UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-17771
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 75-2243266
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices, including zip code, and telephone
number,including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months(or
for such shorter period that the registrant was required to file such reports)
and (2)has been subject to such filing requirements for the past 90 days.
Yes X No___.
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes X No___.
As of August 11, 1999 the issuer had 5,916,527 of shares of Common Stock,
par value $0.01 per share, outstanding.
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
June 30, 1999
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets June30,1999(unaudited)and December 31
,1998 3
Consolidated Statements of Income (unaudited) for the three months
and six Months ended June 30, 1999 and 1998 4
Consolidated Statements of Stockholders'Equity June 30,199
(unaudited) 5
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 1999 and 1998 6
Notes to consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22-23
SIGNATURES 24
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<TABLE>
<CAPTION>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
30-Jun-99 31-Dec-98
<S> <C> <C>
------------- ------------
ASSETS
CASH AND CASH EQUIVALENTS
$ 5,907,945 $ 5,119,906
RESTRICTED CASH 1,118,446 1,103,446
NOTES RECEIVABLE:
Principal 188,383,061 158,730,622
Joint venture participation (301,990) (301,990)
Purchase discount (20,727,840) (20,435,067)
Allowance for loan losses (21,851,630) (22,168,345)
------------- ------------
Net notes receivable 145,501,601 115,825,220
LOANS HELD FOR SALE 2,967,122 5,699,577
ACCRUED INTEREST RECEIVABLE 2,127,828 1,924,601
OTHER REAL ESTATE OWNED 10,318,266 10,357,181
OTHER RECEIVABLES 989,321 1,231,667
DEFERRED TAX ASSET 1,842,932 1,842,932
OTHER ASSETS 2,624,088 1,453,158
BUILDING, FURNITURE AND FIXTURES- Net 915,470 751,512
DEFERRED FINANCING COSTS 1,843,605 1,582,227
------------- ------------
TOTAL ASSETS $176,156,624 $146,891,427
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,016,559 2,946,071
LINES OF CREDIT 3,727,744 6,197,803
NOTES PAYABLE 163,582,161 132,227,257
203(K) REHABILITATION ESCROWS PAYABLE 65,426 72,386
SUBORDINATED DEBENTURES 465,577 598,050
NOTES PAYABLE, AFFILIATES AND STOCKHOLDERS 169,247 181,129
DEFERRED TAX LIABILITY 1,922,991 1,922,991
------------- ------------
TOTAL LIABILITIES 172,949,705 144,145,687
------------- ------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 10,000,000
authorized shares;issued and outstanding 1999and
1998:
5,916,527 , 5,916,527 59,167 59,167
Additional paid-in capital 6,985,968 6,985,968
Accumulated deficit (3,838,216) (4,299,395)
------------- ------------
Total stockholders' equity 3,206,919 2,745,740
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $176,156,624 146,891,427
============= ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
30-Jun-99 30-Jun-98 30-Jun-99 30-Jun-98
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:Interest Income 3,521,575 1,949,251 6,762,993 3,291,028
Purchase discount earned 1,290,014 1,321,521 2,250,492 2,347,885
Gain on sale of portfolios 142,820 0 629,021 0
Gain on sale of originated 22,815 425,853 97,928 548,282
loans
Gain or(Loss) on sale of 61,754 (45,370) 142,130 (149,675)
other real estate owned
Rental Income 223,073 249,813 460,545 410,364
Other 123,121 355,732 198,251 418,420
---------- ----------- ----------- ----------
Total Income 5,385,172 4,256,800 10,541,360 6,866,304
--------- ----------- ----------- ----------
OPERATING EXPENSES:
Interest expense 3,106,398 2,508,586 5,917,892 4,559,544
Collection, general and 1,852,191 1,890,721 3,835,449 3,392,713
administrative
Provision for loan losses 0 (1,439) 0 31,391
Amortization of deferred 138,440 84,976 257,461 137,762
financing costs
Depreciation 44,804 18,412 69,379 48,798
----------- ----------- ----------- ----------
5,141,833 4,501,256 10,080,181 8,170,208
----------- ----------- ----------- ----------
OPERATING INCOME (LOSS) 243,339 (244,456) 461,179 (1,303,904)
----------- ----------- ----------- ----------
INCOME (LOSS)BEFORE PROVISION
FOR INCOME TAXES 243,339 (244,456) 461,179 (1,303,904)
----------- ----------- ----------- ----------
NET INCOME( LOSS) 243,339 (244,456) 461,179 (1,303,904)
=========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON
SHARE:
Basic 0.04 (0.04) 0.08 (0.24)
Dilutive 0.04 (0.04) 0.08 (0.24)
=========== =========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,916,527 5,516,527 5,916,527 5,516,527
=========== =========== =========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 30, 1999
- --------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital (Deficit) Total
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Bal, Dec 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)
---------------------------------------------------------
Bal, Dec 31, 1998 5,916,527 59,167 6,985,968 (4,299,395) $2,745,740
=========================================================
Net Income 461,179 461,179
=========================================================
Bal, June 30, 1999 5,916,527 59,167 6,985,968 (3,838,216) 3,206,919
=========================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
- -------------------------------------------------------------------------------
