UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-17771
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 75-2243266
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer identification No.)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices, including zip code,
and telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and(2) has been subject to such filing requirements for the past 90 days.
Yes X No___ .
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes X No .
As of August 11, 2000 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, 2000
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 2000 (unaudited) 3
and December 31, 1999
Consolidated Statements of Income (unaudited) for the
three months and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity 5
June 30, 2000 (unaudited)
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 2000 and 1999 6
Notes to consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-18
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 22
SIGNATURES 23
<PAGE> 3
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30-Jun-00 31-Dec-99
-------------------- ------------------
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 6,075,006 6,015,567
RESTRICTED CASH 1,225,319 387,972
NOTES RECEIVABLE:
Principal 207,327,192 206,262,651
Purchase discount ( 17,908,594) (18,449,141)
Allowance for loan losses ( 22,471,201) (22,185,945)
-------------------- ------------------
Net notes receivable 166,947,397 165,627,565
LOANS HELD FOR SALE 4,697,520 3,288,568
ACCRUED INTEREST RECEIVABLE 2,366,038 2,425,358
OTHER REAL ESTATE OWNED 6,360,875 7,699,468
OTHER RECEIVABLES 1,119,098 2,827,301
DEFERRED TAX ASSET 3,408,903 3,408,903
OTHER ASSETS 1,339,795 1,155,097
BUILDING, FURNITURE AND FIXTURES- Net 832,416 884,903
DEFERRED FINANCING COSTS 1,979,577 2,016,394
-------------------- ------------------
TOTAL ASSETS $196,351,944 $ 195,737,096
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXP 2,529,270 3,098,648
FINANCING AGREEMENTS 828,899 791,075
NOTES PAYABLE 186,545,433 185,019,806
203(K)REHABILITATION ESCROWS PAY 18,691 18,691
SUBORDINATED DEBENTURES 97,048 332,976
NOTES PAYABLE,AFFILIATES AND STOCKHLDERS 62,948 109,350
DEFERRED TAX LIABILITY 3,488,962 3,488,962
-------------------- ------------------
TOTAL LIABILITIES 193,571,251 192,859,508
-------------------- ------------------
STOCKHOLDERS' EQUITY
Common Stock,$.01 par value
10,000,000 authorized shares; issued and
outstanding 2000 and 1999:
5,916,527 ,5,916,527 59,167 59,167
Additional paid-in capital 6,985,968 6,985,968
Accumulated deficit (4,264,442) (4,167,547)
-------------------- ------------------
Total stockholders' equity 2,780,693 2,877,588
-------------------- ------------------
TOTAL LIABI STKHLDERS'EQUITY $196,351,944 $ 195,737,096
==================== ==================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
30-Jun-00 30-Jun-99 30-Jun-00 30-Jun-99
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Interest Income 4,737,847 3,521,575 9,633,548 6,762,993
Purchase discount earned 904,095 1,290,014 1,885,608 2,250,492
Gain on sale of portfolios 500,000 142,82 575,756 629,021
Gain on sale of originated loan 44,874 22,815 101,119 97,928
Gain on sale of REO 87,608 61,754 174,795 142,130
Rental Income 168,001 223,073 355,781 460,545
Other 227,331 123,121 441,607 198,251
---------- --------- ----------- ---------
6,669,756 5,385,172 13,168,214 10,541,360
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Interest expense 4,366,994 3,106,398 8,787,794 5,917,892
Collection, g &a 1,931,040 1,852,191 3,959,064 3,835,449
Provision for loan losses 156,556 0 171,706 0
Amortization of deferred
financing costs 159,558 138,440 282,693 257,461
Depreciation 31,683 44,804 63,852 69,379
--------------- ----------- ----------- ------------
6,645,831 5,141,833 13,265,109 10,080,181
--------------- ----------- ----------- ------------
OPERATING INCOME (LOSS) 23,925 243,339 ( 96,895) 461,179
--------------- ----------- ----------- ----------
GAIN (LOSS) INCOME BEFORE
PROVISION FOR INCOME TAXES 23,925 243,339 ( 96,895) 461,179
--------------- ---------- ---------- ----------
