the
National Association of Securities Dealers, Inc. Automated Quotation System
("Nasdaq") under the symbol "FCSC" since December 26, 1996 and "FCMC" from
December 30, 1994 until such date.
The following table sets forth the bid prices for the common stock on
Nasdaq Bulletin Board, for the periods indicated adjusted to reflect the Reverse
Split and the Stock Dividend. Trading during these periods was limited and
sporadic. Therefore, the following quotes may not accurately reflect the true
market value of the securities. Such prices reflect inter-dealer prices without
retail markup or markdown or commissions and may not represent actual
transactions. Information for 1997 and 1998 was compiled from information
representing the daily inter-dealer bid activity during the period. Such
information was not available from the Nasdaq Bulletin Board due to a lack of
two complete inter-dealer postings during the period as is required by the
Nasdaq Bulletin Board to publish such prices.
<TABLE>
<CAPTION>
1998 Bid 1997 Bid
-------- --------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $3.00 $1.25 $0.60 $0.50
Second Quarter $2.50 $1.25 $1.10 $0.40
Third Quarter $1.75 $1.25 $1.20 $0.05
Fourth Quarter $1.50 $0.55 $1.00 $0.50
</TABLE>
As of March 30, 1999, there were approximately 324 record holders of
the Company's Common Stock.
DIVIDEND POLICY. The Company intends to retain any future earnings that
may be generated from operations to help finance the operations and expansion of
the Company and accordingly does not plan to pay cash dividends to holders of
the Common Stock during the reasonably foreseeable future. Any decisions as to
the future payment of dividends will depend on the earnings and financial
position of the Company and such factors as the Company's Board of Directors
deem relevant.
ITEM 6. 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 the Form
10-KSB, including particularly, but without limitation, those under the heading
"Goals for 1999" 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: unanticipated changes in the U.S. economy,
business conditions and interest rates and 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 Senior Debt Lender, the status
of relations between the Company and
<PAGE> 12
its primary sources for loan purchases, , unanticipated difficulties in
collections under loans in the Company's portfolio 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 on any events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
LOAN AND OREO ACQUISITIONS. During the year ended December 31, 1998
("fiscal 1998") the Company purchased 4,174 loans primarily second mortgages,
with an aggregate face value of $84 million at an aggregate purchase price of
$72 million or 86% of the face value and 5 OREO properties at an aggregate
purchase price of $1.1 million compared with the purchase during the year ended
December 31, 1997 ("fiscal 1997") of 771 loans with an aggregate face value of
$47.7 million at an aggregate purchase price of $23.7 million or 49.7% of
aggregate face value, and 107 OREO at an aggregate purchase price of $2.6
million. Acquisition of these portfolios was fully funded through Senior Debt in
the amount equal to the purchase price plus a 1% loan origination fee.
The Company believes these acquisitions of high yielding coupon loans
will result in substantial increases in the level of 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 of the new portfolios. Payment streams are
only generated once the loans are incorporated into the Company's loan tracking
system, contact with the borrower is made, and any non-performing loans are
restructured or collection litigation initiated.
Management intends to continue to expand the Company's earning asset
base through the acquisition of additional portfolios including performing and
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 expenses.
COST OF FUNDS. The decrease in the prime rate to 7.75% from 8.25%, on
September 30, 1998 decreased the benchmark rate for the cost of funds on Senior
Debt used to fund loan portfolio acquisitions, directly increasing net income.
As of December 31, 1998, the Company had forty-eight loans outstanding with an
aggregate principal balance of $131.9 million. Additionally the Company with
Tribeca has lines of credit, which had an outstanding balance of $6.1 million at
December 31, 1998. References herein to the Company's Senior Debt Lender or
lending arrangements refer to such continuing lender.
The majority of the loans purchased by the Company bear interest at a
fixed rate; consequently, there was a corresponding change in interest income
due to changes in market interest rate conditions. The weighted average interest
rate on borrowed funds for the Senior Debt based on the balances as of December
31, 1998 and December 31, 1997 were 8.3% and 9.5%, 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.
The impact of inflation on the Company's operations during both fiscal
1998 and 1997 was immaterial.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenue, comprised of interest income, purchase discount earned,
gains recognized on the bulk sale of notes, gain on sale of repossessed
collateral, gain on sale of OREO, gain on sale of loans originated,
<PAGE> 13
rental income and other income, increased by $2,712,688 or 19%, to $16,996,886
during fiscal 1998, from $14,284,198 during fiscal 1997.
Total revenue as a percentage of notes receivable in the Company's
portfolio as of the last day of the fiscal year, net of allowance for loan
losses and joint venture participation during fiscal 1998 was 12.4% as compared
with 16.2% during fiscal 1997. This decrease reflected in part significant loan
purchases during 1998. The income related to notes receivable typically lags
behind the acquisition of the loans as the Company enters the new loans on its
systems and begins to service the newly acquired loans.
Interest income on notes receivable increased by $3,169,577 or 53%, to
$9,147,553 during fiscal 1998 from $5,977,976 during fiscal 1997. The Company
recognizes interest income on notes included in its portfolio based upon three
factors: (i) interest on performing notes, (ii) interest received 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
purchase of $85.million of performing loans and OREO during 1998, which
increased the size of the Company's outstanding portfolio of notes receivable by
73%. The increase in interest income lagged behind the growth in the size of the
Company's portfolio, measured at the last day of the year because many of the
acquired loans were only owned by the Company for a portion of the fiscal year.
Purchase discount earned decreased by $641,171 or 13%, to $4,330,610
during fiscal 1998 from $4,971,781 during fiscal 1997. The decrease in purchase
discount earned reflected the Company's practice, initiated during 1996, of
selling reperforming loans, which 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 in foreclosures of loans in the Company's portfolio,
which converts the purchase discount into potential gain or loss on sale of OREO
when the property is sold. The Company believes that the aggregate sales
proceeds on its OREO portfolio will exceed the lower of cost or market value at
which it is recorded resulting in a gain on sale.
Gains from the bulk sale of loans decreased by $504,066 or 38%, to
$827,067 during fiscal 1998 from $1,331,133 during fiscal 1997. The Company sold
approximately $6.2 million and $7.7 million in face value notes receivable
during 1998 and 1997, respectively. This decrease reflected a decrease in the
aggregate amount of loans sold and the more favorable pricing of such sales in
1997.
Gain on sale of originated notes, originated by Tribeca increased by
$731,269, due to sales of $16,675,486 of loans during 1998 as compared with no
sales during 1997 when Tribeca was in the start up phase.
Gain on sale of OREO decreased by $822,160 or 79% to $222,984 during
fiscal 1998 from $1,045,144 during fiscal 1997. The decrease resulted from a
decrease in the number of properties sold during 1998 and an increase in the
number of properties being held as rental properties. At December 31, 1998 the
Company held 115 OREO properties for rent as compared with 73 OREO properties
held for rent at December 31, 1997.
Rental income increased by $504,563 or 170% to $800,983 from $ 296,420
during fiscal 1998. This increase was a result of 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. Rental
properties held at December 31, 1998 were 115 as compared to 73 at December 31,
1997.
Other income increased by $274,676 or 42%, to $936,420 during fiscal
1998 from $661,744 during fiscal 1997. The increase was due partly to an
increase of $138,065 in settlement income related to the Schultz settlements and
an increase in various fees (credit, appraisal, application fees) associated
with Tribeca loan originations.
<PAGE> 14
Total operating expenses increased by $3,239,369 or 22% to $18,288,268
during fiscal 1998 from $15,048,899 during fiscal 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 $1,748,150 or 21%, to $10,098,640 during
fiscal 1998 from $8,350,490 during fiscal 1997. Total debt increased by
$53,009,702 or 62%, to $139,204,239 as of December 31, 1998 as compared with
$86,194,537 as of December 31, 1997. Interest expense did not increase in direct
proportion with the change in senior debt because most of the senior debt was
incurred in the latter part of year in connection with portfolio's of additional
loans for the Company's portfolio. Total debt includes Senior Debt, debentures,
lines of credit and loans from affiliates.
Collection, general and administrative expenses increased by $1,749,226
or 30%, to $7,672,971 during fiscal 1998 from $5,923,745 during fiscal 1997. The
primary components of collection, general and administrative expense are
personnel expense, OREO related expense, litigation expense, office expense, and
collection expense.
Personnel expenses increased by $1,580,485 or 94%, to $3,267,353
during fiscal 1998 from $1,686,868 during fiscal 1997. Approximately 72% of the
increase resulted from the staffing of Tribeca, while the remainder resulted
from increases in staffing and the experience level of personnel in the
Company's core business. OREO related expenses increased by $694,867 or 80%, to
$1,558,508 during fiscal 1998 from $863,641 during fiscal 1997. This increase
resulted from an increase in properties held as rental OREO properties during
1998 and increased foreclosure activity resulting from the growth in size of the
Company's portfolio. Litigation expenses decreased by $508,613 or 37%, to
$867,605 during fiscal 1998 from $1,376,218 during fiscal 1997. This decrease
was primarily due to the quality and quantity of notes receivables purchased and
the improved performance of the existing portfolio. Office expenses increased by
$126,312 or 71%, to $ 303,204 during the fiscal 1998 from $176,892 primarily due
to the opening of Tribeca offices (since closed) in Maryland, Connecticut, New
Jersey, and Florida. Other collection expenses decreased $143,827 or 8% to $
1,676,300 during fiscal 1998 from $1,820,127 during fiscal 1997. This decrease
resulted primarily from higher miscellaneous expenses incurred during 1997 and
compared to 1998 and also lower franchise taxes payable in 1998 as compared to
1997.
Provisions for loan losses decreased by $121,380 or 64%, to $69,741
during fiscal 1998 from $191,121 during fiscal 1997. This decrease reflects the
improved performance during fiscal 1998 of the Company's portfolio. Bad debt
expense expressed as a percentage of face value of notes receivable as of the
last day of such years for fiscal 1998 and fiscal 1997 was approximately 0.04%
and 0.16%, respectively. Provisions for loan losses are incurred as soon as the
valuation of the asset diminishes and there is no unamortized discount remaining
associated with that asset.
Banking service fees decreased by $31,520 to $0 during fiscal 1998 from
$31,520 during fiscal 1997 as a result of the elimination of service fees
charged by the Company's Senior Debt Lender effective March 1997.
Amortization of deferred financing costs decreased by $116,291 or 24%,
to $363,219 during fiscal 1998 from $479,510 during fiscal 1997. This decrease
resulted from a decrease in the number and dollar amount of loans and OREO sold,
which sales generally accelerate the amortization of financing costs. On
December 31, 1998 and December 31, 1997 deferred financing costs as percentage
of Senior Debt outstanding was 1.19% and 1.39%, respectively.
<PAGE> 15
Depreciation expense increased by $11,184 or 15%, to $83,697 during
fiscal 1998 from $72,513 during fiscal 1997. This increase resulted from an
increase in depreciable assets owned by the Company.
The Company's operating loss increased by $526,681 or 69% to a loss of
$1,291,382 during fiscal 1998 from a loss of $764,701 during fiscal 1997 for the
reasons set forth within.
The Company took a $1,500,000 Special Charge to income during fiscal
1997 in order to create a reserve for what it had discovered to be the impaired
value of a portfolio of notes receivable purchased by the Company from Preferred
Credit Corporation, in connection with which purchase the Company believes it
was defrauded. The portfolio was purchased for approximately $1,800,000 and the
Company currently expects approximately $300,000 of the notes receivable in the
portfolio to be collectible. The Company is currently vigorously pursuing legal
remedies from PCC and has been advised by its litigation counsel that it has a
substantial probability of prevailing in such suit. See "Part I. Item 3. Legal
Proceedings."
