UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 incorporation or organization)(I.R.S. Employer
Identification No.)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices,including zip code,and telephone number
including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d)of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and(2) has been subject to such filing requirements for the past 90 days.Yes(X)
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes X No .
As of November 12, 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
September 30, 1999
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 1999 (unaudited) and
December 31, 1998 3
Consolidated Statements of Operations(unaudited) for the three months and
nine Months ended September 30, 1999 and 1998 4
Consolidated Statements of Stockholders' Equity(unaudited)September 30 1999 5
and the year ended December 31,1998
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 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 19-20
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
30-Sept-99 31-Dec-98
------------- ------------
ASSETS
CASH AND CASH EQUIVALENTS $ 6,759,656 $ 5,119,906
RESTRICTED CASH 1,298,446 1,103,446
NOTES RECEIVABLE:
Principal 200,490,538 158,730,622
Joint venture participation (60,210) (301,990)
Purchase discount (19,163,138) (20,435,067)
Allowance for loan losses (21,457,446) (22,168,345)
------------- ------------
Net notes receivable ................... 159,809,744 115,825,220
LOANS HELD FOR SALE .......................... 2,750,504 5,699,577
ACCRUED INTEREST RECEIVABLE .................. 2,397,843 1,924,601
OTHER REAL ESTATE OWNED ...................... 9,360,854 10,357,181
OTHER RECEIVABLES ........................... 1,403,184 1,231,667
DEFERRED TAX ASSET ........................... 1,842,932 1,842,932
OTHER ASSETS ................................. 1,189,763 1,453,158
BUILDING, FURNITURE AND FIXTURES- Net ........ 900,805 751,512
DEFERRED FINANCING COSTS ..................... 1,968,924 1,582,227
----------- -----------
TOTAL ASSETS $189,682,655 $ 146,891,427
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,645,600 2,946,071
LINES OF CREDIT 2,896,933 6,197,803
NOTES PAYABLE 178,538,689 132,227,257
203(K) REHABILITATION ESCROWS PAYABLE 44,001 72,386
SUBORDINATED DEBENTURES 399,315 598,050
NOTES PAYABLE, AFFILIATES AND STOCKHOLDERS 154,706 181,129
DEFERRED TAX LIABILITY 1,922,991 1,922,991
------------- ------------
TOTAL LIABILITIES 186,602,235 144,145,687
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000
authorized
shares; issued and outstanding 1999 and
1998: 5,916,527 59,167 59,167
Additional paid-in capital 6,985,968 6,985,968
Accumulated deficit (3,964,715) (4,299,395)
------------- ------------
Total stockholders' equity 3,080,420 2,745,740
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $189,682,655 $ 146,891,427
============= ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
30-Sept-99 30-Sept-98 30-Sept-99 30-Sept-98
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
- -
REVENUES: Int Income 3,932,298 2,435,470 10,695,291 5,726,498
Purchase discount earned 1,201,767 1,025,767 3,452,259 3,373,408
Gain on sale of portfolios 20,609 815,503 649,630 815,503
Gain on sale of originated 32,220 161,417 130,148 709,699
loans
Gain on sale of other real 46,884 154,897 189,014 5,222
estate owned
Rental Income 150,960 172,698 611,505 583,062
Other 305,514 218,123 503,765 636,787
----------- ---------- ----------- -----------
5,690,252 4,983,875 16,231,612 11,850,179
----------- ----------- ----------- ----------
OPERATING EXPENSES:
Interest expense 3,755,322 2,647,779 9,673,214 7,207,323
Collection, general and 1,866,335 2,009,105 5,701,784 5,401,818
administrative
Provision for loan losses 25,137 23,436 25,137 54,827
Amortization of deferred 120,843 85,779 378,304 223,541
financing costs
Depreciation 49,114 29,960 118,493 78,758
----------- ----------- ----------- ----------
5,816,751 4,796,059 15,896,932 12,966,267
----------- ----------- ----------- ----------
(LOSS) INCOME (126,499) 187,815 334,680 (1,116,088)
----------- ----------- ----------- ----------
NET ( LOSS) INCOME (126,499) 187,815 334,680 (1,116,088)
=========== =========== =========== ==========
Basic (0.02) 0.03 0.06 (0.20)
Dilutive (0.02) 0.03 0.06 (0.20)
=========== =========== =========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,916,527 5,540,637 5,916,527 5,540,637
=========== =========== =========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine months ended SEPTEMBER 30, 1999 and December 31, 1998
- ------------------------------------------------------------------------------
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, Dece 31, 1998 5,916,527 59,167 6,985,968 (4,299,395) $2,745,740
---------------------------------------------------------
Net Income 334,680 334,680
--------------------------------------------------------
Bal, Sept 30, 1999 5,916,527 59,167 6,985,968 (3,964,715) 3,080,420
=========================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