BENEFIT (PROVISION)
FOR INCOME TAXES 0 0 0 0
--------------- ---------- --------- ----------
NET INCOME (LOSS) 23,925 243,339 ( 96,895) 461,179
=============== ========= ========= ==========
NETINCOME (LOSS) PER COMMON SHARE:
Basic 0.00 0.04 (0.02) 0.08
Dilutive 0.00 0.04 (0.02) 0.08
=============== ======== ========= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,916,527 5,916,527 5,916,527 5,916,527
=============== =========== ========== ==========
</TABLE>
<PAGE> 5
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
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<TABLE>
<CAPTION>
Common Stock Additional Retained
---------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bal,December 31, 1998 5,916,527 59,167 6,985,968 (4,299,395) $2,745,740
Net Income 131,848 131,848
-------------------------------------------------------------------------------
Bal,December 31, 1999 5,916,527 59,167 6,985,968 (4,167,547) $2,877,588
===============================================================================
Net (Loss) (96,895) (96,895)
------------------------------------------------------------------------------
Bal, June 30, 2000 5,916,527 59,167 6,985,968 (4,264,442) 2,780,693
===============================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30-Jun00 30-Jun-99
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (96,895) 461,179
Adjustments to reconcile net(loss)income
to
Net cash provided(used)by operating
Depreciation 63,852 69,379
Amortization 282,693 257,461
Purchase discount earned ( 1,885,608) ( 2,250,492)
Gain on Sale of REO ( 174,795) ( 142,130)
Provision for loan loss 171,706 0
Deferred tax provision 0 0
(Increase) decrease in:
Accrued interest receivable 59,320 ( 203,227)
Foreclosures on real estate 0 (2,592,856)
Assets held for sale (1,408,952) 2,732,455
Other receivables 1,708,203 242,346
Other current assets (184,698) (1,170,930)
Increase (decrease) in:
Accounts payable and accrued expenses (569,378) 70,488
203(k) rehabilitation escrow (0) (6,960)
Due to affiliates (46,402) (11,882)
------------- -------------
Net cash(used)by operating
activities (2,080,954) (2,545,169)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions 0 0
Additional capital contributed 0 0
Acquisition and loan fees (325,038) (518,839)
Acquisition of notes receivable (23,104,622) (48,872,731)
Acquisition of REO 0 0
Proceeds from sale of REO 3,367,479 2,919,112
Foreclosures on real estate 384,581 267,858
Reclassification of notes receivable
for foreclosure 2,434,312 3,497,480
Loans originated (2,639,466) (568,825)
Acquisition of furniture & equipmen (11,366) (230,029)
Prin collection on notes receivable 21,544,337 18,101,810
(Increase) decrease in restricted cash (837,347) (15,000)
------------- -------------
Net cash provided (used) by
investing activities 812,870 (25,419,164)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debenture notes payable (235,928) (132,473)
Payments on financing agreements (2,974,751) (4,196,359)
Proceeds from financing agreements 3,012,575 1,726,300
Proceeds from notes payable 23,287,331 49,994,608
Payments on notes payable (21,761,704) (18,639,704)
------------- -------------
Net cash provided (used) by
financing activities 1,327,523 28,752,372
------------- -------------
NET INCREASE IN CASH 59,439 788,039
CASH, BEGINNING OF PERIOD 6,015,567 5,119,906
CASH, ENDED 6,075,006 5,907,945
============= =============
</TABLE>
<PAGE> 7
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,nonperforming, nonconforming and subperforming
notes receivable and promissory notes from financial institutions, and mortgage
and finance companies. The Company services and collects such notes receivable
through enforcement of terms of original note, modification of original note
terms and, if necessary, liquidation of the underlying collateral.
In January 1997, a wholly owned subsidiary was formed, to originate or
purchase, sub prime residential mortgage loans to individuals whose credit
histories,income and other factors cause them to be classified as nonconforming
borrowers.
A summary of the Company's significant accounting policies follows.