During 1998, there was no provision for income taxes due to the
operating loss compared to a benefit of $1,698,803 during fiscal 1997.
Net income decreased by $725,484 or 128% to a loss of $1,291,382 during
fiscal 1998 from a loss of $565,898 during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. During fiscal 1998 the Company purchased 4,174 loans with an
aggregate face value of $84 million at an aggregate purchase price of $72
million or 86% of the face value and 5 OREO properties with an aggregate
purchase price of $1.1 million. During fiscal 1997, the Company purchased 771
loans with an aggregate face value of $47.7 million at an aggregate purchase
price of $23.7 million or 49.7% of aggregate face value, and 107 OREO properties
with an aggregate purchase price of $2.6 million. This increase reflected the
Company's new focus of acquiring high yielding coupon loans and the ability of
the Company to bid competitively on portfolio acquisitions as a result of the
reduction in its cost of funding relative to the prime rate and the increased
activity to cultivate additional business.
GOALS FOR 1999. The following disclosure reflects the Company's current
expectations of its plan for 1999. Such plans are subject to general risks and
uncertainties, including, without limitation those set forth above under the
heading "Forward Looking Statement". Such plans are subject to change without
notice and the Company does not undertake to update this discussion for such
changes. The Company plans to pursue acquisitions of approximately $100 million
of additional notes receivable and OREO in 1999. Acquisitions of notes
receivable is expected to be focused on performing loans, in order to enable the
Company to capture larger interest spreads. The Company's acquisition of
non-performing assets is expected to be limited to non-performing assets that
offer a special profit opportunity and fit into its overall portfolio mix.
Acquisitions of OREO are expected to focus on higher value properties,
where the underwriting criteria can give the Company reasonable assurance that
there will be enough equity to allow the Company to earn a sufficient return on
the investment.
The Company believes that these strategies will permit an increase in the
size of its portfolio with a less than proportionate increase in overhead. The
acquisition of a higher percentage of performing loans is expected to reduce the
high legal and OREO costs that have previously negatively impacted earnings.
Tribeca will continue in 1999 to focus on retail loan originations, primarily
from the servicing database of the Company. The Company has refocused Tribeca's
operations by closing its wholesale offices and reducing
<PAGE> 16
personnel operating from Tribeca's 99 Hudson Street location. The Company is
seeking through these newly refocused strategies to limit any loss related to
Tribeca's continued development in 1999 to $200,000. Thus far in 1999, the
Company has made $5.6 million of acquisitions, of notes receivable. The Company
is currently in various stages of acquiring an additional $21 million of notes
receivable although there can be no assurance that such acquisitions will be
consummated. The Senior Debt Lender has recently advanced the Company $2
million, to enable the Company to post a bid bond on certain of these
acquisitions. The Senior Debt Credit facility and the continuing willingness of
the Senior Debt Lender to extend additional credit to the Company on favorable
terms is critical to the successful implementation of the Company's 1999 goals.
LIQUIDITY. The Company's portfolio of notes receivable at December
31, 1998 had a face value of $158.7 million and included net notes receivable of
approximately $115.8 million. Net notes receivable are stated at the amount of
unpaid principal, reduced 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 sale if it is
economically advantageous to do so.
During fiscal 1998, the Company used cash in the amount of $13.3
million in its operating activities primarily for interest expense, overhead,
ordinary litigation expense incidental to its collections and for the
foreclosure and improvement of OREO. The Company used $38 million in its
investing activities, which reflected primarily the use of $72.8 million for the
purchase of notes receivable and OREO offset by principal collections upon its
notes receivable of $21.6 million proceeds from sales of OREO of $7.7 million
was funded by $53.6 million of net cash provided by financing activities,
primarily from a net increase in Senior Debt of $48.5 million. The above
activities resulted in a net increase in cash at December 31, 1998 over December
31, 1997 of $2.3 million
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 December 31, 1998 and 1997, the Company held OREO recorded in the
financial statements at $10.3 million and $11.8 million, respectively. OREO is
recorded on the financial statements of the Company at the lower of cost or fair
market value. The Company believes that the OREO inventory held at December 31,
1998 has a net realizable value (market value less estimated commissions and
legal expenses associated with the disposition of the asset) of approximately
$10.3 million based on market analyses of the individual properties less the
estimated closing costs. The Company generally holds OREO as rental property or
sells such OREO in the ordinary course of business when it is economically
beneficial to do so.
OPERATING EXPENSES OF TRIBECA. During 1998, Tribeca incurred an
operating loss of approximately $1.2 million. This loss stemmed from substantial
start-up costs and an increase in operating expenses without a corresponding
increase in revenues. 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 $5.0 million. Tribeca began originating mortgages on
September 1, 1997. There can be no assurances that Tribeca will earn a profit in
the future, however, management believes that Tribeca's existing cash balances,
credit lines, and anticipated cash flow from operations will provide sufficient
working capital resources for Tribeca's anticipated operating needs.
CASH FLOW FROM OPERATING AND INVESTING ACTIVITIES
<PAGE> 17
Substantially all of the assets of the Company are invested in its
portfolios of notes receivable and OREO. The Company's primary source of cash
flow for operating and investing activities is collections on notes receivable
and gain on sale notes and OREO properties.
At December 31, 1998, the Company had unrestricted cash, cash
equivalents and marketable securities of $5.1 million. 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.
In December 1998, in connection with continuing increases in the
availability extended to the Company, the Company's Senior Debt agreement was
amended to provide that interest on Senior Debt incurred to finance portfolio
acquisitions after December 1, 1998 accrues at the prime rate plus .50%. At
December 31, 1998 the weighted average interest rate on Senior Debt was 8.32%.
The Senior Debt Lender has advised the Company that as of December 31, 1998
there was $ 82.1 million of Senior Debt available to be used by the Company to
purchase additional portfolios of mortgage loans and OREO.
CASH FLOW FROM FINANCING ACTIVITIES
SENIOR DEBT. As of December 31, 1998, the Company owed an aggregate of
$131.9 million to the Senior Debt Lender, under 48 loans.
The Senior Debt is collateralized by first liens on the respective loan
portfolios for the purchase of which the debt was incurred and is guaranteed by
the Company. The monthly payments on the Senior Debt have been, and the Company
intends for such payments to 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 collection of the notes receivable securing the debt during the
preceding month. The Senior Debt accrues interest at variable rates with a
premium of between 0% and 1.75% over the prime rate. The accelerated payment
provisions 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.
In October 1997, the Company negotiated with its Senior Debt Lender a
modification to the Senior Debt obligation, which increases the cash flow
available to the Company for operations. The outstanding balances were
re-amortized, thereby increasing the amount of cash available for the Company's
monthly operating cost allocation. Management believes that this modification
may reduce irregular periods of cash flow shortages arising from operations. The
Senior Debt Lender has provided the Company with a cash advance of $600,000 per
month for the first quarter of the year increasing the monthly cash advance from
$425,000 per month. 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.
<PAGE> 18
Certain of the Senior Debt credit agreements required 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 account, at 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
$1,103,446 on December 31, 1998 and $990,466 on December 31, 1997.
Total Senior Debt funding capacity was $200 million at March 29, 1999 of which
approximately $131.9 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 $14.3 million of Senior Debt that it had syndicated to other banks
as of such date as outstanding for purposes of determining availability under
the Senior Debt Facility. As a result, the Company has approximately $82.4
million available to purchase additional portfolios of notes receivable and
OREO.
The Company's Senior Debt Lender has provided Tribeca with a
warehouse line of credit of $5 million. The Company at year-end had an
additional line of credit from another bank of $ 7 million. At December 31,
1998, the Company had drawn down $5.6 million on the two lines.
12% DEBENTURES. In connection with the acquisition of a loan portfolio
during 1994, the Company offered to investors $750,000 of subordinated
debentures. As of December 31, 1998 and December 31, 1997, $176,250 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 to be repaid 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 the loan portfolio.
HARRISON FIRST CORPORATION 12% DEBENTURES. In connection with the
acquisition of a loan portfolio during 1995, the Company offered to investors
$800,000 of subordinated debentures of which $555,000 were issued. As of
December 31, 1998 and 1997, $421,800 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 to
be repaid 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 the loan portfolio.
LINES 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 the bank's prime rate plus two percent per annum. Principal repayment
of the lines is due six months from the date of each cash advance and interest
is payable monthly. The total amounts outstanding under the lines of credit as
of December 31, 1998 and December 31, 1997, were $450,415 and $916,957
respectively. Advances made under the line of credit were used to satisfy senior
lien positions and fund property 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.
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS.
See the financial statements and notes related thereto, beginning on
page F-1, included elsewhere in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
See Item 4 of the Company's 8-K as filed with the Securities and Exchange
Commission on July 2, 1997.
<PAGE> 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT.
<TABLE>
<CAPTION>
Year First Current Term
Elected as Director
Name Age Director Expires Office
- ---- --- -------- ------- ------
<S> <C> <C> <C> <C>
Allan R. Lyons 58 1994 1999 Director
William F. Sullivan 49 1996 1999 Director
Michael Bertash (1) 46 1998 1999 Director
Thomas J. Axon 47 1988 2000 President, Chief Executive
Officer and Director
Frank B. Evans 47 1994 2000 Director
Steven W. Lefkowitz 43 1996 2000 Director
Joseph Bartfield 44 1994 2001 Director
Joseph Caiazzo 41 1994 2001 Vice President, Chief
Operating Officer and Director
Robert M. Chiste 52 1994 2001 Director
</TABLE>
(1) ELECTED BY THE BOARD OF DIRECTORS TO SERVE THE UNEXPIRED PORTION OF
EUGENE WILKINSON'S TERM. MR. WILKINSON RESIGNED EFFECTIVE DECEMBER 31,
1998 TO PURSUE OTHER BUSINESS INTERESTS.
CLASS 1 DIRECTORS
WITH TERMS EXPIRING 2001
Joseph Bartfield has practiced law in New York State since 1980. From
1988 until September 1997 Mr. Bartfield was self-employed as an attorney,
specializing in commercial litigation and commercial arbitration. Since
September 1997, Mr. Bartfield has been a partner in RMTS Associates LLC.
("RMTS"), an insurance consulting and underwriting business with emphasis in
professional sports, medical stop loss insurance and large risk management. RMTS
is a partnership in which Mr. Axon is also a partner. Mr. Bartfield graduated
from New York Law School and holds a master's degree in political science from
Long Island University.
Joseph Caiazzo has served as Vice President and Chief Operating Officer
since March of 1996. From August 1989 to March 1996, Mr. Caiazzo served as
corporate controller of R.C. Dolner, Inc., a general contractor. Mr. Caiazzo
holds a Bachelor of Science from St. Francis College and a Masters of Business
Administration in Finance from Long Island University.
<PAGE> 21
Mr. Chiste has been Chairman and Chief Executive Officer of TriActive
Technologies, Inc. since July, 1998. He was President, Industrial Services
Group, of Philip Services Corp, from August 1997 to July 1998. He served as Vice
Chairman of Allwaste, Inc. ("Allwaste"), a provider of industrial and
environmental services, from May 1997 through July 1997, President and Chief
Executive Officer of Allwaste from November 1994 through July 1997 and a
director of Allwaste from January 1995 through August 1997. Philip Services
Corp. acquired Allwaste effective July 31, 1997. Mr. Chiste served as Chief
Executive Officer and President of America National Power, Inc., a successor
company of Transco Energy Ventures Company, from its inception in 1986 until
August 1994. During the same period he served as Senior Vice President of
Transco Energy Company. Mr. Chiste also serves as a director of Innovative Valve
Technology, Inc. and Pentacon, Inc. Mr. Chiste holds a Bachelor of Science with
honors in mathematics from Trenton State College, a J.D. cum laude from Rutgers
University School of Law and a Master of Business Administration cum laude from
Rutgers University School of Management.