30-Sept-99 30-Sept-98
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 334,680 (1,116,088)
Adjustments to reconcile net
income (loss) to
Net cash used in operating
activities:
Depreciation 118,493 78,758
Amortization 378,304 223,541
Purchase discount earned (3,452,259) (3,373,408)
Gain on sale of OREO (189,014) (820,503)
Provision for loan loss 25,137 54,827
(Increase) decrease in:
Accrued interest receivable (473,242) (833,176)
Foreclosures on real estate (3,192,465) (3,715,252)
Loans held for sale 2,949,073 (856,459)
Other receivables (171,517) (6,414,526)
Other current assets 263,395 (826,344)
Increase(decrease) in:
Accounts payable and accrued (300,471) 474,259
expenses
203(k) rehabilitation escrow (28,385) (2,726,954)
Notes payable, affiliates and (26,423) 102,710
stockholders
----------- ---------
Net cash used in operating (3,764,694) (19,748,837)
activities ----------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Additional capital contributed 0 500,000
Acquisition and loan fees (762,942) (692,472)
Acquisition of notes receivable (72,584,546 (54,512,186)
Acquisition of REO 0 (271,879)
Proceeds from sale of REO 4,913,878 12,415,936
Foreclosures on real estate 999,232 469,018
Reclassification of notes 3,571,690 2,452,472
receivable for foreclosures
Loans originated (1,068,675) (575,223)
Acquisition of furniture & (233,337) (43,705)
equipment
Participation interest (262,824) (36,951)
Principal collection on notes 28,315,141 14,441,481
receivable
Increase in restricted cash (195,000) (59,424)
----------- ---------
Net cash used) in investing (37,407,383) (25,912,933)
activities ----------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on debenture notes (198,735) (198,788)
payable
Payments on line of credit (4,973,279) (749,078)
Proceeds from line of credit 1,672,409 4,365,046
Proceeds from notes payable 74,398,071 56,010,353
Payments on notes payable (28,086,639) (12,580,528)
----------- ---------
Net cash provided by financing 42,811,827 46,847,005
activities ----------- ---------
NET INCREASE IN CASH 1,639,750 1,185,235
CASH, AND CASH EQUIVALENTS, 5,119,906 2,783,920
BEGINING OF THE PERIOD
CASH AND CASH EQUIVALENTS, ENDED 6,759,656 3,969,155
=========== =========
See notes to consolidated financial statements
</TABLE>
<PAGE>
Page 25
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 - he 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 the Companywill be unable to collect
allcontractual 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's 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 discountis 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 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 month 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 the face of the income statement for all entities with
complex capital structures and the restatement of all prior period earnings
per share data presented. SFAS No. 128 also requires a reconciliation of the
numerator and denominator of Basic EPS and Diluted EPS computation.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments (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.
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 Receivables
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 notes receivable portfolio is
estimated by discounting the uture 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 ofcredit 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.The 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 busines 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 othe comprehensive income during the three months ended September
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 ofderivatives 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 material 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 elsewhere in this Form10-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 status of relations between the Company and its Senior
Debt Lender, the status of relations between the Company and its sources for
loan purchases, the success of the Company in purchasing additional appropriate
loans, 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 nine months ended September 30,
1999, the Company purchased 2,130 loans, in twenty portfolio's consisting
primarily of first and second mortgages, with an aggregate face value of $78.8
million, at an aggregate purchase price of $72.6 million or 92% of the face
value, and no OREO properties. During the nine months ended September 30, 1998,
the Company purchased 3,325 loans and OREO properties in nine portfolios with a
aggregate face value of $63.2 million at an aggregate purchase price of $54.2
million or 85% of aggregate face value, and $235,000 in 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. In March 1999, the Company changed its
strategy and has since 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 rate 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 the remainder of 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 to 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 Company's database.