Basis of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents 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 no 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 under performing 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 has the
ability and intent to hold its notes until maturity, payoff or liquidation of
collateral. Impaired notes are measured based on the present value of expected
future cash flows discounted at the note's effective interest rate or, as a
practical expedient, at the observable market price of the note receivable or
the fair value of the collateral if the note is collateral dependent. A note
receivable is impaired when it is probable the Company will be unable t collect
all contractual principaland interest payments due in accordance with the terms
of the note agreement.
In general, interest on the notes receivable is calculated based on
contractual interest rates applied to daily balances of the collectible
principal amount outstanding using the simple-interest method.
Accrual of interest on notes receivable, including impaired notes
receivable, is discontinued when management believes,after considering economic
and business conditions and collection efforts, that the borrowers financial
condition is such that collection of interest is doubtful When interest accrual
is discontinued, all unpaid accrued interest is reversed.Subsequent recognition
of income occurs only to the extent payment is received subject to management's
assessment of the collectibility of the remaining interest and principal. A
nonaccrual note is restored to an accrual status when it is no longer
delinquent and collectibility of interest and principal is no longer in doubt
and past due interest is recognized at that time.
Loan purchase discount is amortized to income using the interest method
over the period to maturity. The interest method recognizes income by applying
the effective yield on the net investment in the loans to the projected cash
flows of the loans. Discounts are amortized if the projected payments are
probable of collection and the timing of such collections is reasonably
estimable.The projection of cash flows for purposes of amortizing purchase loan
discount is a material estimate, which could change significantly, in the near
term. Changes in the projected payments are accounted for as a change in
estimate and the periodic amortization is prospectively adjusted over the
remaining life of the loans. Should projected payments not exceed the carrying
value of the loan,the periodic amortization is suspended and either the loan is
written down or an allowance for uncollectibility is recognized.
Allowance for Loan Losses - The allowance for loan losses, a material
estimate which could change significantly in the near-term, is initially
established by an allocation of the purchase loan discount based on the
management's assessment of the portion of purchase discount that represents
uncollectable principal. Subsequently, increases to the allowance are made
through a provision for loan losses charged to expense and the allowance is
maintained at a level that management considers adequate to absorb potential
losses in the loan portfolio.
Management's judgment in determining the adequacy of the allowance is
based on the evaluation of individual loans within the portfolios,the known and
inherent risk characteristics and size of the note receivable portfolio, the
assessment of current economic and real estate market conditions, estimates of
the current value of underlying collateral, past loan loss experience and other
relevant factors. Notes receivable, including impaired notes receivable, are
charged against the allowance for loan losses when management believes that the
collectibility of principal is unlikely based on a note-by-note review. Any
subsequent recoveries are credited to the allowance for loan losses when
received.In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties, when
considered necessary.
The Company's real estate notes receivable are collateralized by real
estate located throughout the United States with a concentration in the
Northeast. Accordingly, the collateral value of a substantial portion of the
Company's real estate notes receivable and real estate acquired through
foreclosure is susceptible to changes in market conditions.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on notes
receivable, future additions to the allowance or write-downs may be necessary
based on changes in economic conditions.
Other Real Estate Owned - Other real estate owned consisting of
properties acquired through,or in lieu of, foreclosure or other proceedings are
held for sale and are carried at the lower of cost or fair value less estimated
costs of disposal. Any write-down to fair value, less cost to sell, at the time
of acquisition is charged to the allowance for loan losses. Subsequent
write-downs are charged to operations based upon management's continuing
assessment of the fair value of the underlying collateral.Property is evaluated
regularly to ensure that the recorded amount is supported by current fair
values and valuation allowances are recorded as necessary to reduce the
carrying amount to fair value less estimated cost to dispose. Revenue and
expenses from the operation of other real estate owned and changes in the
valuation allowance are included in operations. Costs relating to the
development and improvement of the property are capitalized, subject to the
limit of fair value of the collateral, while costs relating to holding the
property are expensed. Gains or losses are included in operations upon
disposal.
Building, Furniture and Fixtures- Building, furniture and fixtures are
recorded at cost net of accumulated depreciation.Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 40 years. Gains and losses on dispositions are recognized upon
realization. Maintenance and repairs are expensed as incurred.
Deferred Financing Costs - Debt financing costs, which include loan
origination fees incurred by the Company in connection with obtaining financing
are deferred and are amortized based on the principal reduction of the related
loan.