CLASS 2 DIRECTORS
WITH TERMS EXPIRING 1999
Mr. Lyons is a Certified Public Accountant who has been a principal in
Piaker & Lyons, P.C., an accounting firm, and its predecessors since 1968. Mr.
Lyons is engaged primarily in estate, tax and financial planning services
including investment structuring. Mr. Lyons has been a director of Starlog
Franchise Corporation since August 1993 and a Director of The Score Board, Inc.,
since June 1990. Mr. Lyons holds a Bachelor of Science in accounting from Harpur
College and a Masters of Business Administration from Ohio State University.
Mr. Sullivan has been a Partner at Marnik & Sullivan, a general
practice law firm, since 1985 and is admitted to both the New York State and
Massachusetts Bar Associations. Mr. Sullivan graduated from Suffolk University
School of Law and holds a Bachelor of Arts in political science from the
University of Massachusetts.
Mr. Bertash has been a Senior Vice President with J. & W. Seligman &.
Co., an investment management firm, since 1997. Mr. Bertash was an Associate
Director of the asset management division of Bear, Stearns & Co. Inc., a
worldwide investment bank and brokerage firm, from 1991 to 1997. In December
1998, Mr. Bertash was elected by the Board of Directors to fill the remainder of
the unexpired term of Mr. Wilkinson, who resigned from the Board to pursue other
interests. Mr. Bertash holds a Bachelor of Science in Operations Research from
Syracuse University and a Master in Business from New York University.
CLASS 3 DIRECTORS
WITH TERMS EXPIRING 2000
Thomas J. Axon has served as President, Chief Executive Officer and
Chairman of Board of Directors of the Company since December 30, 1994. Mr. Axon
also served as Director of Franklin Credit Management Corporation ("Franklin")
from May 1988 until the merger of Franklin and Miramar Resources, Inc. in
December 1994 (the "Merger") and President of Franklin from October 8, 1991
until the Merger. Since 1985, Mr. Axon has been the President and principal
owner of RMTS Associates, LLC. Mr. Axon holds a Bachelor of Arts in economics
from Franklin and Marshall College and attended the New York University Graduate
School of Business.
Frank B. Evans, Jr. had served as Vice President, Treasurer Secretary
and Chief Financial Officer of the Company since December 30, 1994 until
November 15, 1998. Mr. Evans also served as the Secretary,
<PAGE> 22
Treasurer, a Vice President and a Director of Franklin from its inception in
1990 until the Merger. Mr. Evans has served as CEO of Earthsafe Corporation, a
McLean, Virginia firm that designs and supplies environmental compliance
systems, since its inception in 1990. Mr. Evans is a Certified Public Accountant
and holds a Bachelor of Science from the University of Maryland and a Masters in
Business from the University of Southern California.
Steven W. Lefkowitz has served as the founder and President of Wade
Capital Corporation, a privately held investment firm organized since 1990. From
1988 to 1990, Mr. Lefkowitz served as a Vice President of Corporate Finance for
Drexel Burnham Lambert, Incorporated, where he had been employed since 1985. Mr.
Lefkowitz serves on the Board of Directors of Allstate Financial Corp., a
publicly traded financial services company, as well as several private
companies. Mr. Lefkowitz holds a Bachelor of Arts in history from Dartmouth
College and a Masters in Business Administration from Columbia University.
COMPLIANCE WITH SECTION 16(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended
requires the Company's Directors and Executive Officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the Commission initial reports of ownership and reports of changes
in ownership of Common Stock and other equity securities of the Company.
Reporting persons are required by Commission regulations to furnish the Company
with copies of all Section 16(a) forms that they file.
Based solely on review of the copies of such reports furnished to the
Company, the Company believes that during fiscal 1998 all Section 16(a) filing
requirements applicable to its Officers, Directors and ten percent stockholders
were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth compensation earned by or paid to Thomas J. Axon,
the Chief Executive Officer of the Company and Joseph Caiazzo, the Chief
Operating Officer of the Company (collectively the "Named Executive Officers").
No other executive officers of the Company earned over $100,000 in salary and
bonus during the fiscal year ended December 31, 1998:
<PAGE> 23
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION
COMPENSATION AWARDS
------------------------------ ----------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDER-LYING
FISCAL COMPEN- STOCK AWARD OPTIONS/
NAME AND PRINCIPAL YEAR SALARY BONUS SATION (s) SARs
POSITION ($) ($) ($) ($) (#)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Axon- 1998 -- -- 7,000(1) -- --
Chief Executive 1997 -- -- 7,000(1) -- --
Officer 1996 -- -- 7,000(1) -- --
- -------------------------------------------------------------------------------------------------
Joseph Caiazzo-Chief 1998 $140,000 -- -- -- --
Operating Officer 1997 $145,577 -- -- -- --
1996 $91,527 -- -- -- 100,000(2)
</TABLE>
(1) Represents health insurance benefits received by Mr. Axon.
(2) Represents options to purchase shares of the Company's Common Stock
granted on March 25, 1996 at $1.56 per share, 50,000 of which vested
upon grant and 50,000 of which vested on March 26, 1998.
The following table sets forth the aggregate value, realized gain, and
number of options granted to the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
ACQUIRED VALUE UNEXERCISED OPTIONS/SARs AT FY- MONEY OPTIONS/SARs AT
EXERCISE REALIZED END FY-END
----------------------------------------------------------------------------------------------------
NAME # ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Axon -- -- -- -- -- --
Joseph Caiazzo -- -- 100,000 0 -- --
</TABLE>
(1) Based upon a $1.50 share price at December 31, 1998.
EMPLOYMENT AGREEMENTS.
Joseph Caiazzo, serves as Chief Operating Officer of the Company under
a five-year contract for annual compensation of $125,000 (which has been
increased by the Company to $135,000), expiring on March 24, 2001. In addition,
under his employment contract Mr. Caiazzo will receive a bonus of 3.5% of post
tax profits of the Company in any fiscal year in excess of $500,000. Mr. Caiazzo
also received a grant of
<PAGE> 24
100,000 options to purchase Common Stock, of which 50,000 vested upon grant and
50,000 vested on March 26, 1998.
Peter Spielberger, serves as Chief Financial Officer of the Company,
under a one-year contract for annual compensation of $150,000 expiring on July
12, 1999. Under his employment contract Mr. Spielberger will receive a bonus of
$30,000 in April 1999. Mr. Spielberger also received a grant of 100,000 options
to purchase Common Stock, exercisable at a purchase price of $ 1.57 per share of
which 50,000 vested upon grant and 50,000 vest on July 12, 1999.
DIRECTORS COMPENSATION. Directors receive no compensation for their
service as such. Effective June 5, 1996, each non-employee director of the
Company was granted an option to purchase 10,000 shares of Common Stock pursuant
to the Company's 1996 Stock Incentive Plan. These options vest 25% each year on
the first four anniversaries of the date of grant at $1.57 per share. To date
none of these options have been exercised.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 15, 1999, the number of
shares of Common Stock and the percentage of the Company's Common Stock
beneficially owned by (i) each person known (based solely on Schedules 13D or
13G filed with the Securities and Exchange Commission (the "Commission") to the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each Director and nominee for Director of the Company, (iii) the Named Executive
Officers, and (iv) all Directors and executive Officers of the Company as a
group (based upon information furnished by such persons). Under the rules of the
Commission, a person has beneficial ownership of Common Stock if the power or
shares the power to vote or direct the disposition of such security or the power
to dispose of or to direct the disposition of such security. In general, a
person is also deemed to be a beneficial owner of any securities of which that
person has the right to acquire beneficial ownership within 60 days.
Accordingly, more than one person may be deemed a beneficial owner of the same
securities.
<TABLE>
<CAPTION>
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
Thomas J. Axon(1)(2) 3,112,990 52.6%
Frank B. Evans, Jr.(1)(3) 897,960 15.2%
Joseph Caiazzo(1)(4) 123,550 2.1%
Joseph Bartfield(1)(5) 162,290 2.7%
Robert M. Chiste(1)(5) 65,055 1.1%
Allan R. Lyons(1)(5) 32,500 *
William F. Sullivan(1)(6) 32,200 *
Michael Bertash(1) 0 *
Steven Lefkowitz(1)(7) 149,500 2.5%
Vincent A. Merola(8) 295,935 5.0%
Peter Spielberger(1)(9) 50,000 *
All Directors and officers as a
Group (10 persons)(10) 4,626,045 74.9%
</TABLE>
<PAGE> 25
* Indicates beneficial ownership of less than one (1%) percent. Percentages
are based on 5,917,295 of common stock outstanding.
(1) Mailing address: C/O Franklin Credit Management Corporation, Six Harrison
Street, New York, New York 10013.
(2) Does not include 11,610 shares beneficially owned by Mr. Axon's mother, Ann
Axon, with respect to which shares Mr. Axon disclaims beneficial ownership.
Includes 1,030 shares owned of record by him as custodian for a minor
child.
(3) Does not includes 5,225 shares beneficially owned by Mr. Evans' father
Frank Evans and 20,720 shares owned by Mr. Evans' wife Karen Evans, with
respect to which shares Mr. Evans disclaims beneficial ownership. Includes
20,000 shares held by Mr. Evans as custodian for his four minor children.
(4) Includes 100,000 shares issuable upon exercise of options exercisable
within sixty days.
(5) Includes 5,000 shares issuable upon exercise of options exercisable within
sixty days.
(6) Includes 2,500 shares issuable upon exercise of options exercisable within
sixty days.
(7) Includes 87,000 shares issuable upon exercise of warrants exercisable
within sixty days and 2,500 shares issuable upon exercise of options
exercisable within sixty days.
(8) Mr. Merola's mailing address is P.O Box 769 Tannersville, PA 18372-0769.
(9) Includes 50,000 shares issuable upon exercise of options exercisable within
sixty days.
(10) Includes 170,00 shares issuable upon exercise of options exercisable within
sixty days and 87,000 shares issuable upon exercise of warrants exercisable
within sixty days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION.
Mr. Axon, the Company's President, Chief Executive Officer and Chairman
purchased from the Company a Florida condominium unit subject to considerable
title defects, held by the Company in its OREO inventory available for sale. The
consideration included forgiveness of $ 184,335 of indebtedness of the Company
to Axon Associates, Inc. and issuance by Mr. Axon of a note to the Company in
the amount of $234,165. The note bears interest at a rate of 8% per annum, is
secured by the condominium property, and is due January 1, 2001 but can be
extended by Mr. Axon to June 1, 2001. The Company believes that the terms of the
sale were at least as advantageous to the Company as those available from an
arms-length purchaser.
As of December 31, 1998, the Company also had indebtedness of $164,897
outstanding to RMTS in respect of a November 1996 advance under a line of credit
provided to the Company by RMTS to fund deposits required in connection with
bids at portfolio auctions. The indebtedness bears interest at a rate of 10.5%
per annum.
On April 2, 1997, the Company entered into a letter agreement with Wade
Capital Corporation ("WCC"), of which Steven W. Lefkowitz, a member of the
Company's Board of Directors, serves as President, pursuant to which WCC was
retained through April 30, 1998 to provide financial advisory services to the
Company. Pursuant to such agreement, WCC was granted 87,000 warrants to purchase
Common Stock at $1.56 per share and receives $2,500 per month for the duration
of the agreement. The Company and Mr. Lefkowitz have extended this agreement to
April 30, 1999.