30-Jun-99 30-Jun-98
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 461,179 $ (1,303,904)
Adjustments to reconcile net
income (loss) to
Net cash used in operating
activities:
Depreciation 69,379 48,798
Amortization 257,461 137,762
Purchase discount earned (2,250,492) (2,347,885)
Gain on Sale of REO (142,130) 149,675
Provision for loan loss 0 15,303
(Increase) decrease in:
Accrued interest receivable (203,227) (192,779)
Foreclosures on real estate (2,592,856) (2,034,957)
Loans held for sale 2,732,455 602,696
Other receivables 242,346 (82,458)
Other current assets (1,170,930) (1,237,610)
Increase(decrease) in:
Accounts payable and accrued 70,488 259,009
expenses
203(k) rehabilitation escrow (6,960) (2,674,391)
Notes payable, affiliates and (11,882) 59,230
stockholders
--------- ---------
Net cash used in operating (2,545,169) (8,601,511)
activities --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Additional capital contributed 0 500,000
Acquisition and loan fees (518,839) (220,924)
Acquisition of notes receivable 48,872,731) (20,127,336)
Acquisition of REO 0 (235,182)
Proceeds from sale of REO 2,919,112 4,779,470
Foreclosures on real estate 271,166 90,272
Reclassification of notes
receivable for foreclosures 3,497,480 1,653,838
Loans originated (568,825) (550,000)
Acquisition of Furniture
equipment (233,337) (15,080)
Participation interest 0 (20,130)
Advances to subsidiaries 0 312,302
Principal collection on notes
receivable 18,101,810 8,488,783
Increase in restricted cash (15,000) (44,424)
--------- ---------
Net cash used in investing (25,419,164) (5,388,411)
activitie ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on debenture notes ( 132,473) (132,525)
payable
Payments on line of credit (4,196,359) (419,991)
Proceeds from line of credit 1,726,300 2,688,834
Proceeds from notes payable 49,994,608 20,889,503
Payments on notes payable (18,639,704) (7,935,766)
--------- ---------
Net cash provided by financing 28,752,372 15,090,055
activities
--------- ---------
NET INCREASE IN CASH 788,039 1,100,133
CASH,AND CASH EQUIVALENTS, 5,119,906 2,783,920
BEGINING OF PERIOD ---------- ---------
CASH AND CASH EQUIVALENTS, ENDED 5,907,945 3,884,053
========= =========
</TABLE>
<PAGE>
Page 23
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Franklin Credit Management Corporation (together with its
subsidiaries the "Company"), incorporated under the laws of the State of
Delaware, acquires performing, 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
inter-company accounts and transactions have been eliminated in consolidation.
Estimates -The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Cash and Cash Equivalents- Cash and cash equivalents include all cash accounts,
with the exception of restricted cash, and money market funds. The Company
maintains amounts due from banks, which at times may exceed federally insured
limits. The Company has not experienced any losses from such concentrations.
Notes Receivable and Income Recognition - The 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 performing or underperforming at the time of purchase
and 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 generally 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 theCompany 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.
<PAGE>
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 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 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. 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 lowerof 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.
<PAGE>
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' pre-tax wages. Currently, the Company does not offer a matching
provision for the Plan.
Income Taxes - The Company recognizes income taxes under an asset and liability
method. Under this method, deferred tax assets are recognized for deductible
temporary differences and operating loss or tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective 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 - Statement of Financial Accounting Standards No.128,
Earnings Per Share (SFAS No. 128), requires dual presentation of Basic EPS and
Diluted EPS on theface of the income statement for all entities with complex
capital structures and there statement of all prior period earnings per share
data presented. SFAS No. 128 also requires a reconciliation of the numerator
and denominator of Basic EPS and Diluted EPS computation.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments (SFAS
No. 107), requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. 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. SFAS No. 107 excludes certain
financial instruments and all non-financial assets and liabilities from its
disclosure requirements. Accordingly, the aggregate fair value amounts do not
represent the underlying value of the Company.
<PAGE>
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 - he 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 ("SFAS 131"), Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 supersedes SFAS 14, Financial
Reporting for Segments of a Business 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. SFAS 131 also require disclosures about products and
services, geographic areas and major customers. he adoption of SFAS 131 did not
affect results of operations or the financial position of the Company.