Mortgage Servicing Rights -The Company allocates the total cost of the
mortgage loans purchased or originated, proportionately, to the mortgage
servicing rights and the loans based on the relative fair value. The servicing
rights capitalized are amortized in proportion to and over the period of,
estimated net servicing income including prepayment assumptions based upon the
characteristics of the underlying loans. Capitalized servicing rights are
periodically assessed for impairment based on the fair value of the rights with
any impairment recognized through a valuation allowance.
Pension Plan - The Company has a defined contribution retirement plan
(the "Plan") covering all full-time employees who have completed one year of
service. Contributions to the Plan are made in the form of payroll reductions
based on employees' pretax wages. Currently, the Company does not offer a
matching provision for the Plan.
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 incom 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.
Fair Value of Financial Instruments -Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet for which it is practicable to
estimate that value. In cases where quoted market prices are not available,fair
values are based on estimates using present value or other valuation techniques
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial assets and liabilities from its disclosure
requirements.Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
a. Cash, Restricted Cash, Accrued Interest Receivable,Other Receivable
and Accrued Interest Payable -The carrying values reported in the
balance sheet are a reasonable estimate of fair value.
b. Notes Receivable - Fair value of the net note receivable portfolio
is estimated by discounting the future cashflows using the interest
method. The carrying amounts of the notes receivable approximate
fair value.
c. Short-Term Borrowings -The carrying amounts of the financing agree
ment 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 -Statement of Financial Accounting Standards No. 131
("FAS 131"), Related Information,replaced the "industry segment" approach
with the "management" approach. The management approach designates the
internal reporting that is used by management for making operating
decisions and assessing performance as the source of the Company's
reportable segments. FAS 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of FAS 131
did not affect results of operations or the financial position of the
Company but did affect the Company's footnote disclosures (Note 12).
Comprehensive Income - SFAS No. 130, Reporting Comprehensive Income
defines comprehensive income as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and
distributions to stockholders. The Company had no items of other
comprehensive income in 2000 and 1999; therefore net income (loss was the
same as its comprehensive income (loss).
Recent Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
The Company is required to implement FAS 133 on January 1, 2001. FAS 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 this standard
will have any effecton its results of operations and financial position.
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 purchase of additional loans and the
quality of such 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's portflio 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, 2000,
the Company purchased 1,115 loans in eleven portfolios consisting primarily of
first and second mortgages, with an aggregate face value of $27.6 million at an
aggregate purchase price of $23.1 million or 86% of the face value and no OREO
properties, compared with the purchase during the six months ended June 30,1999
of 1,494 loans with an aggregate face value of $53.3 million at an aggregate
purchase price of $48.9 million or 92% of aggregate face value. Acquisition of
these portfolios was fullyfunded 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 increases in the level of interest income during future periods.
Payments 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, general and administrative expenses excluding personnel expenses.
There can be no assurance the Company will be able to acquire any
additional loans on favorable terms or at all.
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 lower credit quality
borrowers present an opportunity for the Company to earn superior returns for
the risks assumed. Tribeca provides first and second mortgages, originated on a
retail basis through marketing efforts including utilization of the company's
database. Tribeca is currently licensed as a mortgage banker in Alabama,
California, Colorado, Connecticut, District of Columbia, Florida, Georgia,
Kentucky, Illinois, Maryland, Massachusetts, Missouri, New York, New Jersey,
North Carolina, Oklahoma,South Carolina, and Virginia, Washington State, West
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 six months ending June 30, 2000 Tribeca originated 47
mortgages with an aggregate initial principal amount of $2,639,466, compared to
7 mortgages with an aggregate initial principal amount of $568,825 in mortgages
during the six months ending June 30 1999.During the six months ending June 30,
2000, Tribeca incurred an operating loss of $104,290 compared to an operating
loss of $259,671 during the six months ended June 30, 1999. This decrease in
loss reflected successful efforts to reduce core-operating expenses within
Tribeca during the six months ending June 30, 2000. As of June 30, 2000,Tribeca
had approximately $4.7 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 increases in the prime rate during 2000, from 8.5%
to 8.75% and 9.0% in February and March respectively, increased the benchmark
rate for the cost of funds on Senior Debt used to fund loan portfolio
acquisitions directly decreasing net income.The weighted average interest rate
on borrowed funds for the Senior Debt based on the balances as of June 30, 2000
and June 30, 1999 were 9.3% and 8.3%, respectively. As of June 30, 2000, the
Company had eighty-eight loans outstanding with an aggregate principal balance
of $186.2 million. Additionally the Company with Tribeca has financing
agreements with the Senior Debt Lender, which had an outstanding balance of
$828,899 at June 30, 2000.