<PAGE> 26
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
PART IV
<TABLE>
<CAPTION>
(a) EXHIBIT TABLE
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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.
(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.
10(e) Agreement dated March 29, 1997 between the Company and the
Citizens Banking Company.
10(f) Loan and Real Estate Purchase Agreement dated September
17,1998 by and among Franklin credit Management Corporation
and Home Gold Financial Inc. f/k/a Emergent Mortgage Corp.
10(g) Form of Subscription Agreement and Investor Representation,
dated as of September 8,1998 between the Company and
certain subscribers.
10(h) Loan Purchase Agreement dated December 31,1998 between the
Company and Thomas Axon, corporate General Partner .(Filed
herewith)
10(i) Promissory Note between Thomas J. Axon and the Company
dated December 31,1998.(Filed herewith)
</TABLE>
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.
April 15, 1999 FRANKLIN CREDIT MANAGEMENT
<PAGE> 27
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
THOMAS J. AXON President, Chief Executive Officer April 15, 1999
- ----------------------------- and Director --------------
Thomas J. Axon
(Principal executive officer)
PETER SPIELBERGER Executive Vice President and April 15, 1999
- ----------------------------- Chief Financial Officer --------------
Peter Spielberger
(Principal financial and
accounting officer)
JOSEPH CAIAZZO Vice President, Chief Operating April 15, 1999
- ----------------------------- Officer and Director --------------
Joseph Caiazzo
</TABLE>
<PAGE> 28
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-24
</TABLE>
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Franklin Credit Management Corporation and Subsidiaries
We have audited the consolidated balance sheets of Franklin Credit Management
Corp. and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
April 12, 1999
<PAGE> 30
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 5,119,906 $ 2,783,920
RESTRICTED CASH 1,103,446 990,466
NOTES RECEIVABLE:
Principal 158,730,622 115,965,158
Joint venture participations (301,990) (321,460)
Purchase discount (20,435,067) (16,175,518)
Allowance for loan losses (22,168,345) (27,424,641)
------------- -------------
NET NOTES RECEIVABLE 115,825,220 72,043,539
LOANS HELD FOR SALE 5,699,577 3,702,723
ACCRUED INTEREST RECEIVABLE 1,924,601 929,908
OTHER REAL ESTATE OWNED 10,357,181 11,806,473
OTHER RECEIVABLES (including $234,165 and $0 receivable from related parties) 1,231,667 695,471
DEFERRED TAX ASSET 1,842,932 1,479,939
OTHER ASSETS 1,453,158 735,075
BUILDING, FURNITURE AND FIXTURES - Net 751,512 729,285
DEFERRED FINANCING COSTS 1,582,227 1,161,437
------------- -------------
TOTAL ASSETS $ 146,891,427 $ 97,058,236
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 2,946,071 $ 2,938,340
Lines of credit 6,197,803 1,376,403
Notes payable 132,227,257 83,643,550
203(k) rehabilitation escrows payable 72,386 2,828,239
Subordinated debentures 598,050 863,100
Notes payable, affiliates and stockholders 181,129 311,484
Deferred tax liability 1,922,991 1,559,998
------------- -------------
TOTAL LIABILITIES 144,145,687 93,521,114
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000 authorized shares; issued
and outstanding: 5,916,527 and 5,516,527 59,167 55,167
Additional paid-in capital 6,985,968 6,489,968
Accumulated deficit (4,299,395) (3,008,013)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,745,740 3,537,122
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 146,891,427 $ 97,058,236
============= =============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 31
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
REVENUES:
Interest income $ 9,147,553 $ 5,977,976
Purchase discount earned 4,330,610 4,971,781
Gain on sale of notes receivable 827,067 1,331,133
Gain on sale of notes originated 731,269 --
Gain on sale of other real estate owned 222,984 1,045,144
Rental income 800,983 296,420
Other 936,420 661,744
------------ ------------
16,996,886 14,284,198
------------ ------------
OPERATING EXPENSES:
Interest expense 10,098,640 8,350,490
Collection, general and administrative 7,672,971 5,923,745
Special charge -- 1,500,000
Provision for loan losses 69,741 191,121
Bank service fees -- 31,520
Amortization of deferred financing costs 363,219 479,510
Depreciation 83,697 72,513
------------ ------------
18,288,268 16,548,899
------------ ------------
LOSS BEFORE BENEFIT FOR INCOME
TAXES (1,291,382) (2,264,701)
BENEFIT FOR INCOME TAXES -- 1,698,803
------------ ------------
NET LOSS $ (1,291,382) $ (565,898)
============ ============
NET LOSS PER COMMON SHARE:
Basic $ (0.23) $ (0.10)
============ ============
Dilutive $ (0.23) $ (0.10)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,640,363 5,516,527
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 32
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------ PAID-IN ACCUMULATED
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 dividend 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
Private placement 400,000 4,000 496,000 -- 500,000
Net loss (1,291,382) (1,291,382)
--------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 5,916,527 $ 59,167 $ 6,985,968 $(4,299,395) $ 2,745,740
========= =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 33
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,291,382) $ (565,898)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of notes receivable (827,067) (1,331,133)
Special charge -- 1,500,000
Gain on sale of other real estate owned (222,984) (1,045,144)
Depreciation 83,697 72,513
Amortization of deferred financing costs 363,219 479,510
Purchase discount earned (4,330,610) (4,971,781)
Provision for loan losses 69,741 191,121
Deferred tax (benefit) provision -- (1,698,803)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (994,693) 202,462
Increase in other receivables (536,196) (274,079)
Increase in other assets (718,083) (30,380)
Increase in loans held for sale (1,996,854) (3,702,723)
Increase in accounts payable and accrued expenses 7,731 1,064,073
Decrease in notes payable, affiliates and stockholders (130,355) (61,734)
(Decrease) increase in 203(k) rehabilitation escrows payable (2,755,853) 2,828,239
------------ ------------
Net cash used in operating activities (13,279,689) (7,343,757)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (112,980) (161,621)
Purchase of other real estate owned (1,100,809) (2,571,459)
Purchase of notes receivable (71,753,755) (23,705,563)
Principal collections on notes receivable 21,669,970 15,438,035
Joint venture participation (19,470) (38,936)
Acquisition and loan fees (797,694) (282,072)
Foreclosures on real estate (4,915,798) (8,645,655)
Reclassification of notes receivable for foreclosures 5,243,674 5,347,716
Proceeds from sale of other real estate owned 7,762,586 4,822,718
Proceeds from sale of notes receivable 6,123,911 7,382,329
Purchase of building, furniture and fixtures (124,018) (161,049)
------------ ------------
Net cash used in investing activities (38,024,383) (2,575,557)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 74,018,327 30,626,654
Principal payments of notes payable (25,434,619) (20,521,969)
Proceeds from private placement 500,000 --
Proceeds from line of credit 26,789,536 1,302,591
Payments on line of credit (21,968,136) (510,106)
Principal payments of subordinated debentures (265,050) (161,900)
------------ ------------
Net cash provided by financing activities 53,640,058 10,735,270
------------ ------------
NET INCREASE IN CASH 2,335,986 815,956
CASH, BEGINNING OF YEAR 2,783,920 1,967,964
------------ ------------
CASH, END OF YEAR $ 5,119,906 $ 2,783,920
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 8,843,698 $ 8,333,722
============ ============
Cash (receipts) payments for taxes $ (37,878) $ 38,371
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 34
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Franklin Credit Management Corporation (the
"Company"), incorporated under the laws of the State of Delaware, acquires
performing, nonperforming, nonconforming and subperforming notes receivable and
promissory notes from financial institutions, and mortgage and finance
companies. The Company services and collects such notes receivable through
enforcement of terms of original note, modification of original note terms and,
if necessary, liquidation of the underlying collateral.
In January 1997, a wholly owned subsidiary was formed, to originate or
purchase, sub prime residential mortgage loans to individuals whose credit
histories, income and other factors cause them to be classified as nonconforming
borrowers.
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
intercompany 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 includes 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 notes receivable
portfolio consists primarily of secured real estate mortgage loans purchased
from financial institutions, and mortgage and finance companies. Such notes
receivable are generally nonperforming or underperforming 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. Impaired notes are measured based on the present value of expected
future cash flows discounted at the note's effective interest rate or, as a
practical expedient, at the observable market price of the note receivable or
the fair value of the collateral if the note is collateral dependent. A note
receivable is impaired when it is probable the Company will be unable to collect
all contractual principal and interest payments due in accordance with the terms
of the note agreement.
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 collection of interest is doubtful. When interest accrual
is discontinued, all unpaid accrued interest is reversed. Subsequent recognition
of income occurs only to the extent payment is received subject to management's
assessment of the collectibility of the remaining interest and principal. A
nonaccrual 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 payments are
F-6
<PAGE> 35
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 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 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 by an allocation of the purchase loan discount based on the
management's assessment of the portion of purchase discount that represents
uncollectable principal. Subsequently, increases to the allowance are made
through a provision for loan losses charged to expense and 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 receivable, 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 receivable 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 consisting of
properties acquired through, or in lieu of, foreclosure or other proceedings 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. Property 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.
F-7
<PAGE> 36
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 basis.
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.
The reconciliation is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(1,291,382) $ (565,898)
Basic and diluted EPS $(1,291,382) 5,640,363 $(0.23) $ (565,898) 5,516,527 $(0.10)
=========== ========= ===== =========== ========= =====
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments,
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.
Those techniques 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 nonfinancial 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.
BUSINESS SEGMENTS - During 1998, the Company adopted Statement of
Financial Accounting Standards No. 131 ("FAS 131"), Disclosures about
Segments of an Enterprise and Related Information. FAS 131 supersedes FAS
14, Financial Reporting for Segments of a Business
F-8
<PAGE> 37
Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
reporting that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
FAS 131 also requires disclosures about products and services, geographic
areas and major customers. The adoption of FAS 131 did not affect results
of operations or the financial position of the Company but did affect the
Company's footnote disclosures (Note 13).
COMPREHENSIVE INCOME - SFAS No. 130, Reporting Comprehensive Income
defines comprehensive income as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and
distributions to stockholders. The Company had no items of other
comprehensive income in 1998, so its net loss was the same as its
comprehensive loss.
RECENT PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
The Company is required to implement FAS 133 on January 1, 2000. FAS 133
require that all derivative instruments be recorded on the balance sheet
at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and the
type of hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. The Company does not believe that it will have any
effect on its results of operations and financial position.
2. NOTES RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Notes receivable consists principally of real estate mortgage as of
December 31, 1998 and 1997 and are classified as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real estate secured $ 145,114,466 $ 92,920,679
Consumer, unsecured 2,188,205 12,175,541
Mobile homes 9,523,867 3,641,000
Other 1,904,084 7,227,938
------------- -------------
158,730,622 115,965,158
Less:
Joint venture participation (301,990) (321,460)
Purchase discount (20,435,067) (16,175,518)
Allowance for loan losses (22,168,345) (27,424,641)
------------- -------------
$ 115,825,220 $ 72,043,539
============= =============
</TABLE>
As of December 31, 1998, contractual maturities of classified notes
receivables net of the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1999 $ 22,353,062
2000 20,604,594
2001 19,900,854
2002 14,218,787
2003 7,778,455
Thereafter 43,345,955
------------
$128,201,707
============
</TABLE>
Excluded from the contractual maturities reflected above are the notes
receivable acquired during the last week of 1998 with $ 8,360,570 of aggregate
principal balances, net of allowance for loan losses. Management is in the
process of performing the analyses to determine the final discount allocation
and
F-9
<PAGE> 38
the initial determination of the allowance for loan losses associated with these
purchases which are necessary to develop the related contractual maturities of
the underlying notes receivable.