Tribeca is currently licensed as a mortgage banker in Connecticut, District of
Columbia, Florida, Georgia, Kentucky, Maryland, Missouri, New York, 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.
During the nine months ended September 30, 1999 Tribeca originated 13
loans with an aggregateface value of $1.1 million in mortgages, compared to 235
loans and $19.7 million in mortgages during the nine months ended September 30,
1998. During the nine months ended September 30, 1999, Tribeca incurred an
operating loss of $400,000 compared with an operating loss of $900,000
during the nine months ended September 30, 1998. This decrease in loss and
originations reflected a restructuring period during which management changed
strategies to focus Tribeca on refinancing the Company's existing customer base.
As of September 30, 1999, Tribeca had approximately $2.8 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 September 30,1999 and September 30,
1998 were 8.9% and 9.5%, respectively.As of September 30, 1999, the Company had
sixty-eight loans outstanding with an aggregate principal balance of $178.2
million. Additionally the Company has lines of credit with the Senior Debt
Lender, which had an outstanding balance of $2.8 million at September 30, 1999.
The increase in the prime rate from 7.75% to 8.00%, on July 8, 1999 and on
August 26, 1999 from 8.00% to 8.25% increased the benchmark rate for the
interest on Senior Debt used to fund loan portfolio acquisitions,which resulted
in decreased net income during the current period.
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, 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 September 30, 1999 and 1998 was immaterial.
Year 2000 Compliance.
The Company believes it has identified all of its significant applications
which required modification to ensure Year 2000 compliance. All of the Company's
applications are provided by outside vendors who have provided the Company with
appropriate certification that they have modified and tested their respective
applications and they are Year 2000 compliant. Additionally the Company has
engaged the services of an outside vendor to test the Company's systems for both
hardware and software Year 2000 compliance. This vendor has completed the
testing, corrected any deficiencies, and has certified the compliance of the
Company, as well as reviewed the compliance statements of the Company's outside
application vendors. In addition, the Company has prepared contingency plans to
deal with any unforeseen occurrences related to Year 2000. It is the Company's
expectation that it will make the transition to the Year 2000 without any
significant impact.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998.
Total revenue, which is comprised of interest income, purchase discount
earned, gain on sale of portfolios, gain on sale of originated loans, gain on
sale of OREO, rental income and other income, increased by $706,377 or 14%,
to $5,690,252 during the three months ended September 30, 1999, from
$4,983,875 during the three months ended September 30, 1998.Total revenue
(excluding gain on sales of loans, OREO and originated loans) for the three
months ended September 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 3.1% and 3.6%, respectively. This decrease reflected
acquisitions of notes receivable during the later part of the three months
ended September 30, 1999, which only began to realize income in subsequent
periods.
Interest income on notes receivable increased $1,496,828 or 61%, to
$3,932,298 during the three months ended September 30, 1999 from $ 2,435,470
during the three months ended September 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. his increase resulted from the acquisition
of $137.0 million of performing loans with a weighted average interest rate of
12% between July 1998 and September 1999, which was partially offset by loan
sales, pre-payments and principal collections during the same period.
Purchase discount earned increased $176,244 or 17%,to $1,201,767 during
the three months ended September 30, 1999 from $1,025,523 during the three
months ended September 30, 1998. This increase reflected the growth in the
Company's portfolio.
Gain on sale of portfolios decreased $794,894 to an immaterial amount
during the three months ended September 30, 1999 from $815,503 during the three
months ended September 30, 1998. The Company did not consummate bulk sales of
notes during this period.
Gain on sale of notes originated by Tribeca decreased $129,197 or 80% to
$32,220 during the three months ended September 30, 1999 from $ 161,417 during
the three months ended September 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 decreased $108,013 or 70% to $46,884 during the three
months ended September 30, 1999 from $154,897 during the three months ended
September 30, 1998. This decrease resulted primarily from the sale of certain
lower quality properties at a loss during the three months ended September 30,
1999 as compared to those sold during the three months ended September 30, 1998.