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 have caused direct
corresponding changes in interest income. Management and its Senior Debt Lender
have agreed to a fixed base rate on Senior Debt of 8.75%, for the 12-month
period April 1, 2000 thru March 31, 2001. Any increases, during this period in
the prime rate will not negatively impact the net income of the Company.
Inflation. The impact of inflation on the Company's operations
during the three months ended June 30, 2000 and 1999 was immaterial.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999.
Total revenue, which is comprised of interest income,purchase discount
earned, gains on bulk sale of notes, gain on sale of notes receivable
originated, gain on sale of OREO, rental income and other income, increased by
$1,284,584 or 24%, to $6,669,756 during the three months ended June 30, 2000,
from $5,385,172 during the three months ended June 30, 1999.
Interest income on notes receivable increased by $1,216,272 or 35%, to
$4,737,847 during the three months ended June 30, 2000 from $3,521,575 during
the three months ended June 30, 1999.The Company recognizes interest income on
notes included in its portfolio based upon three factors: (i) interest on
performing notes, (ii) interest received or committed with settlement payments
on non-performing notes and (iii) the balance of settlements in excess of the
carried face value. This increase resulted primarily from the $70.7 million in
high yielding performing notes acquired by the Company during July 1999 through
June 2000, which was only partially offset by collections, prepayments,and loan
sales.
Purchase discount earned decreased by $385,919 or 29%, to $904,095
during the three months ended June 30, 2000 from $1,290,014 during the three
months ended June 30, 1999. 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 increases in the reserves on older portfolio's held by
the Company.
Gain on bulk sale of notes receivable increased by $357,180 or 250% to
$500,000 during the three months ended June 30, 2000 from $ 142,820 during the
three months ended June 30, 1999. This increase is due primarily from the sale
of one large loan during the three months ending June 30, 2000. 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 increased by $22,059 or 97%
to $44,874 during the three months ended June 30, 2000 from $22,815 during the
three months ended June 30, 1999. This increase reflected an increase in note
originations by Tribeca during the three months ended June 30, 2000, which
created more inventory availablefor sale during the three months ended June 30,
2000 compared to the three months ended June 30, 1999.
Gain on sale of OREO increased by $25,854 or 42% to $87,608 during the
three months ended June 30,2000 from $61,754 during the three months ended June
30, 1999. This increase resulted primarily from an increase in value of the
properties sold, and an increase in the number of OREO's sold during the three
months ended June 30,2000 as compared to the three months ended June 30, 1999.
The Company sold 34 and 15 OREO properties during the three months ended June
30, 2000 and June 30, 1999.
Rental income decreased by $55,072 or 25% to $168,001 during the three
months ended June 30, 2000,from $223,073 during the three months ended June 30,
1999. This decrease primarily reflected a decrease in the number of rental
properties during the three months ended June 30, 2000 as compared to the three
months ended June 30,1999. The Company had 80 and 107 rental properties during
the three months ended June 30, 2000 and June 30, 1999.
Other income increased by $104,210 or 85%,to $227,331 during the three
months ended June 30, 2000 from $123,121 during the three months ended June 30,
1999. This increase reflected increases in prepayment penalties, late charges,
and modification fees resulting from the increase in size of the Company's
portfolio and loan fees associated with Tribeca loans sold.