It is the Company's experience that a portion of the notes receivable
portfolio may be renewed or repaid before contractual maturity dates. The above
tabulation, therefore, is not to be regarded as a forecast of future cash
collections. During the years ended December 31, 1998 and 1997, cash collections
of principal amounts totaled approximately $21,700,000 and $15,400,000
respectively, and the ratios of these cash collections to average principal
balances were approximately 15.8% and 16.5%, respectively.
Changes in the allowance of loan losses for the years ended December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, beginning $ 27,424,641 $ 23,604,810
Initial allowance allocated on purchased portfolio 4,341,195 12,074,372
Loans charged to allowance (9,667,232) (8,445,662)
Provision for loan losses 69,741 191,121
------------ ------------
Balance, ending $ 22,168,345 $ 27,424,641
============ ============
</TABLE>
At December 31, 1998 and 1997, principal amounts of notes receivable
included approximately $62,000,000 and $72,000,000, respectively, of notes for
which there was no accrual of interest income. At December 31, 1998 and 1997,
approximately $0 and $6,800,000 of such notes at principal amounts relate to
recent portfolio acquisitions whose performance and collection classification by
management is currently in the process of being determined.
The following information relates to impaired notes receivable which
include all nonaccrual loans as of and for the year ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Total impaired notes receivable $62,156,469 $72,069,675
=========== ===========
Allowance for loan losses related to impaired
notes receivable $20,420,642 $26,508,033
=========== ===========
Average balance of impaired notes receivable
during the year $67,113,072 $70,049,260
=========== ===========
Interest income recognized $ 1,687,793 $ 2,158,988
=========== ===========
</TABLE>
In the normal course of business, the Company restructures or modifies
terms of notes receivable to enhance the collectibility of certain notes which
were impaired at the date of acquisition and were included in certain portfolio
purchases.
3. SPECIAL CHARGE
The Company took a $1,500,000 Special Charge to income during 1997 in
order to create a reserve for what it has discovered to be the impaired value of
portfolio of notes receivable purchased by the Company and in connection with
such purchases the Company believes it was defrauded. The portfolio was
purchased for approximately $1,800,000 million and the Company currently expects
approximately $300,000 of the notes receivable in the portfolio to be
collectible.
F-10
<PAGE> 39
4. BUILDING, FURNITURE AND FIXTURES
At December 31, 1998 and 1997, building and improvements, and furniture
and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Building and improvements $ 682,617 $ 754,804
Furniture and equipment 416,131 228,625
---------- ----------
1,098,748 983,429
Less accumulated depreciation 347,236 254,144
---------- ----------
$ 751,512 $ 729,285
========== ==========
</TABLE>
5. NOTES PAYABLE
Notes payable consists primarily of loans made to the Company from a
bank ("Senior Debt Lender") to acquire portfolios of notes receivable. The
Company has a credit facility with the Senior Debt Lender. The facility provides
the Company with the ability to borrow up to an aggregate of $200,000,000 at
rates ranging from prime to prime plus 1.75% per annum. All notes payable are
secured by a security interest in the notes receivable, payments to be received
under the notes and the underlying collateral securing the notes. As of December
31, 1998 and 1997, the Company had 48 and 34 loans outstanding to its Senior
Debt Lender with an aggregate principal balance of $131,904,745 and $83,309,407,
respectively. The loans accrue interest at various interest rates. The principal
balances and interest rates are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Prime (1998: 7.75% and 1997: 8.50%) $ 77,267,113 $ 28,718,738
1.75% over prime (1998: 9.50% and 1997: 10.25%) 41,071,580 54,590,669
0.50% over prime (1998: 8.25% and 1997: 9.00%) 7,442,282 --
1.00% over prime (1998: 8.75% and 1997: 9.50%) 6,123,770 --
------------ ------------
$131,904,745 $ 83,309,407
============ ============
</TABLE>
The above financing agreements also provide for additional monthly principal
reduction based on cash collections received by the Company.
The remaining note payable consists of a bank loan made to the Company
to acquire its principal offices. The note payable is secured by the principal
offices. As of December 31, 1998 and 1997, the Company had a note payable of
$322,512 and $334,143, respectively, which accrues interest at 8.75%.
Certain agreements require that a non-interest bearing cash account be
established at the closing of the loan and may require additional deposits based
on a percentage of monthly collections up to a specified dollar limit. The
aggregate balance of restricted cash at December 31, 1998 and 1997 was
$1,103,446 and $990,466, respectively.
Substantially all of the Company's outstanding financing with respect
to its notes receivable portfolio acquisition activities is provided by the
Senior Debt Lender.
Aggregate maturities of all long-term debt at currently effective
principal payment requirements, including subordinated debentures (Note 7),
financing agreements (Note 9) and notes payable, affiliates and stockholders
(Note 8), at December 31, 1998 are as follows:
F-11
<PAGE> 40
<TABLE>
<CAPTION>
NOTES
YEAR ENDING NOTES SUBORDINATED FINANCING PAYABLE
DECEMBER 31, PAYABLE DEBENTURES AGREEMENTS AFFILIATE TOTAL
<S> <C> <C> <C> <C> <C>
1999 $ 31,495,232 $ 265,050 6,197,803 181,129 38,139,214
2000 32,738,926 333,000 33,071,926
2001 57,765,121 57,765,121
2002 7,009,970 7,009,970
2003 372,156 372,156
Thereafter 2,845,852 2,845,852
------------ --------- ----------- --------- -------------
$132,227,257 $ 598,050 $ 6,197,803 $ 181,129 $ 139,204,239
============ ========= =========== ========= =============
</TABLE>
6. CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS
During 1993, the Company issued $2,000,000 of 15% convertible
subordinated debentures and during 1995, the Company fully repaid the remaining
outstanding obligation of $526,600. The debentures were convertible into common
stock of the Company at the rate of $2.00 per share. Warrants, exercisable to
the extent that conversion rights have not been exercised, to purchase common
stock at the rate of $2.00 per share, were issued on principal repayment dates
and were due to expire one year thereafter. In December 1997, the Company
extended the warrants provision, due to expire on December 31, 1997, through
December 31, 1998.
7. SUBORDINATED DEBENTURES
In connection with the acquisition of a loan portfolio, the Company
offered $750,000 in subordinated debentures of which $705,000 were issued. As of
December 31, 1998 and 1997, $176,250 and $352,500, respectively, of these
debentures were outstanding. The debentures bear interest at 12% per annum
payable in quarterly installments. The principal is payable over 4 years in 16
equal quarterly installments of $44,062, which commenced March 31, 1996. The
debentures are secured by a lien of the Company's interest in certain notes
receivable and are subordinate to a note payable with a December 31, 1998
balance of $1,915,502 encumbering the notes receivable portfolio.
In connection with the acquisition of a notes receivable portfolio
during 1995, the Company offered $800,000 in subordinated debentures. As of
December 31, 1998 and 1997, $421,800 and $510,600, respectively, of these
debentures were outstanding. The debentures bear interest at a rate of 12% per
annum payable in quarterly installments. The principal is payable over 3 years
in 10 equal quarterly installments of $22,200 commencing September 30, 1997 with
the remaining balance of $333,000 payable on June 30, 2000. The debentures are
secured by a lien on the Company's interest in certain notes receivable and are
subordinate to a note payable with a December 31, 1998 balance of $3,944,728
encumbering the note receivable portfolio.
8. NOTES PAYABLE, AFFILIATES AND STOCKHOLDERS
Notes payable, affiliates and stockholders consist of the following at
December 31, 1998 and 1997:
F-12
<PAGE> 41
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable to a stockholder of the Company, payable in
quarterly installments of $6,000 plus interest at a rate of 10% per
annum through August 31, 1998 $ -- $ 79,247
Note payable to a company affiliated through certain common
ownership due on demand, with interest payable monthly at a
rate of 10% per annum 16,232 150,098
Note payable to a stockholder of the Company due on demand
with interest payable monthly at a rate of 10% per annum -- 82,139
Note payable to a company affiliated through certain common
ownership due on demand, with interest payable monthly at a
rate of 10.5% per annum 164,897 --
-------- --------
$181,129 $311,484
======== ========
</TABLE>
9. FINANCING AGREEMENTS
The Company has a financing agreement with a bank. The agreement
provides the Company with the ability to borrow a maximum of $1,500,000 at a
rate equal to the bank's prime rate plus two percent per annum. The credit
facility is to be utilized through a series of loans made to purchase the
underlying collateral of certain nonperforming real estate secured loans.
Principal repayment of each resulting loan is due six months from the date of
each advance and interest is payable monthly. As of December 31, 1998 and 1997,
$450,415 and $916,957, respectively, is outstanding on this credit facility.
The financing agreement is secured by a first priority security
interest in the notes receivable, the individual real estate that may be
purchased, payments to be received under the notes receivable, an unconditional
suretyship by one of the stockholders of the Company, and collateral securing
the notes of certain loan portfolios.
In 1998, the Company opened a line of credit with a bank. The agreement
provides the Company with the ability to borrow a maximum of $150,000 at a rate
equal to the bank's prime rate plus one percent per annum. As of December 31,
1998, $149,125 is outstanding on this line of credit.
As of December 31, 1998 the Company has two warehouse lines of credit
with banks. The first provides the Company with the ability to borrow a maximum
of $5,000,000 at a rate equal to the bank's prime rate. The second provides the
Company with the ability to borrow a maximum of $7,000,000 at a rate equal to
the LIBOR rate plus three percent per annum. The credit facilities are to be
utilized for the purpose of originating mortgage loans. As of December 31, 1998
and 1997, $5,598,263 and $459,446, respectively, is outstanding on these lines
of credit.
The facility is secured by a first priority security interest in the
note receivable portfolio, the respective collateral for each loan purchased and
a lien on certain other note receivable portfolios. As of December 31, 1998,
$131,905,346 is outstanding on this facility. 10. INCOME TAX MATTERS
The components of income tax (benefit) provision for the years ended
December 31, 1998 and 1997 are as follows:
F-13
<PAGE> 42
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current provision:
Federal $ -- $ --
State and local
-- 12,926
----------- -----------
-- 12,926
----------- -----------
Deferred provision (benefit):
Federal
-- (1,230,195)
State and local
-- (481,534)
----------- -----------
-- (1,711,729)
----------- -----------
(Benefit) provision $ -- $(1,698,803)
=========== ===========
</TABLE>
A reconciliation of the anticipated income tax expense (computed by
applying the Federal statutory income tax rate of 35% to income before income
tax expense) to the provision for income taxes in the statements of income for
the years ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Tax (benefit) determined by applying U.S. statutory rate
to income (loss) $ (451,984) $ (693,297)
Increase (decrease) in taxes resulting from:
State and local income taxes, net of Federal benefit (176,919) (258,750)
Tax benefit of net operating losses -- (796,141)
Valuation allowance 628,903 --
Other items, net -- 49,385
----------- -----------
$ -- $(1,698,803)
=========== ===========
</TABLE>
A valuation allowance has been established for a portion of the deferred tax
asset because management could not assert that it is more likely than not that
the total benefit of the deferred tax asset will be realized. The tax effects of
temporary differences that give rise to significant components of deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1997 are presented
below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred liabilities:
Purchase discount $ 1,858,981 $ 1,497,149
Joint venture participation 64,010 62,849
----------- -----------
Gross deferred tax liabilities $ 1,922,991 $ 1,559,998
=========== ===========
Deferred tax assets:
Accounts payable and accrued expenses $ $ --
Debt issuance costs --
Inventory, repossessed collateral 762,265 1,273,199
Special charge on purchased loans 402,844 706,740
Net operating loss carryforward 3,348,528 362,782
----------- -----------
Gross deferred tax assets 4,513,637 2,342,721
Less valuation allowance (2,670,705) (862,782)
----------- -----------
Deferred tax assets - net of valuation allowance $ 1,842,932 $ 1,479,939
=========== ===========
</TABLE>
F-14
<PAGE> 43
The Company has net operating loss carryforwards of approximately
$6,484,212 for Federal purposes, available to reduce future taxable income. Such
net operating loss carryforwards expire through 2018.