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 during the three months ended June 30,
1999.
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 ("SFAS 133"). The Company is
required to implement SFAS 133 on January 1, 2000. SFAS 133 requires 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 SFAS133 will have any effect on its results of operations and
financial position.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Forward-Looking Statements. When used in this report, press releases and
elsewhere by the Company from time to time, the words "believes","anticipates",
and "expects" and similar expressions are intended to identify forward-looking
statements that involve certain risks and uncertainties. Additionally, certain
statements contained in this discussion and the Form 10-QSB 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 its sources for loan purchases, unanticipated difficulties in
collections under loans in the Company'sportfolio 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 six months ended June 30, 1999, the
Company purchased 1,494 loans in sixteen portfolio's consisting primarily of
first and second mortgages, with an aggregate face value of $53.3 million at an
aggregate purchase price of $48.9 million or 92% of the face value and no OREO
properties,compared with the purchase during the six months ended June 30, 1998
of 1,302 loans with an aggregate face value of $24.3 million at an aggregate
purchase price of $20.4 million or 83% of aggregate face value, and $235,182
OREO properties.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. The Company has changed its strategy and
has focused on acquiring performing and high equity nonperforming loans.Payment
streams are generated once the loans are incorporated into the Company's loan
tracking system.
Management intends to continue to expand the Company's earning asset base
through the acquisition of additional portfolios including performing first and
second mortgages at a positive interest ate spread based upon the Company's
cost of funds. The Company believes that its current infrastructure is adequate
to service additional loans without any material increases in collection, and
general and administrative expenses excluding personnel. There can be no
assurance the Company will be able to acquire any additional loans on favorable
terms or at all. While management believes that the acquisition of additional
loan portfolios would be beneficial, management does not believe that current
operations would be materially impacted if no additional loan portfolios were
acquired during 1999.
Single-Family Residential Lending. 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 o be classified as
non-conforming borrowers. Management believes that credit impaired 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 database.
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.
<PAGE>
During the six months ended June 30, 1999 Tribeca originated seven loans
with an aggregate face value of $568,825 in mortgages,compared to 165 loans and
$14.6 million in mortgages during the six months ended June 30,1998. During the
six months ended June 30, 1999, Tribeca incurred an operating loss of $259,671
compares with operating losses of $475,782 during the six months ended June 30,
1998. This decrease in loss and originations reflected a restructuring period
during which management changed strategies to focus on refinancing selected
loans from the existing customer base from the Company. As of June 30,1999,
Tribeca had approximately $2.9 million face value of loans held for sale.
Revenues and expenses related to such loans, other than periodic interest
payments, and fee income are expected to be realized upon sale of such loans.
Cost of Funds. The weighted average interest rate on borrowed funds for
the Senior Debt based on the balances as of June 30,1999 and June 30, 1998 were
8.3% and 9.5%, respectively. As of June 30, 1999, the Company had sixty-five
loans outstanding with an aggregate principal balance of $163 million.
Additionally the Company has lines of credit with the Senior Debt Lender, which
had an outstanding balance of $3.6 million at June30, 1999. The increase in the
prime rate from 7.75% to 8.00%, on July 8,1999 increased the benchmark rate for
the interest on Senior Debt used to fund loan portfolio acquisitions, which is
expected by management to decrease net income during future periods.
The majority of the loans purchased by the Company bear interest at a
fixed rate; Senior Financing is at a variable rate adjusted with the prime rate.
Consequently, changes in market interest rate conditions cause directly
corresponding changes in interest income. 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.
Inflation. The impact of inflation on the Company's operations
during the three months ended June 30, 1999 and 1998 was immaterial.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998.
Total revenue, which is comprised of interest income, purchase discount
earned, gains on bulk sale of notes, gain on sale of originated loans, gain on
sale of OREO, rental income and other income,increased by $1,128,372 or 27%, to
$5,385,172 during the three months ended June 30,1999, from $4,256,800 during
the three months ended June 30, 1998. Total revenue (excluding gain on sales of
loans, OREO and originated loans) for the three months ended June 30, 1999 and
1998, as a percentage of notes receivable, net of allowance for loan losses and
joint venture participation as of the last day of each period was 12.5% and
15.3%, respectively. This decrease reflected acquisitions of notes receivable
during the three months ended June 30, 1999.