Total operating expenses increased by $1,503,998 or 29% to $6,645,831
during the three months ended June 30, 2000 from $5,141,833 during the three
months ended June 30, 1999.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 $1,260,596 or 41%, to $4,366,994 during
the three months ended June 30, 2000, from $3,106,398 during the three months
ended June 30, 1999. This increase resulted primarily from the increase in
Senior Debt reflecting the acquisition of $70 million in notes receivables and
increases in our costs of funds due to three increases in the prime rate. Costs
of funds were 9.29% and 8.3% during the three months ended June 30, 2000 and
June 30, 1999. Total debt increased by $19,468,485 or 12%,to $187,534,327 as of
June 30, 2000 from $168,065,842 as of June 30, 1999. Total debt consists
principally of Senior Debt, and also includes debentures, and financing
agreements and loans from affiliates.
Collection,general and administrative expenses increased by $78,849 or
4% to $1,931,040 during the three months ended June 30, 2000 from $1,852,191
during the three months ended June 30, 1999. Collection, general and
administrative expense consists primarily of personnel expense, and all other
collection expenses including OREO related expense, litigation expense, and
miscellaneous collection expense.
Personnel expenses increased by $266,123 or 39% to $940,434 during
the three months ended June 30, 2000from $674,311 during the three months ended
June 30, 1999.This increase resulted largely from increases in staffing and the
experience level of personnel in the Company's core business. All other
collection expenses decreased by $187,274 to $990,606 during the three months
ended June 30, 2000 from $1,177,880 during the three months ended June 30,1999.
This decrease reflected decreases in core operating expenses associated with
reductions in legal, office, computer consulting and supplies, and collection
expenses primarily from decreased OREO activity, negotiated fixed litigation
expenses and the growth of the Company's performing portfolio, which reduces
collection expenses.
Provisions for loan loss increased from $0 to$156,556 due primarily to
an excess of losses associated with three portfolios over the estimated reserve
for the three months ended June 30, 2000.
Amortization of deferred financing costs increased by $21,118 or 15%to
$159,558 during the three months ended June 30, 2000, from $138,440 during the
three months ended June 30, 1999. This increase resulted from a payoff of one
senior debt note and the realization of the 1% exit fee, and increased
collections and repayment of the senior debt during the three months ended June
30, 2000 as compared to the three months ended June 30, 1999.
Depreciation expense decreased by $13,121 or 29%,to $31,683 during the
three months ended June 30, 2000, from $44,804 during the three months ended
June 30, 1999.
Operating income decreased by $219,414 to $23,925 during the three
months ended June 30, 2000 from $243,339 during the three months ended June 30,
1999.
During the three months ended June 30, 2000 there was no provision for
income tax due to a loss carry-forward. During the three months ended June 30,
1999 there was no provision for income taxes due to a loss.
Net income decreased by $219,414 to $23,925 during the three months
ended June 30, 2000 from $243,339 during the three months ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999.
Total revenue, increased by $2,626,853 or 25%, to $13,168,213 during
the six months ended June 30, 2000,from $10,541,360 during the six months ended
June 30, 1999.
Interest income on notes receivable increased by $2,870,555 or 42%,to
$9,633,548 during the six months ended June 30, 2000 from $6,762,993 during the
six months ended June 30, 1999.This increase resulted primarily from the $70.7
million in high yielding performing notes acquired by the Company during July
1999 through June 2000, which was only partially offset by collections,
prepayments, and loan sales.
Purchase discount earned decreased by $364,884 or 16%, to $1,885,608
during the six months ended June 30, 2000 from $2,250,492 during the six months
ended June 30, 1999. This decrease reflected the growing proportion of the
Company's portfolio comprised of performing loans purchased atsmaller discounts
than the non-performing high-discount loans historically purchased by the
Company, which results in income being realized as interes rather than purchase
discount, and increases in reserves in maturing portfolios which lower discount
available to be earned during the six months ended June 30, 2000.
Gain on bulk sale of notes receivable decreased by $53,266 to$ 575,756
or 8% during the six months ended June 30, 2000, from $629,021 during the six
months ended 1999. This decrease reflected a decrease in aggregate bulk sales
during the six months ended June 30, 2000, which was only partially offset by
the greater gain realization on the properties held during the six months ended
June 30, 2000. The Company sold $1.4 million in sales during the six months
ended June 30, 2000 and $4.3 million during the six months ended June 30, 1999.