The Company sold 32 and 23 OREO properties during the three months ended
September 30, 1999 and September 30, 1998.
Rental income decreased $ 21,738 or 13% to $150,960 during the three
months ended September 30,1999 from $172,698 compared to the three months ended
September 30, 1998. This decrease reflected a decrease in the number of
properties rented during the three months ended September 30, 1999, as compared
to the three months ended September 30, 1998, and the write-off of accrued
rental income as a result of the eviction of certain tenants.
.
Other income increased $87,147 or 40%, to $305,514 during the three months
ended September 30, 1999 from $218,000 during the three months ended September
30, 1998. This increase resulted primarily from the retirement of the last
remaining joint venture participation of other parties with the Company.
Total operating expenses increased $1,020,691 or 21% to $5,816,751
during the three months ended September 30, 1999 from $4,796,060 during the
three months ended September 30, 1998. Total operating expenses is comprised of
interest expense, collection, general and administrative expenses, provisions
for loan losses, amortization of deferred financing costs and depreciation
expense.
Interest expense increased $1,107,543 or 42%, to $3,755,322 during the
three months ended September 30, 999, from $2,647,779 during the three months
ended September 30, 1998. This increase resulted primarily from the increase in
Senior Debt reflecting the acquisition of notes receivables and the increase in
the prime rate. Total debt increased by $42.8 million or 31%, to $182.0 million
as of September 30, 1999 from $139.2 million as of September 30, 1998. Total
debt consists principally of Senior Debt, and also includes debentures, and
lines of credit and loans from affiliates.
Collection, general and administrative expenses decreased $142,771 or 7%
to $1,866,335 during the three months ended September 30, 1999 from
$2,009,106 during the three months ended September 30, 1998.Collection, general
and administrative expense consists primarily of personnel expense, and other
collection, general and administrative expenses including, REO related expense,
litigation expense, and miscellaneous collection expense.
Personnel expenses decreased $220,191 or 22% to $767,253 during the
three months ended September 30, 1999 from $987,444 during the three months
ended September 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 $ 77,420 or 7.6% to
$1,099,082 during the three months ended September 30, 1999 from $1,021,662
during the three months ended September 30, 1998, principally due to the growth
of the portfolio.
Provisions for loan losses were immaterial during the three months ended
September 30, 1999 and September 30, 1998.
Amortization of deferred financing costs increased by $35,064 or 41% to
$120,843 during the three months ended September 30, 1999, from $85,779 during
the three months ended September 30, 1998. This increase resulted from the
increase in the portfolio, and increased prepayments during the three months
ended September 30, 1999,which accelerated the amortization of loan origination
fees. On September 30,1999 and September 30, 1998 deferred financing costs as a
percentage of Senior Debt outstanding was 1.10% and 1.17%, respectively.
Depreciation expense increased $19,154 or 64%,to $49,114 during the three
months ended September 30, 1999, from $29,960 during the three months ended
September 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 decreased $ 314,314 to a loss of $126,499 during the
three months ended September 30,1999 from a gain of $187,815 during the three
months ended September 30, 1998.
During the three months ended September 30, 1999, there was no provision
for income tax due to a loss carry-forward.
Net income decreased by $314,314 to a loss of $126,499 during the three
months ended September 30,1999 from a gain of $187,815 during the three months
ended September 30, 1998.
Nine months ended September30, 1999compared to Nine months ended
September 30, 1998.
Total revenue, increased $4,381,433 or 37%, to $16,231,612 during the
nine months ended September 30, 1999, from $11,850,179 during the nine months
ended September 30, 1998. Total revenue (excluding gain on sales of loans, OREO
and originated loans) for the three months ended September 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 8.5% and 8.1%,
respectively.
Interest income on notes receivable increased $4,968,793 or 87%, to
$10,695,291 during the nine months ended September 30, 1999 from $5,726,498
during the nine months ended September 30, 1998.This increase resulted from the
acquisition of $137.0 million of performing loans with a weighted average
interest rate of 12%, between July 1998 and September 1999 which was only
partially offset by loan sales, pre-payments and principal collections.