Interest income on notes receivable increased by $1,572,324 or 81%, to
$3,521,575 during the three months ended June 30, 1999 from $1,949,251 during
the three months ended June 30, 1998. The Company recognizes interest income on
notes included in its portfolio based upon three factors: (i) interest on
performing notes, (ii) interest received or committed with settlement payments
on non-performing notes and (iii) the balance of settlements in excess of the
carried face value. This increase resulted from the acquisition of $112 million
of performing loans with a weighted average interest rate of 12% between July
1998 and June 1999, which was only partially offset by loan sales, payoffs and
principal collections during the same period.
<PAGE>
Purchase discount earned decreased by $31,507 or 2%, to $1,290,014 during
the three months ended June 30, 1999 from $1,321,521 during the three months
ended June 30, 1998.This decrease reflected the growing proportion of the
Companys portfolio comprised of performing loans purchased at smaller discounts
than the non-performing high-discount loans historically purchased by the
Company,which results in income being realized as interest rather than purchase
discount,and the increase in bulk sales during the three months ended June 30,
1999 which results in income being realized as gain on sale rather than
purchase discount.
Gain on bulk sale of notes receivable increased to $142,820 during the
three months ended June 30,1999 from $0 during the three months ended June 30,
1998.The Company may consummate bulk sales of notes from time to time as may be
economically advantageous.
Gain on sale of notes originated by Tribeca decreased by $403,038 or 95%
to $22,815 or during the three months ended June 30, 1999from $ 425,853 during
the three months ended June 30, 1998. This decrease reflected a reduction in
note originations by Tribeca in connection with its new focus described above.
Gain on sale of OREO increased by $107,124 to a gain of $61,754 during the
three months ended June 30,1999 from a loss of $45,370 during the three months
ended June 30, 1998. This increase resulted primarily from the liquidation,
during the three months ended June 30, 1998, of 40 of the longest-held OREO
properties in the Company's portfolio, which management believes were of lower
quality than those sold during the three months ended June 30, 1999. As a
result the Company believed that the disposition of such properties, while at a
loss, was beneficial to the Company's long-term profitability. The Company sold
15 and 40 OREO properties during the three months ended June 30, 1999 and June
30, 1998.
Rental income decreased by $26,740 or 11% to $223,073 or 11% during the
three months ended June 30, 1999, from $249,813 during the three months ended
June 30, 1998. This decrease reflected a decrease in the number of properties
rented during the three months ended June 30, 1999, as compared to the three
months ended June 30,1998, because of the eviction of certain tenants and
reversal of accrued rental income for those tenants.
Other income decreased by $232,611 or 65%, to $123,121 during the three
months ended June 30, 1999 from $355,732 during the three months ended June 30,
1998. This decrease resulted from the realization of settlement income from one
unusually large note during the three months ended June 30, 1998, and from the
various loan fees, such as credit report, appraisal and application fees
resulting from the reduction in Tribeca's originations during the three months
ended June 30, 1999.
Total operating expenses increased by $640,577 or 14% to$5,141,833 during
the three months ended June 30, 1999 from $4,501,256 during the three months
ended June 30, 1998. Total operating expenses includes interest expense,
collection, general and administrative expenses, provisions for loan losses,
amortization of deferred financing costs and depreciation expense.
Interest expense increased by $597,812 or 24%, to $3,106,398 during the
three months ended June 30,1999, from $2,508,586 during the three months ended
June 30, 1998.This increase resulted primarily from the increase in Senior Debt
reflecting the acquisition of notes receivables. Total debt increased by
$66,596,236 or 66%, to $167,944,729 as of June 30,1999 from $101,348,493 as of
June 30, 1998.Total debt consists principally of Senior Debt, and also includes
debentures, and lines of credit and loans from affiliates.
<PAGE>
Collection,general and administrative expenses decreased by $38,531 or 2%
to $1,852,190 during the three months ended June 30,1999 from $1,890,721 during
the three months ended June 30, 1998. Collection, general and administrative
expense consists primarily of personnel expense, and other collection, general
and administrative expenses including,OREO related expense, litigation expense,
and miscellaneous collection expense.
Personnel expenses decreased by $43,107 or 6% to $674,311 during the
three months ended June 30, 1999 from $717,418 during the three months ended
June 30, 1998 This decrease resulted primarily from staff reductions at Tribeca
related to its refocused and reduced originations. All other collection general
and administrative expenses increased by $4,576 to $1,177,879 during the three
months ended June 30, 1999 from $1,173,303 during the three months ended June
30, 1998.
Provisions for loan loss were immaterial during the three months ended
June 30, 1999 and June 30, 1998.
Amortization of deferred financing costs increased by $53,464 or 63% to
$138,440 during the three months ended June 30, 1999, from $84,976 during the
three months ended June 30, 1998. This increase resulted from the bulk sale of
notes receivable, and increased prepayments during the three months ended June
30,1999, which accelerated the amortization of loan origination fees associated
with the loans sold or collected. On June 30, 1999 and June 30, 1998 deferred
financing costs as a percentage of Senior Debt outstanding was 1.12% and 1.31%,
respectively.