11. STOCK OPTION PLAN
During 1996, the Company adopted an incentive stock option plan (the
"Plan") for certain of its officers and directors. Under the terms of the Plan,
options to purchase an aggregate of up to 800,000 shares of the Company's common
stock may be granted. Each option has an exercise price at least equal to the
fair market value of the shares of common stock at the time the option is
granted. Options become exercisable at various times after the date granted and
expire ten years after the date granted.
During 1996 the Company granted 209,500 options to employees and
directors. The Company did not grant any options in 1997. In 1998 the Company
granted an additional 100,000 options to the chief financial officer.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock options; accordingly no compensation cost has been
recognized. Had compensation cost been determined upon the fair value of the
stock options at the grant date consistent with the method of FAS 123, the
Company's nets income and earnings per share would have been reduced to the pro
forma amounts indicated in the table that follows. The following pro forma
effect on net loss for the current year is not representative of the pro forma
effect on net income (loss) in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1997.
<TABLE>
<CAPTION>
1998
<S> <C>
Net loss - as reported $ (1,291,382)
Net loss - pro forma (1,380,313)
Net loss per common share - basic - as reported (0.23)
Net loss per common share - basic - pro forma (0.24)
Net loss per common share - dilutive - as reported (0.23)
Net loss per common share - dilutive - pro forma (0.24)
</TABLE>
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998:
<TABLE>
<CAPTION>
1998
<S> <C>
Dividend yield
0%
Volatility
60.0%
Risk-free interest rate
5.5%
Weighted average expected lives 10 years
</TABLE>
F-15
<PAGE> 44
Transactions in stock options under the Plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Options outstanding, at December 31, 1996 41,900 $7.80
Effect of 4:1 stock dividend in 1997 167,600 (6.24)
Granted -- --
Exercised -- --
Expired (3,500) 1.56
------- -----
Options outstanding at December 31, 1997 206,000 1.56
Granted 100,000 1.57
Exercised -- --
Expired -- --
------- -----
Options outstanding at December 31, 1998 306,000 $1.56
======= =====
</TABLE>
As of December 31, 1998 and 1997, 228,500 and 89,250 options are
exercisable. During the year ended December 31, 1999, 63,750 additional options
will become exercisable and the remainder will become exercisable during the
year ended December 31, 2000.
12. SALE OF NOTES RECEIVABLE WITH RECOURSE
In June 1996, the Company sold notes receivable with a net carrying
value of approximately $5.4 million for approximately $6.4 million to the
Company's primary lender and retained the servicing rights. Such loans were sold
with recourse. The recourse provision amounted to approximately $600,000 and
provides that the Company either buy back or replace a note with a note that is
approximately equivalent to the outstanding principal and accrued interest
should the note receivable become sixty days past due. At December 31, 1998, the
remaining obligation under the recourse provision is approximately $340,000. In
addition, the buyer of the notes has the right to proceed to foreclose on the
delinquent note and, after sale of the collateral, require the Company to pay
any deficiency balance on the note.
In June 1997, the Company sold notes receivable with a net carrying
value of approximately $3,900,000 for approximately $4,900,000 to the Company's
primary lender and retained the servicing rights. Such loans were sold with
recourse. The recourse provision amounted to approximately $500,000 and provides
that the Company either buy back or replace a note with a note that is
approximately equivalent to the outstanding principal and accrued interest
should the note receivable become sixty days past due. At December 31, 1998 and
1997, the remaining obligation under the recourse provision was approximately
$370,000 and $430,000, respectively. In addition, the buyer of the notes has the
right to proceed to foreclose on the delinquent note and, after sale of the
collateral, require the Company to pay any deficiency balance on the note. The
Company recognized a gain of approximately $920,000 on this sale.
As of December 31,1998 and 1997, unpaid balances of mortgage loans
serviced for others were $13,500,000 and $8,900,000, respectively. Mortgage
loans serviced for others are not included in the Company's consolidated balance
sheet.
13. BUSINESS SEGMENTS
The Company has two reportable operating segments: (i) portfolio asset
acquisition and resolution; and (ii) mortgage banking. The portfolio asset
acquisition and resolution segment acquires performing, nonperforming,
nonconforming and subperforming notes receivable and promissory notes from
financial institutions, mortgage and finance companies, and services and
collects such notes receivable through enforcement of terms of original note,
modification of original note terms and, if necessary, liquidation of the
underlying collateral. The mortgage-banking segment originates or purchases, sub
prime residential mortgage loans for individuals whose credit histories, income
and other factors cause them to be classified as nonconforming borrowers.
F-16
<PAGE> 45
The Company's management evaluates the performance of each segment
based on profit or loss from operations before unusual and extraordinary items
and income taxes. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (see Note 1).
<TABLE>
<CAPTION>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION
1998 1997
<S> <C> <C>
REVENUES:
Interest income $ 8,575,565 $ 5,967,327
Purchase discount earned 4,330,610 4,971,781
Gain on sale of notes receivable 827,067 1,331,133
Gain on sale of other real estate owned 222,984 1,045,144
Rental income 800,983 296,420
Other 828,719 629,045
------------ ------------
15,585,928 14,240,850
------------ ------------
OPERATING EXPENSES:
Interest expense 9,708,571 8,349,343
Collection, general and administrative 5,513,917 5,382,075
Special charge -- 1,500,000
Provision for loan losses 69,741 191,121
Banking service fees -- 31,520
Amortization of deferred financing costs 363,219 479,510
Depreciation 53,669 56,772
------------ ------------
15,709,117 15,990,341
------------ ------------
LOSS BEFORE PROVISION FOR INCOME
TAXES (123,189) (1,749,491)
BENEFIT FOR INCOME TAXES -- 1,698,803
------------ ------------
NET LOSS $ (123,189) $ (50,688)
============ ============
</TABLE>
F-17
<PAGE> 46
<TABLE>
<CAPTION>
MORTGAGE BANKING
1998 1997
<S> <C> <C>
REVENUES:
Interest income $ 571,988 $ 10,649
Gain on sale of notes originated 731,269 --
Other 107,701 32,699
------------- -------------
1,410,958 43,348
------------- -------------
OPERATING EXPENSES:
Interest expense 390,069 1,147
Collection, general and administrative 2,159,054 541,670
Depreciation 30,028 15,741
------------- -------------
2,579,151 558,558
------------- -------------
LOSS BEFORE PROVISION FOR INCOME
TAXES (1,168,193) (515,210)
BENEFIT FOR INCOME TAXES -- --
------------- -------------
NET LOSS $ (1,168,193) $ (515,210)
============= =============
CONSOLIDATED ASSETS
Portfolio asset acquisition and resolution assets $ 140,451,836 $ 93,002,483
Mortgage banking assets 6,439,591 4,055,753
------------- -------------
Consolidated assets $ 146,891,427 $ 97,058,236
============= =============
</TABLE>
14. STOCK DIVIDEND
On August 8, 1997, shareholders approved a five-for-one split up,
effected in the form of a four-for-one stock dividend, of the issued and
outstanding common stock of the Company with no corresponding change in par
value of the common stock. Accordingly, $44,145 was transferred from the paid-in
capital account to the common stock account to record the transaction.
15. PRIVATE PLACEMENT
On September 9, 1998, in order to obtain additional equity to support
increases in the warehouse lines of credit available to fund loan 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, at $1.25 per share. 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. The private placement was
approved by the board of directors and the stockholders in June 1998.
16. CERTAIN CONCENTRATIONS
GEOGRAPHIC CONCENTRATIONS OF NOTES RECEIVABLE - Approximately 40% of
the Company's secured consumer real estate notes receivable are with customers
in the northeastern region of the U.S. Such real estate notes receivable are
collateralized by real estate with a concentration in this region. 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. In the event of sustained adverse economic
conditions, it is possible that the Company could experience a negative impact
in its ability to collect on existing loans, or liquidate foreclosed assets in
this region which could impact the Company's related loan loss estimates.
F-18
<PAGE> 47
FINANCING - Substantially all of the Company's existing debt and
available credit facilities are with one financial institution. The Company's
purchases of new portfolios is contingent upon the continued availability of
these credit facilities.
17. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT - Effective March 25, 1996, the Company entered
into a five year employment agreement with its Chief Operating Officer. The
agreement provides for, among other things, a stipulated base salary, and a
bonus of up to 3.5% of the Company's net income in excess of $500,000.
Effective July 13, 1998, the Company entered into a one-year employment
agreement with its Chief Financial Officer. The agreement provides for, among
other things, a stipulated base salary and a stipulated bonus.
OPERATING LEASES - Certain secondary office space is leased under an
operating lease. The lease commenced on December 1, 1998 and expires on November
30, 2007. The future minimum lease payments are as follows:
<TABLE>
<S> <C>
1999 $ 120,200
2000 122,604
2001 125,056
2002 127,557
2003 130,109
Thereafter 535,029
-----------
$ 1,160,555
===========
</TABLE>
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 Lending Corp. (a
subsidiary), and the Company's chief executive officer 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 and retain three principals of K as paid consultants and
employ a fourth principal. In the suit K seeks to recover damages of $10 million
for the failure of the Company to make certain payments to third parties,
provide the fourth principal 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 the fourth principal, and breach of fiduciary
duty against the fourth principal in what it believes to have been the fourth
principal's unjustified unilateral termination of his employment in violation of
the Letter Agreement and is collectively seeking damages of $1 million. During
January 1999, the United States District Court struck K's jury demand and
dismissed K's claims based on fraud, unjust enrichment and conversion. The Court
also dismissed the Company's counterclaim against the fourth principal. The
Company intends to vigorously defend itself against the remaining allegations
and vigorously pursue recovery of damages and does not at this time believe that
its operations or financial position will be materially impacted. Trial on
remaining claims is currently scheduled to commence in April 1999.
OTHER LEGAL ACTIONS - The Company is also involved in legal proceedings
and litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such proceedings and litigation currently pending
will not materially affect the Company's financial statements.
18. RELATED PARTY TRANSACTIONS
In addition to the notes payable, affiliates and stockholders disclosed
in Note 8, the Company received approximately $100,000 for the year ended
December 31, 1997 from a company related through common ownership, for the use
of the Company's facilities.
On December 31, 1998, the Company sold one of its mortgage notes to the
President of the Company for $418,500. The sale was approved by the Board of
Directors on December 31, 1998. The mortgage note was paid for through the
reduction of a note payable of $184,335 due to an affiliated
F-19
<PAGE> 48
company, in which the President is a partner and through the issuance of a
promissory note from the President for $234,165.
19. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The table below sets forth selected unaudited financial information for
each quarter of the last two years.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
1998
<S> <C> <C> <C> <C>
Revenue $ 2,609,504 $ 4,256,800 $ 4,983,875 $ 5,146,707
Operating expenses 3,668,952 4,501,256 4,796,059 5,322,001
----------- ----------- ----------- -----------
(Loss) income before benefit for
income taxes and net (loss) income (1,059,448) (244,456) 187,816 (175,294)
=========== =========== =========== ===========
(Loss) income per common share
Basic $ (0.19) $ (0.04) $ 0.03 $ (0.03)
=========== =========== =========== ===========
Diluted $ (0.19) $ (0.04) $ 0.03 $ (0.03)
=========== =========== =========== ===========
1997
Revenue $ 2,961,152 $ 5,073,388 $ 4,595,936 $ 1,653,722
Operating expenses 3,148,569 3,631,687 5,276,357 4,492,286
----------- ----------- ----------- -----------
(Loss) income before benefit
for income taxes (187,417) 1,441,701 (680,421) (2,838,564)
(Provision) benefit for income taxes -- (722,765) 764,530 1,657,038
----------- ----------- ----------- -----------
Net loss (187,417) 718,936 84,109 (1,181,526)
=========== =========== =========== ===========
(Loss) income per common share
Basic $ (0.03) $ 0.13 $ 0.01 $ (0.21)
=========== =========== =========== ===========
Diluted $ (0.03) $ 0.12 $ 0.01 $ (0.21)
=========== =========== =========== ===========
</TABLE>
20. SUBSEQUENT EVENTS
Subsequent to year-end, the Company has purchased approximately
$5,600,000 in notes receivable at a cost of approximately $4,900,000. Also
subsequent to the year end, the Company sold notes receivable with a net
carrying value of approximately $3.3 million to an unaffiliated third party for
approximately $3.5 million.
******
F-20
<PAGE> 1
Exhibit 10(h)
LOAN PURCHASE AGREEMENT
This is a Loan Purchase Agreement for mortgage loan(s), dated and
effective as of December 31, 1998, and is executed between Franklin Credit
Recovery Fund XXI L.P., a limited partnership organized under the laws of the
state of Virginia, by Franklin Credit Management Corporation, a Delaware
corporation, its corporate General Partner as Seller (the "Seller") and Thomas
J. Axon as Purchaser (the "Purchaser").
W I T N E S S E T H
WHEREAS, Seller is the present holder of the Note(s), Mortgage(s) and
attendant Loan Documents (the "Mortgage Loan"), described in the attached
Exhibit "A", the Mortgage Loan Schedule which affects the Mortgaged Property
commonly known by the street address 520 Brickell Key Drive Unit A-PH12, Miami,
Florida 33131.
WHEREAS, the Mortgagors are in default under the Mortgage Loan;
WHEREAS, Purchaser desires to purchase the Mortgage Loan from Seller.
NOW, THEREFORE, for other good and valuable consideration, the Purchaser
and the Seller, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
Whenever used herein, the following words and phrases, unless the context
otherwise requires, shall have the following meanings:
Agreement: This Loan Purchase Agreement , together with all exhibits
and schedules appended hereto, as well as all amendments hereof and
supplements hereto.
Assignment of Mortgage: An assignment of the Mortgage, notice of transfer
or equivalent instrument in recordable form, sufficient under the laws of the
jurisdiction wherein the related Mortgaged Property is located for the absolute
transfer of the Mortgage.
<PAGE> 2
Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a
day on which federal savings banks are authorized or obligated by law or
executive order to be closed.
Closing Date: February 19, 1998, or a Business Day prior thereto as
may hereafter be agreed upon by the Purchaser and the Seller.
Collateral Agreements: With respect to Mortgage Loans, any Assignments of
Leases, Rents, Management Agreements or similar collateral agreement providing
security for the Mortgage Loan, including all assignments of mortgage to Seller
or Seller"s predecessor.
Loan Schedule: A schedule of Mortgage Loans annexed hereto as Exhibit
A.
Mortgage: The Mortgage, deed of trust or other instrument securing a
Mortgage Note, which creates a lien on an estate in fee simple with real
property securing the Mortgage Note.
Mortgage Note: The note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage.
Mortgagor: The obligor on a Mortgage and Mortgage Note.
Mortgaged Property: The real property securing repayment of the debt
evidenced by a Mortgage Loan.
Purchase Price: The amount to be paid in certified funds to the Seller
by the Purchaser as provided herein.
ARTICLE II
CONVEYANCE OF MORTGAGE LOANS;
FILE; PRICE; BOOKS AND RECORDS
1. Purchase Price.
Before 5:00 p.m., Eastern Standard Time on the Closing Date, the Purchaser
shall pay to the Seller by certified check or money order the sum of: FOUR
HUNDRED EIGHTEEN THOUSAND FIVE HUNDRED 00/100 ($418,500.00) DOLLARS.
2. Closing Date.
The closing date shall be no later than February 15, 1999 at 10:00 A.M.
Closing shall be conducted at the offices of the Seller,
2
<PAGE> 3
at 6 Harrison Street, 6th Floor, New York, New York 10013, or such other
location as is mutually acceptable to Seller and Purchaser.
3. Release of Documents. Immediately upon receipt of the full Purchase
Price, the Seller shall assign and deliver to Purchaser the Note,
3
<PAGE> 4
Mortgage, all underlying assignments in Seller's possession, and all rights of
the Seller pursuant to those documents.
4. Recording Fees, Title Policy Endorsements and Continuations.
The Purchaser shall be responsible for recording all Deeds, assignments,
and other instruments, including any assignment of any UCC financing statements
included in the Mortgage Loan Files. All recording fees incurred shall be paid
by the Purchaser. The Purchaser shall pay any real estate transfer taxes
required for the conveyance of each Real Estate Property. The Seller shall
prepare and execute any appropriate UCC Form 3 with respect to collateral
securing any Mortgage Loan (when applicable).
5. Terms of Sale to Purchaser. The parties hereto agree that the sale of
the Mortgage Loan referenced hereunder is made, without recourse to Seller,
without representations by or warranties of Seller except as expressly provided
in this Agreement herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES;
REMEDIES AND BREACH
1. Representations and Warranties.
The Seller represents and warrants to the Purchaser that as of the date
hereof and, as of the Closing Date, the following shall be true, complete and
correct:
(a) Duly Organized; Good Standing; Duly Licensed and Qualified. The Seller
is a limited partnership under the laws of the state of Virginia, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization;
(b) Due Authority and Binding Obligation. The Seller has the full power
and authority to execute and deliver this Agreement and has been duly
authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Seller; and all requisite corporate action has been taken by
the Seller to make this Agreement valid and binding upon the Seller in
accordance with its terms.
(c) No Conflicts. The execution and delivery of this Agreement or
compliance with the terms and conditions of this Agreement will not materially
conflict with or result in a material breach of any of the terms, conditions or
provisions of the Seller"s articles, charter or bylaws , or violate the terms of
any contract, agreement or other instrument to which the Seller or any of its
assets may be subject.
4
<PAGE> 5
(d) Ability to Perform. As of the date hereof, the Seller knows of no
reasons as to why it may not be able to fully perform each and every covenant
contained in this Agreement;
(e) No Litigation Pending. There is no action, suit, proceeding or
investigation pending or, to the Seller"s knowledge, threatened against the
Seller which shall adversely affect the Mortgage Loans and Real Estate, the
execution, delivery or enforceability of this Agreement, or which may hereafter
have a materially adverse effect on the financial condition of the Seller ; and
(f) No Consent Required. No consent, approval, authorization or order of
any court or governmental agency or body is required for the execution, delivery
and performance by the Seller of or compliance by the Seller with this
Agreement.
(g) No Bulk Sale. The transfer, assignment and conveyance of the Mortgage
Loans and Real Estate Property by the Seller pursuant to this Agreement are in
the ordinary course of the Seller"s business and are not subject to the bulk
transfer or any similar statutory provisions in effect in any applicable
jurisdiction. Seller is not transferring the Mortgage Loans and/or Real Estate
Property with an intent to hinder, delay or defraud any of its creditors. Seller
is solvent and will not be rendered insolvent by the sale of any of the Mortgage
Loans or Real Estate Property.
(h) No Broker. The Seller and Purchaser mutually represent and warrant to
each other that no broker, finder or intermediary other than (NONE) has brought
about this transaction. The Purchaser agrees to pay the fees due pursuant to a
separate agreement. In the event any claim is made by any other broker, finder
or intermediary for a commission or fee as a result of acts or actions of either
the Seller or the Purchaser with respect to the within transaction, such party
shall indemnify and hold the other safe and harmless from any and all such
costs, claims or expense arising therefrom. These representations shall survive
the Closing.
(i) Representations as to the Mortgage Loan.
(i) Seller is the sole owner of the Mortgage Loan and has the right
to convey same to Purchaser;
(ii) The information set forth in the Mortgage Loan Schedule is true
and correct as of the Closing Date;
(iii) The terms of the note or other evidence of indebtedness of the
related mortgage secured by the mortgaged property have not been altered or
modified in any respect, except by written instruments, if
5
<PAGE> 6
required by law in the jurisdiction where the Mortgaged Property is located;
(iv) The Mortgage Loan is valid and enforceable in accordance with
its terms and conditions and during the period during which the Seller serviced
the Mortgage Loan, and such Mortgage Loan was serviced in accordance with all
applicable laws and regulations.
The representations and warranties of this Section shall survive the
execution of this Agreement and any subsequent transfers of each Mortgage Loan.
2. No Representation as to Encumbrances. It is expressly agreed and
understood between the parties that by its execution and delivery to Purchaser
of the Assignment of Mortgage, the Seller shall transfer and convey to Purchaser
all of Seller"s right, title and interest to each Mortgage Loan subject to any
and all liens, claims, taxes, encumbrances or security interests of any kind or
nature whatsoever, of which Seller has written notice, including any junior or
subordinated liens or encumbrances which may have priority over the Mortgage
Loan or may encumber the Mortgaged Property. Purchaser agrees to purchase the
Mortgage Loan subject to such liens, claims, taxes, encumbrances and security
interests of any kind or nature whatsoever, and shall have no recourse against
Seller with respect to such liens, claims, taxes, encumbrances and security
interest which may have priority over the Mortgage Loan or may encumber the
Mortgaged Property.
ARTICLE IV
CLOSING
1. Closing Documents. The closing documents (the "Closing Documents")
shall consist of the following for the Closing Date:
(a) two (2) fully executed copies of this Agreement;
(b) all original Mortgage Loan Documents, including the Mortgage or
Deed of Trust, Promissory Note, Assignments and other related loan
documentation, including but not limited to, if applicable, Assignment of Leases
and Rents;
(c) all other documentation presently contained in the Mortgage Loan
file;
(d) a Bill of Sale for the Mortgage Loan in the form attached hereto
as Exhibit "B";
6
<PAGE> 7
(e) a statement of amounts due under the Mortgage Loan;
(f) Consent to Change of Attorney, if applicable;
(g) Assignment of Claim/Cause of Action in foreclosure suit, if
applicable.
2. Costs. Each party shall pay any commissions it has incurred and the
fees of its attorneys in fact with the negotiations for, documenting of and
closing of the transactions contemplated by this Agreement. Purchaser shall, be
solely responsible for, and shall bear all fees, taxes and expenses related to
the transfer of this Mortgage Loan, including the recordation of Assignment of
Mortgage from Seller to Purchaser.
ARTICLE V
MISCELLANEOUS PROVISIONS
1. Governing Law; Consent to Jurisdiction. This Agreement shall be
construed in accordance with the laws of the State of New York without regard to
any principles of conflict of laws. The Purchaser and the Seller each hereby
agree that any LEGAL ACTION OR PROCEEDING AGAINST IT WITH RESPECT TO THIS
AGREEMENT, OR ANY OF THE AGREEMENTS, DOCUMENTS OR INSTRUMENTS DELIVERED IN
CONNECTION WITH THIS AGREEMENT MAY ONLY BE BROUGHT IN THE SUPREME COURT OF THE
STATE OF NEW YORK, NEW YORK COUNTY OR THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK, located in the County of New York, and, by
execution and delivery hereof, the Purchaser and the Seller each accepts and
consents to, for itself and in respect to its property, generally and
unconditionally, the jurisdiction of the aforesaid courts with respect to any
action or proceeding brought by the Purchaser and/or Seller against one another.