Purchase discount earned increased $78,851 or 2%, to $3,452,259 during
the nine months ended September 30, 1999, from $3,373,408 during the nine
months ended September 30, 1998. This increase reflected the growth in the
Company's portfolio.
Gain on sale of portfolios decreased $ 165,873 or 20% to $ 649,630 during
the nine months ended September 30, 1999, from $ 815,503 during the nine months
ended 1998. This decrease reflected bulk sales of $4.4 million of notes
receivable during the nine months ended September 30,1999 compared to bulksales
of $6.3 million during the nine months ended September 30, 1998.
Gain on sale of notes originated by Tribeca decreased $579,551 or 82% to
$130,148 during the nine months ended September 30, 1999, from $709,699 during
the nine months ended September 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 $183,792 to $189,014 during the nine months
ended September 30,1999, from $5,222 during the nine months ended
September 30, 1998. This increase reflected an increase in the quality of OREO
properties sold during the period at a profit as compared to the nine months
ended September 30, 1998.The Company sold 79 and 104 OREO properties during the
nine months ended September 30, 1999 and September 30, 1998, respectively.
Rental income increased $28,443 or 5% to $611,505 during the nine months
ended September 30, 1999,compared to $ 583,062 during the nine months ended
September 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 nine months ended September 30, 1999, as compared to the nine months ended
September 30, 1998.
Other income decreased $ 133,022 or 21%, to $503,765 during the nine
months ended September 30, 1999 from $ 636,787 during the nine months ended
September 30, 1998. This decrease resulted from the realization of settlement
income from one unusually large note during the nine months ended September 30,
1998, and from a decrease in various loan fees arising from the decrease in
Tribeca's originations,which was partially offset by the retirement of the last
remaining joint venture participation of other parties with the Company during
the nine ended September 30,1999.
Total operating expenses increased by $2,930,665 or 23%, to $15,896,932
million during the nine months ended September 30, 1999, from $12,966,267
during the nine months ended September 30, 1998.
Interest expense increased $2,465,891 or 34%, to $9,673,214 during the
nine months ended September 30, 1999 from $7,207,323 during the nine months
ended September 30, 1998. This increase resulted primarily from the increase in
Senior Debt reflecting the acquisition of notes receivable and the increase in
the prime rate. Total debt increased by $42.8 million or 65%, to $182.0 million
as of September 30, 1999 from $139.2 million as of September 30, 1998.
Collection, general and administrative expenses increased $299,966 or 6%,
to $5,701,784 during the nine months ended September 30, 1999 from
$5,401,818 during the nine months ended September 30, 1998.
Personnel expenses decreased $150,091 or 6%, to $2,227,204 during the nine
months ended September 30, 1999 from $2,377,295 during the nine months ended
September 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 $ 450,057 this increase reflected
increased litigation expenses in relation to asset recovery,computer consulting
expenses associated with the growth of the portfolio and office expenses due to
the expansion of the company's corporate office, as well as training expenses
associated with the purchase of a new accounting software package.
Provisions for loan losses decreased $ 29,690 or 54% to $ 25,137 from $
54,827 during the nine months ended September 30,1998 due to a reduction in the
amount of loans written of during the nine months ended September 30, 1999.
Amortization of deferred financing costs increased $154,763 or 69%, to
$378,304 during the nine months ended September 30,1999 from $223,541 during
the nine months ended September 30, 1998.This increase resulted from the growth
in the size of the portfolio and, increased prepayments and collections during
the nine months ended September 30, 1999, hich accelerated the amortization of
loan origination fees associated with the loans sold or collected.
Depreciation expense increased by $39,735 or 50%,to $118,493 during the
nine months ended September 30, 1999, rom $78,758 during the nine months ended
September 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 $1,450,768 to a gain of $334,680 during
the nine months ended September 30, 1999 from a loss of $1,116,088 during the
nine months ended September 30, 1998.
During the nine months ended September 30, 1999, there was no provision
for income taxes due to loss-carryforwards, and during the nine months ended
September 30, 1998, there were no provisions for income taxes due to an
operating loss.