Depreciation expense increased by $26,392 or 143%, to $44,804 during the
three months ended June 30, 1999, from $18,412 during the three months ended
June 30, 1998.This increase resulted from the purchase of computer equipment, a
new accounting software package, and renovations of the Company's corporate
headquarters.
Operating income increased by $487,795 to a gain of $243,339 during the
three months ended June 30,1999 from a loss of $244,456 during the three months
ended June 30, 1998.
During the three months ended June 30, 1999, there was no provision for
income tax due to a loss carry-forward.
Net income increased by $487,795 to a gain of $243,339 during the three
months ended June 30,1999 from a loss of $244,456 during the three months ended
June 30, 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998.
Total revenue, increased by $3,675,056 or 54%, to $10,541,360 during the
six months ended June 30,1999, from $6,866,304 during the six months ended June
30, 1998. Total revenue (excluding gain on sales of loans, OREO and originated
loans) for the three months ended June 30, 1999 and 1998 as a percentage of
notes receivable, net of allowance for loan losses and joint venture
participation as of the last day of each period was 12.4% and 12.8%,
respectively.
Interest income on notes receivable increased by $3,471,965 or 105%, to
$6,762,993 during the six months ended June 30, 1999 from $3,291,028 during the
six months ended June 30, 1998. This increase resulted from the acquisition
activity of $112 million of performing and a weighted average interest rate of
12%, between July 1998 and June 1999 which was only partially offset by loan
sales, pre-payments and principal collections.
Purchase discount earned decreased by $97,393 or 4%, to $2,250,492 during
the six months ended June 30, 1999, and from $2,347,885 during the six months
ended June 30, 1998. This decrease reflected the growing proportion of the
Company's portfolio comprised of performing loans purchased at smaller
discounts than the non-performing high-discount loans historically
purchased by the Company,which results in income being realized as interest
rather than purchase discount, and the increase in bulk sales during the six
months ended June 30, 1999 which results in income being realized as gain on
sale rather than purchase discount.
<PAGE>
Gain on bulk sale of notes receivable increased by $629,021 during the six
months ended June 30, 1999, from $0 during the six months ended 1998. This
increased reflected the timing off our bulk sales of notes during the six
months ended June 30, 1999.
Gain on sale of notes originated by Tribeca decreased by $450,354 or 82%
to $97,928 during the six months ended June 30, 1999, from $548,282 during the
six months ended June 30,1998. This decrease reflected a reduction in note
originations by Tribeca in connection with its new focus as described above.
Gain on sale of OREO increased by $291,805 to a gain of $142,130 during
the six months ended June 30, 1999, from a loss of $149,675 during the six
months ended June 30, 1998. This increase resulted primarily from the
liquidation, during the six months ended June 30, 1998, of 81 of the
longest-held OREO properties in the Company's portfolio, which management
believes were of lower quality than those sold during the six months ended June
30, 1999. As a result, the Company believed that its disposition of such
properties, while at a loss, was beneficial to the Company's long-term
profitability. he Company sold 47 OREO properties during the six months ended
June 30,1999, and 81 OREO properties during the six months ended June 30, 1998.
Rental income increased by $50,181 or 12% to $460,545 during the six
months ended June 30, 999, from $410,364 during the six months ended June 30,
1998. This increase reflected an increase in the number of properties in the
Company's portfolio that were held as rental property during the six months
ended June 30, 1999, as compared to the six months ended June 30, 1998.
Other income decreased by $220,169 or 53%, to $198,251 during the six
months ended June 30, 1999 from $418,420 during the six months ended June 30,
1998. This decrease resulted from the realization of settlement income from one
unusually large note during the six month ended June 30, 1998, and from the
decrease in various loan fees, such as credit report, and appraisal and
application fees resulting from the reduction with Tribeca's origination's
during the six months ended June 30, 1999.
Total operating expenses increased by $1,909,973 or 23%,to $10,080,181
during the six months ended June 30, 1999,from $8,170,208 during the six months
ended June 30, 1998.
Interest expense increased by $1,358,348or 30%, to $5,917,892 during the
six months ended June 30, 1999 from $4,559,544 during the six months ended June
30, 1998. This increase reflects increases in the Senior Debt associated with
the acquisition of notes receivable.Total debt increased by $66,717,349 or 65%,
to $168,065,842 as of June 30, 1999 from $101,348,493 as of June 30, 1998.
Collection, general and administrative expenses increased by $442,736 or
13%, to $3,835,449 during the six months ended June 30, 1999 from $3,392,713
during the six months ended June 30, 1998.