2. Notices. All demands, notices and communications hereunder shall be in
writing and shall be deemed to have been duly given when sent to the intended
recipient, in writing within three (3) business days after same is deposited in
the U.S. Mail (certified mail, return receipt requested), or delivered to the
premises of the addressee, or other address as may hereafter be furnished in
writing by one party to the other party to this Agreement:
(a) if to the Seller:
Franklin Credit Management Corp.
6 Harrison St. -6th Floor
New York, NY 10013
Attention: Amy B. Braun
7
<PAGE> 8
(b) if to the Purchaser:
Thomas J. Axon
6 Harrison Street - 6th Floor
New York, NY 10013
3. Severability of Provisions: If any provision, or part thereof of this
Agreement is invalid or unenforceable under any law such provision, or part
thereof , shall be deemed severable from the remaining provisions or terms of
this Agreement and shall in no way affect the validity or enforceability of the
other provisions of this Agreement.
4. Successors and Assigns: This Agreement, and the representations and
warranties contained herein shall be binding upon and shall inure to the benefit
of the parties hereto, their successors and assigns with respect to this
Agreement, as well as each Mortgage Loan. This Agreement may not be assigned by
the Seller or the Purchaser, provided, however, that the Purchaser may, with the
Seller"s consent (not to be unreasonably withheld) collaterally assign this
Agreement to a lender if required to finance the purchase of the Mortgage Loans.
5. Execution. This Agreement may be executed in one or more counterparts
and by the different parties hereto on separate counterparts, each of which,
when so executed, shall be deemed to be an original; such counterparts,
together, shall constitute one and the same agreement.
6. Servicing. On the Closing Date, Purchaser, or its designee, shall
assume all servicing responsibilities related to the Mortgage Loan and Seller
shall cease all servicing responsibilities relate to the Mortgage Loan. The
Purchaser shall be responsible for providing notice to all taxing authorities
and insurance companies of the transfer of the servicing to Purchaser; however,
Seller agrees to forward all notices, tax bills and insurance statements, as the
case may be, to Purchaser at the address provided herein, for a period of ninety
(90) days after the Closing Date.
7. Entire Agreement This Agreement, together with the schedules and
exhibits attached hereto and the documents referred to herein, including any
amendments thereto, or executed concurrently herewith, constitute the entire
Agreement between the parties hereto with regard to the subject matter hereof;
and there are no prior agreements, understandings, restrictions, warranties or
representations between the parties with respect thereto.
8
<PAGE> 9
IN WITNESS WHEREOF, the Seller and the Purchaser have caused their names
to be signed hereto as of the day and year first above written.
SELLER:
FRANKLIN CREDIT RECOVERY
FUND XXI, L.P.
By:Franklin Credit Management
Corp., its corporate General Partner
Date:___________________ By:Joseph Caiazzo
------------------------
Title:Chief Operating Officer
PURCHASER:
Date:___________________
By: Thomas J. Axon
------------------------
ACKNOWLEDGMENTS
STATE OF ______________ }
}ss:
COUNTY OF ______________ }
On this _____ day of ________ , 199__, before me, a notary public,
personally appeared __________________________________ who acknowledged
himself/herself to be the of ____________________________ , and that he/she as
such officer, being authorized to do so, executed the foregoing instrument for
the purposes therein contained.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Notary Public
9
<PAGE> 10
STATE OF _______________ }
}ss:
COUNTY OF ______________ }
On this ______ day of ________, 199__, before me, a notary public,
personally appeared ____________________ who acknowledged himself to be and that
he executed the foregoing instrument for the purposes therein contained.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Notary Public
EXHIBIT "A"
MORTGAGE LOAN SCHEDULE
Original Promissory Note dated December 12, 1983 in the original principal
amount of $ 165,000.00, payable to General Federal Savings and Loan Association
of Miami, together with Mortgage of even date therewith, between Enterprises
Ramadan, Inc., a Panamanian Corp. as Mortgagor and General Federal Savings and
Loan Association as Mortgagee, recorded in the Dade County Clerk"s Office on
December 14, 1983 Book/Volume/Liber 11996 Page 1830; thereafter assigned by that
certain Assignment of Mortgage to Franklin Credit Recovery Fund XXI L.P.,
7/25/95, recorded on 9/8/95 in the Dade County Clerk"s Office Book/Volume/Liber
16911 Page 2975.
10
<PAGE> 11
EXHIBIT 10(I)
BILL OF SALE
BILL OF SALE, dated ____________, 199__ , from Franklin Credit
Recovery Fund XXII L.P., ("Seller") to Thomas J. Axon, ("Purchaser").
WHEREAS, pursuant to the Loan and Real Estate Purchase Agreement,
dated as of________________________, 199__, by and between the Purchaser and the
Seller (the "Agreement"), the Seller agreed to grant, sell, assign, convey,
transfer and deliver to the Purchaser, servicing released, all right, title and
interest in and to the mortgage loan identified in the Mortgage Loan Schedule
attached hereto as Exhibit "A".
NOW, THEREFORE, in consideration of the payment of $ 418,500.00 and
other valuable consideration, the receipt of which is hereby acknowledged, and
intending to be legally bound hereby, the Seller by these presents does hereby
sell, convey, transfer, assign, set over to, and vest in, the Purchaser, its
successors and assigns, all of the Seller"s right, title and interest, legal or
equitable, in and to the documents described in the Mortgage Loan Schedule. The
terms of this Bill of Sale shall not supersede the terms of the Agreement.
IN WITNESS WHEREOF, the Seller has caused this Bill of Sale to be
executed as of the date first written above.
FRANKLIN CREDIT RECOVERY FUND XXII L.P..
By: Franklin Credit Management Corp., its
corporate General Partner
By: Joseph Caiazzo
-------------
Title: Chief Operating Officer
-----------------------
11
<PAGE> 1
EXHIBIT 10(I)
PROMISSORY NOTE
$ $234,165.00 New York, DECEMBER 31, 1998
- ---------------------------- -----------------
FOR VALUE RECEIVED,
Thomas J. Axon
6 Harrison Street, 6th Floor
New York, New York 10013
PROMISE TO PAY TO
Franklin Credit Management Corporation.
6 Harrison Street
New York, New York 10013
OR ORDER,
or such other place as may be designated in writing by the holder of this note ,
the principal sum of Two Hundred Thirty Four Thousand One Hundred Sixty Five
00/100 ($234,165.00) Dollars,
with interest thereon to be computed from the date hereof, at the rate of 8% per
annum and to be paid in equal monthly installments of interest only, commencing
on February 1, 1999, and a like sum on the first day of each month thereafter,
up to and including January 1, 2001, at which time the entire unpaid balance,
together with all accrued interest and other charges, if any, shall become due
and payable.
IT IS HEREBY EXPRESSLY AGREED, that upon written notice to the holder, borrower
shall have the option to extend equal monthly installments of interest only,
commencing on January 1, 2001, and a like sum on the first day of each month
thereafter, up to and including June 1, 2001, at which time the entire unpaid
balance, together with all accrued interest and other charges, if any, shall
become due and payable.
IT IS HEREBY EXPRESSLY AGREED, that the said principal sum secured by this note
shall become due at the option of the holder thereof on the happening of any
default or event by which, under the terms of the Agreement securing this note,
said principal sum may or shall become due and payable; also, that all of the
covenants, conditions and agreements contained in said Agreement are hereby made
part of this instrument.
We, the undersigned, unconditionally and personally guarantee the prompt and
full payment of this Note, including interest and all costs of collection, if
not paid when due according to its tenor without need for recourse by Holder
against any other party. We waive presentment, protest, notice of dishonor, or
any other demand to which we may be entitled. We consent to any extensions and
renewals of this Note without any notice to us, and such extensions and renewals
shall not impair Holder's recourse against us or discharge this guaranty. This
guaranty shall not be affected by any of the following: (1) the addition or
release of any parties to this Note; (2) the release of any security for the
payment of this Note; (3) the illegality of this Note; or (4) the failure of
Holder to pursue every remedy against other parties to this Note.
This note may not be changed or terminated orally.
------------------------------
THOMAS J. AXON
<PAGE> 2
STATE OF NEW YORK }
COUNTY OF NEW YORK }
ON THIS 31ST DAY OF DECEMBER 1998, BEFORE ME PERSONALLY CAME THOMAS J. AXON TO
ME KNOWN AND KNOWN TO ME TO BE THE INDIVIDUAL(S) DESCRIBED IN AND WHO EXECUTED
THE FOREGOING INSTRUMENT; AND HE/SHE DULY ACKNOWLEDGED TO ME THAT HE/SHE
EXECUTED THE SAME.
- ---------------------------
NOTARY PUBLIC
======================================================================
STATE OF NEW YORK }
COUNTY OF NEW YORK }
ON THIS ________ DAY OF _________ , 199 , BEFORE ME PERSONALLY CAME __________
______________________________ TO ME PERSONALLY KNOWN TO BE THE PERSON
DESCRIBED AND APPOINTED ATTORNEY-IN-FACT IN AND BY A CERTAIN POWER OF ATTORNEY
EXECUTED BY DATED ___________ , TO BE RECORDED IN THE OFFICE OF THE REGISTER OF
_____________ COUNTY SIMULTANEOUSLY WITH THE FOREGOING INSTRUMENT, AND
ACKNOWLEDGED TO ME THAT ______________________________ EXECUTED THE FOREGOING
INSTRUMENT AS THE ACT OF THE SAID_________________________ .
________________________________________
NOTARY PUBLIC
======================================================================
STATE OF NEW YORK }
COUNTY OF KINGS }
ON THE ______ DAY OF _________ , 199 , BEFORE ME PERSONALLY CAME _____________,
TO ME KNOWN, WHO, BEING BY ME DULY SWORN, DID DEPOSE AND SAY THAT HE RESIDES AT
______________________________________ THAT HE IS THE ________________________
OF _________________________________, THE CORPORATION DESCRIBED IN AND WHICH
EXECUTED THE FOREGOING INSTRUMENT; THAT HE KNOWS THE SEAL OF SAID CORPORATION;
THAT THE SEAL AFFIXED TO SAID INSTRUMENT IS SUCH CORPORATE SEAL; THAT IT WAS SO
AFFIXED BY ORDER OF THE BOARD OF DIRECTORS OF SAID CORPORATION, AND THAT HE
SIGNED HIS NAME THERETO BY LIKE ORDER.
________________________________________
NOTARY PUBLIC
PROMISSORY NOTE
- ---------------------------------
THOMAS J. AXON
TO
FRANKLIN CREDIT MANAGEMENT CORP.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,223,352
<SECURITIES> 0
<RECEIVABLES> 141,149,833
<ALLOWANCES> (22,168,345)
<INVENTORY> 16,056,758
<CURRENT-ASSETS> 4,878,317
<PP&E> 1,098,747
<DEPRECIATION> (347,235)
<TOTAL-ASSETS> 146,891,427
<CURRENT-LIABILITIES> 144,145,687
<BONDS> 0
0
0
<COMMON> 59,167
<OTHER-SE> 2,686,573
<TOTAL-LIABILITY-AND-EQUITY> 146,891,427
<SALES> 0
<TOTAL-REVENUES> 16,996,886
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,119,887
<LOSS-PROVISION> 69,741
<INTEREST-EXPENSE> 10,098,640
<INCOME-PRETAX> (1,291,382)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,291,382)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
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