Net income increased by $1.4 million to a gain of $334,680 during the nine
months ended September 30, 1999 from a loss of $1,116,088 during the nine
months ended September 30, 1998.
Liquidity and Capital Resources
General. During the nine months ended September 30, 1999 the Company
purchased 2,130 loans in twenty portfolios with an aggregate face value of$78.7
million at an aggregate purchase price of $72.6 million or 92%of face value and
no OREO properties. During the nine months ended September 30,1998 the Company
purchased eight portfolios with an aggregate face value of $63.2 million at an
aggregate purchase price of $54.2 million or 85% of aggregate face value, and
$235,000 in OREO properties. This increase, measured by purchase price,
reflected the increase in competitiveness of the Company's bids the increase in
bidding opportunities associated with the Company purchasing performing loansas
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 September 30,1999 had a
face value of $200.4 million and included net notes receivable of approximately
$179 million as compared with a face value of $151.1 million and net notes
receivable of approximately $107.7 million as of September 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 nine months ended September 30, 1999, the Company used cash in
the amount of $3.7 million in its operating activities primarily for interest
expense, increased infrastructure investment 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 $37.4 million in its
investing activities, primarily reflecting purchases of notes receivable which
purchases were only partially offset by principal collections upon its notes
receivable and proceeds from sales of OREO.The amount of cash used in operating
and investing activities was funded by $42.8 million 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
September 30, 1999 over December 31, 1998 of $1.6 million.
In the ordinary course of its business, the Company accelerates and
forecloses upon realestate securing non-performing notes receivable included in
its portfolio. As a result of such foreclosures and selective direct purchases
of OREO, at September 30, 1999 and 1998, the Company held OREO recorded on the
financial statements at $9.4 million and $9.3 million, respectively. OREO is
recorded on the financial statements of the Company at the lowerof cost or fair
market value. The Company estimates,based on third party appraisals and broker
price opinions, that the OREO inventory held at September 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 $10.3 million based on market analyses of the individual
properties less the estimated closing costs. There can be no assurance,however,
that such estimate issubstantially correct or that an amount approximating such
amount would actually be realized upon liquidation of such OREO. 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.
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 itssenior debt
facilities collections on notes receivable and gain on sale of notes and OREO
properties.
At September 30, 1999, the Company had unrestricted cash,cash equivalents
and marketable securities of $6.7 million.
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
as well as to repay the long term indebtedness of the Company.
Financing Activities
Senior Debt.As of September 30, 1999, the Company owed an aggregate of$178.2
million to the lender of Senior Debt, under 68 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 of 0%, .5%,
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 will 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 of restricted cash in such accounts was $1.2
million and $1.0 million on September 30, 1999 and September 30, 1998
respectively.
Total Senior Debt availability was approximately $200 million at September
30, 1999, of which approximately $178.2 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 $8.5 million of Senior Debt that it had
syndicated to other banks as of such date as outstanding for purposes of
determining availability under of Senior Debt. As a result, the Company has
approximately $30.3million 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 September 30,1999, Tribeca had drawn down $ 1.9
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 September 30, 1999 and December 31, 1998,
$44,000 and $176,000 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 $44,000 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 purchased. As of
September 30, 1999 and December 31, 1998, $355,000 and $421,000, 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 $22,000 which payments commenced on September 30, 1997 with the remaining
balloon payment of $333,000 due September 30, 2000. The Harrison 1st 12%
Debentures are secured by a lien on the Company's interest in certain notes
receivable and are subordinated to the Senior Debt encumbering the loan
portfolio. The Company plans to refinance this debt before it becomes due.
OREO Line of Credit. The Company has a line of credit with the Senior Debt
Lender permitting it to borrow a maximum of approximately$1.5 million 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 September 30,1999 and December 31, 1998, were $900,000 million and
$600,000, respectively. Advances made under the line of credit were used to
satisfy senior lien positions and fund capital improvements in connection with
foreclosures of certain real estate loans financed by the Company. Management
believes the ultimate sale of these properties will satisfy the related
outstanding lines of credit and accrued interest, as well as surpass the
collectible value of the original secured notes receivable. Management has
reached an agreement in principal with its Senior Debt Lender to increase the
availability under this credit facility to cover additional properties
foreclosed upon by the Company, which the Company may be required to hold as
rental property in order to maximize its return.