Personnel expenses increased by $70,100 or 5%,to $1,459,951 during
the six months ended June 30, 1999 from $1,389,851 during the six months ended
June 30, 1998. The increase reflected the staffing and the experience level of
personnel in the Company's core business during the first quarter. OREO related
expenses decreased by $38,220 or 5%, to $679,171 from $717,391 during the six
months ended June 30, 1998. This decrease is primarily due to the sale of
certain OREO properties with high carrying costs.Litigation expenses increased
by $91,185 or 24.1%, to $468,976 during the six months ended June 30,1999, from
$377,791 during the six months ended June 30, 1998. This increase reflected a
increase in loans entering the legal recovery process,which increases the costs
incurred by the Company to initiate new proceedings which represent the majority
of the legal expenses typically incurred in bringing the loans to resolution.
All other collection expenses increased by $319,670 or35% during the six months
ended June 30,1999 to $1,227,350 from $907,680 during the six months ended June
30, 1998. The increases in other overall collection, general and administrative
expenses was due to increased computer consulting expenses associated with the
growth of the portfolio and increased office expenses due the expansion of the
company's corporate office, as well as training expenses associated with the
purchase of a new accounting software package.
<PAGE>
Provisions for loan losses decreased to $0 during the six months ended
June 30, 1999 from $31,391 during the six months ended June 30, 1998.
Amortization of deferred financing costs increased by $119,699 or 87%, to
$257,461 during the six months ended June 30,1999 from $137,762 during the six
months ended June 30, 1998. This increase resulted from the bulk sale of notes
receivable, and increased prepayments during the six months ended June 30, 1999,
which accelerated the amortization of loan origination fees associated with the
loans sold or collected.
Depreciation expense increased by $20,581 or 42%, to $69,379 during the
six months ended June 30, 1999, from $48,798 during the six months ended June
30, 1998. This increase resulted from the purchase of computer equipment, and a
new accounting software package,and renovations of our corporate headquarters.
Operating income increased by $1,765,083 to a gain of $461,179 during the
six months ended June 30,1999 from a loss of $1,303,904 during the six months
ended June 30, 1998.
During the six months ended June 30, 1999, there was no provision for
income taxes due to loss-carryforwards and during the six months ended June 30,
1998, there were no provisions for income taxes due to an operating loss.
Net income increased by $1,765,083 to a gain of $461,179 during the six
months ended June 30,1999 from a loss of $1,303,904 during the six months ended
June 30, 1998.
<PAGE>
Liquidity and Capital Resources
General. During the six months ended June 30, 1999 the Company
purchased 1,494 loans in sixteen portfolios with an aggregate face value of
$53.3 million at an aggregate purchase price of $48.8 million or 92% of face
value and no OREO properties. During the six months ended June 30, 1998 the
Company purchased six portfolios with an aggregate face value of $24.3 million
at an aggregate purchase price of $20.1 or 83%of aggregate face value, and
$235,182 in OREO properties. This increase, measured by purchase price,
reflected the increase in competitiveness of the Company's bids resulting from
the reduction in its cost of funds relative to the prime rate and the increase
in bidding opportunities associated with theCompany purchasing performing loans
and well as non-conforming and sub-performing loans. The increase in purchase
price as a percentage of face value of the loans purchased reflected the
increased quality of the loans purchased.
The Company's portfolio of notes receivable at June 30,1999 had a face
value of $188.3 million and included net notes receivable of approximately
$145.5 as compared with a face value of $125.9 million and net notes receivable
of approximately $84.7 million as of June 30, 1998. Net notes receivable are
stated at the amount of unpaid principal, net of purchase discount,an allowance
for loan losses, and joint venture participation. The Company has the ability
and intent to hold its notes until maturity,payoff or liquidation of collateral
or, where deemed to be economically advantageous,sale.
During the six months ended June 30, 1999, the Company used cash in the
amount of $2,545,169 in its operating activities primarily for interest expense,
and increased infrastructure in the Company's core business, litigation expense
incidental to its ordinary collection activities and for the foreclosure and
improvement of OREO. The Company used $25,419,164 in its investing activities,
primarily reflecting purchases of notes receivable which purchases were only
partially offset by principalcollections upon its notes receivable and proceeds
from sales of OREO. The amount of cash used in operating and investing
activities was funded by $28,752,372 of net cash provided by financing
activities, including principally, a net increase in Senior Debt of $50.0
million. The above activities resulted in a net increase in cash at June 30,
1999 over December 31, 1998 of $788,039.
In the ordinary course of its business, the Company accelerates and
forecloses upon real estate securing non-performing notes receivable included in
its portfolio. As a result of such foreclosures and selective direct purchases
of OREO, at June 30, 1999 and 1998, the Company held OREO recorded on the
financial statements at $10.3 million and $9.2 million, respectively. OREO is
recorded on the financial statements of the Company at the lower of cost or fair
market value. The Company estimates,based on third party appraisals and broker
price opinions, that the OREO inventory held at June 30, 1999, in the aggregate,
had a net realizable value (market value less estimated commissions and legal
expenses associated with the disposition of the asset) of approximately $11.5
million based on market analyses of the individual properties less the estimated
closing costs. There can be no assurance, however, that such estimate is
substantially correct or that an amount approximating such amount would actually
be realized upon liquidation of such OREO. The Company generally holds OREOas
rental property or sells such OREO in the ordinary course of business when it
is economically beneficial to do so.
<PAGE>
Cash Flow
Substantially all of the assets of the Company are invested in its
portfolios of notes receivable and OREO. Primary sources of the Company's cash
flow for operating and investing activities are borrowings under its senior debt
facilities collections on notes receivable and gain on sale of notes and OREO
properties.
At June 30, 1999, the Company had unrestricted cash, ash equivalents and
marketable securities of $5.9 million.
Management believes that sufficientcash flow from the collection of notes
receivable will be available to repay the Company's secured obligations, and
that sufficient additional cash flows will exist through collections of notes
receivable, the bulk sale of performing loan portfolios, sales and rental of
OREO, continued modifications to the secured debt credit agreements or
additional borrowing, to repay the current liabilities arising from operations
and to repay the long term indebtedness of the Company.
Financing Activities
Senior Debt. As of June 30, 1999, the Company owed an aggregate of $163.2
million to the Lender of Senior Debt, under 65 loans.
The Senior Debt is collateralized by first liens on the respective loan
portfolios or 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 sch 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 of 0%, 1%
and 1.75% over the prime rate.The accelerated payment provisions of the Senior
Debt are generally of two types: the first requires that all collections from
notes receivable,other than a fixed monthly allowance for servicing operations,
be applied to reduce the Senior Debt, and the second requires a further amount
to be applied toward additional principal reduction from available cash after
scheduled principal and interest payments have been made. As a result of the
accelerated payment provisions, the Company is repaying the amounts due on the
Senior Debt at a rate faster than the minimum scheduled payments. While the
Senior Debt remains outstanding, these accelerated payment provisions may limit
the cash flow that is available to the Company.
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, held by
the Company's Senior Debt Lender. Restricted cash may be accessed by the Senior
Debt Lender only upon the Company's failure to meet the minimum monthly payment
due if collections from notes receivable securing the loan are insufficient to
satisfy the installment due. Historically,the Company has not called upon these
reserves. The aggregate balance f restricted cash in such accounts was
$1,118,446 and $1,000,466 on June 30, 1999 and June 30, 1998 respectively.
Total Senior Debt availability was approximately $200 million at June 30,
1999, of which approximately $163.3 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 or purposes of determining
availability under of Senior Debt. As a result, the Company has approximately
$51.0 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. At June 30,1999, Tribeca had drawn down $ 2.7
million on the line.
12% Debentures. In connection with the acquisition of a loan portfolio
during 1994, the Company offered to investors $750,000 of subordinated
debentures ("12% Debentures"). As of June 30, 1999 and December 31, 1998,
$88,177 and $176,250 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.
<PAGE>
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 purchased.As of June
30, 1999 and December 31, 1998, $377,400 and $421,800, 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. The Company plans to
refinance this debt before it becomes due.
OREO Line of Credit. he Company has a line of credit with the Senior Debt
Lender permitting it to borrow a maximum of approximately $1,500,000 at a rate
equal to such lender's prime rate plus two percent per annum. Principal
repayment of 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 June 30, 1999 and December 31, 1998, were $861,068 and $645,415,
respectively.Advances made under the line of credit were used to satisfy senior
lien positions and fund capital improvements in connection with foreclosures of
certain real estate loans financed by the Company. Management believes the
ultimate sale of these properties will satisfy the related outstanding lines of
credit and accrued interest, as well as surpass the collectible value of the
original secured notes receivable.
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
Asset Purchase Agreement Dispute. On August 9, 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. The Company is seeking recession 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 debt or 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 todismiss 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 an 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 Kseeks 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.
<PAGE>
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. In the fourth quarter of 1998, K voluntary dismissed all claims
against Mr. Axon personally. 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 was conducted
in April and May of 1999. Following the conclusion of K's case in chief, the
court dismissed K's claims against the Company leaving open the remaining claims
against Tribeca. The matter is currently under advisement before the Court with
a decision expected in the fourth quarter of 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 pended. 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, 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's10-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 has been placed on the Court's calendar for
hearing in the fourth quarter of 1999. The Company is a defendant in related
matters in which the same parties are seeking quiet titleto 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.