Part II Other Information
Item 1. Legal Proceedings
Asset Purchase Agreement Dispute. On August 19, 1997 the Company commenced
a civil action in the United States District Court for the Southern District of
New York against Preferred Credit Corporation ("PCC") 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 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 dismisson 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, the Company 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 agreementand
seeking its cost and fees incurred in connection with the proceeding. Trial in
this matter is currently scheduled to commence in January of 2000.
Letter Agreement Dispute. On November 17, 1997 K Mortgage Corporation
("K")filed a civil action in the United States District Court for the Southern
Distric 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 nd 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. 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.
Second Asset Purchase Agreement Dispute. On August 26, 1999 the
Company commenced a civil action in the United States District Court for the
Southern District of New York against Homegold, Inc., f/k/a Emergent Mortgage
Corp. ("Homegold")alleging fraud and breach of contract in connection with the
purchase by the Company of $269,000 in face value of notes receivable from
Homegold for $216,000. On or about October 14, 1999, Homegold filed an Answer
generally denying the allegations of the Complaint and a status conference was
held with the Court on October 15, 1999.The Company plans to vigorously pursue
this action. It is currently anticipated that trial in this matter may occur
during the second 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 areseeking 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 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Maters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on form 8-K
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, 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, 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, 1998
10(f) by and among Franklin credit Management Corporation and Home Gold
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.
Form of Subscription Agreement and Investor Representation, dated
10(g) 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,. Previously filed with, and incorporated
herein by reference to, the Company'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. 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.
November 12, 1999 FRANKLIN CREDIT MANAGEMENT
CORPORATION
By: THOMAS J. AXON
Thomas J. Axon
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
THOMAS J. AXON President, Chief Executive Officer November 12, 1999
- ---------------
Thomas J. Axon and Director
PETER SPIELBERGER Executive Vice President and November 12, 1999
Peter Spielberger Chief Financial Officer
(Principal Accounting Officer)
JOSEPH CAIAZZO Vice President, Chief Operating November 12, 1999
- --------------
Joseph Caiazzo Officer and Director
(Secretary)
<PAGE>
Exhibit 11.
Computation of earnings per share third quarter 1999.
No. of Shares Weight
12/31/98 Common stock 5,916,527
----------------
25%
5,916,527 1,479,132
03/31/99 Common stock
5,916,527
----------------
25%
5,916,527 1,479,132
------------
06/31/99 Common stock
5,916,527
----------------
25% 1,479,132
5,916,527
------------
09/30/99 Common stock
5,916,527
----------------
25%
5,916,527 1,479,132
------------
23,266,108
Weighted average number of 5,916,527
shares
Earnings per Common share:
Net Income $334,380 $ 0.06
<PAGE>
Exhibit 11.
Computation of earnings per share second quarter 1998.
No. of Shares Weight
12/31/97 Common stock 5,516,527
----------------
25% 1,379,132
5,516,527
03/31/98 Common stock
5,516,527
----------------
25%
5,516,527 1,379,132
------------
06/30/98 Common stock
5,516,527
----------------
25% 1,379,132
5,516,527
------------
09/30/98 Common stock
5,916,527
----------------
weighted 1,403,241
5,516,527
------------
Weighted average number of 5,540,637
shares
Earnings per Common share:
Net Income $(1,116,089) $ (0.20)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000831246
<NAME> Franklin Credit Management Corporation
<MULTIPLIER> 1
<CURRENCY> U.S Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 6,759,656
<SECURITIES> 0
<RECEIVABLES> 204,291,565
<ALLOWANCES> (21,457,445)
<INVENTORY> 0
<CURRENT-ASSETS> 4,990,790
<PP&E> 900,805
<DEPRECIATION> 118,493
<TOTAL-ASSETS> 189,682,655
<CURRENT-LIABILITIES> 5,985,849
<BONDS> 0
0
0
<COMMON> 59,167
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 189,682,655
<SALES> 0
<TOTAL-REVENUES> 16,231,612
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,804,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,673,214
<INCOME-PRETAX> 334,380
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 334,380
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