<PAGE>
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Maters to a Vote of Security Holders
On May 26, 1999 at the Company's annual meeting the shareholders voted to
elect the following persons as Directors to the Company expiring upon the
election and qualification of their successors at the annual meeting of the
Company in the year 2002,and to ratify the appointment of Deloitte & Touche LLP
as the Company's independent public auditors for the fiscal year ended December
31,1999.
Director For Against Abstain Not Voting Total
Michael Bertash 5,454,146 0 10,644 452,737 5,917,527
Allan R. Lyons 5,454,146 0 10,644 452,737 5,917,527
William Sullivan 5,454,146 0 10,644 452,737 5,917,527
Independent Public Auditors For Against Abstain Not Voting Total
Deloitte &Touche LLP 5,464,130 10 650 452,737 5,917,527
Item 5. Other Information
None
Item 6. Exhibits and Reports on form 8-K
None
EXHIBIT TABLE
Exhibit
No. Description
3(a) Restated Certificate of Incorporation. Previously filed with, and
incorporated herein by reference to, the Company's 10-KSB, filed
with the Commission on December 31, 1994.
(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, he 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, the
Company's Registration Statement on Form S-4, No. 33-81948, filed
with the Commission on November 24, 1994.
10(d) Employment Agreement dated December 4, 1996, between the Company
and Joseph Caiazzo.Previously filed with, and incorporated herein
by reference to, the Company's Form 10K-SB, filed with the
Commission on March 31,1997.
10(e) Agreement dated March 29, 1997 between the Company and the
Citizens Banking Company. Previously filed.
Loan and Real Estate Purchase Agreement dated September 17, 998
10(f) by and among Franklin credit Management Corporation and HomeGold
Financial Inc. f/k/a Emergent Mortgage Corp. Previously filed
with, and incorporated herein by reference to, the Company's Form
8K filed with the Commission on September 30,1998.
10(g) Form of Subscription Agreement and Investor Representation, dated
as of September 8, 1998 between the Company and certain
subscribers. Previously filed.
10(h) Loan Purchase Agreement dated December 31, 1998 between the
Company and Thomas Axon, corporate General Partner. Previously
filed with, and incorporated herein by reference to, theCompany's
Form 10K-SB, filed with the Commission on April 16,1999.
10(i) Promissory Note between Thomas J. Axon and the Company dated
December 31, 1998. Filed with the Commission on December 31,1998.
Previously filed with, and incorporated herein by reference to,
the Company's Form 10K-SB, filed with the Commission on April
16,1999.
11 Computation of earnings per share. Filed here with.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,the registrant
caused this report to be signed on its behalf by the undersigned,thereunto duly
authorized.
August 11, 1999 FRANKLIN CREDIT MANAGEMENT
CORPORATION
By: THOMAS J. AXON
Thomas J. Axon
President and Chief Executive Officer
In accordance with the Exchange Act, this reporthas been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
THOMAS J. AXON President, Chief Executive Officer August 11,1999
Thomas J. Axon and Director
(Principal executive officer)
PETER SPIELBERGER Executive Vice President and August 11,1999
Peter Spielberger Chief Financial Officer
(Principal financial and accounting officer)
JOSEPH CAIAZZO Vice President, Chief Operating August 11,1999
Joseph Caiazzo Officer and Director
(Secretary)
<PAGE>
Exhibit 11.
Computation of earnings per share second quarter 1999.
No. of Shares Weight
09/30/98 Common stock 5,916,527
---------------- 25%
5,916,527 1,479,132
12/31/98 Common stock
5,916,527
---------------- 25%
5,916,527 1,479,132
03/31/99 Common stock
5,916,527
---------------- 25%
1,479,132
5,916,527
06/30/99 Common stock
5,916,527
---------------- 25% 1,479,132
Weighted average number of 5,916,527
shares
Earnings per Common share:
Net Income $461,179 $ 0.08
<PAGE>
Exhibit 11.
Computation of earnings per share second quarter 1998.
No. of Shares Weight
09/30/97 Common stock 5,516,527
---------------- 25% 1,379,132
5,516,527
12/31/97 Common stock
5,516,527
---------------- 25%
5,516,527 1,379,132
03/31/98 Common stock
5,516,527
---------------- 25% 1,379,132
5,516,527
06/30/98 Common stock
5,516,527
---------------- 25% 1,379,132
Weighted average number of 5,516,527
shares
Earnings per Common share:
Net Income $(1,303,904) $ (0.24)
<PAGE>
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