Gain on sale of notes originated by Tribeca increased by $3,191 or 3%
to $101,119 during the six from $ 97,928 during the six months ended June 30,
1999.
Gain on sale of OREO increased by $32,665 to $174,795 during the six
months ended June 30, 2000, from $142,130 during the six months ended June 30,
1999. The Company sold 75 OREO properties during the six months ended June
30,2000 and 47 OREO properties during the six months ended June 30, 1999. This
increase resulted primarily from an increase in value of the properties sold,
and an increase in the number of OREO's sold during the six months ended June
30, 2000 as compared to the six months ended June 30, 1999.
Rental income decreased by $104,764 or 23% to $355,781 during the six
months ended June 30, 2000, from $460,545 during the six months ended June 30,
1999. This decrease reflected a decrease in the number of rental properties
during the six months ended June 30, 2000 as compared to the six months ended
June 30,1999. The Company had 80 and 107rental properties during the six months
ended June 30, 2000 and June 30, 1999.
Other income increased by $243,356 or 123%,to $441,607 during the six
months ended June 30, 2000 from $198,251 during thesix months ended June 30,
1999. This increase reflected increases in prepayment penalties, late charges,
and modification fees resulting from the increase in size of the Company's
portfolio and loan fees associated with Tribeca loans sold.
Total operating expenses increased by $3,184,927 or 32%,to $13,265,108
during the six months ended June 30, 2000, from $10,080,181 during the six
months ended June 30, 1999.
Interest expense increased by $2,869,902 or 48%,to $8,787,794 during
the six months ended June 30, 2000 from $5,917,89 during the six months ended
June 30, 1999.This increase resulted primarily from the increase in Senior Debt
reflecting the acquisition of $70 million in notes receivables and increases in
costs of funds due to three increases in the prime rate. Costs of funds were
9.29% and 8.3% during the six months ended June 30, 2000 and June 30, 1999.
Total debt increased by $19,468,485 or 12%, to $187,534,327 as of June 30,2000
from $168,065,842 as of June 30, 1999. Total debt includes Senior Debt,
debentures, and financing agreements and loans from affiliates.
Collection, general and administrative expenses increased by $123,615
or 3%, to $3,835,449 during the six months ended June 30,2000 from $ 3,959,064
during the six months ended June 30, 1999.
Personnel expenses increased by $378,938 or 26%, to$1,838,889 during
the six months ended June 30, 2000 from $1,459,951 during the six months ended
June 30, 1999. The increase reflected the staffing and the experience level of
personnel in the Company's core business during the six months ended June 30,
2000. All other collection expenses decreased by $255,322 or 11% to $2,120,175
during the six months ended June 30, 2000 from $2,375,497 during the three
months ended June 30, 1999.This decrease reflected decreases in core operating
expenses associated with reductions in legal, office, computer consulting and
supplies, and collection expenses primarily from decreased OREO activity,
negotiated fixed litigation expenses and the growth of the Company's performing
portfolio, which reduces collection expenses.
Provisions for loan losses increased to $171,705 during the six months
ended June 30, 2000 from $0 during the six months ended June 30, 1999. This was
due primarily to an excess of losses associated with three portfolios over the
estimated reserve during the six months ended June 30, 2000.
Amortization of deferred financing costs increased by $25,232 or 9%,to
$282,693 during the six months ended June 30,2000 from $257,461 during the six
months ended June 30, 1999. This increase resulted from a payoff of one senior
debt note and the realization of the 1% exit fee, and increased collections and
repayment of the senior debt during the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999.
Depreciation expense decreased by $5,527 or 9%, to $63,852 during six
months ended June 30, 2000, from $69,379 during the six months ended June 30,
1999.
Operating income decreased by $558,074 to a lossof $96,895 during the
six months ended June 30, 2000 from a gain of $461,179 during the six months
ended June 30, 1999.
During the six months ended June 30, 2000 or the six months ended June
30,1999, there were no provisions for income taxes due to the operating loss
carry-forward.
Net income decreased by $558,074 to loss of $96,895 during the six
months ended June 30, 2000 from a gain of $461,179 during the six months ended
June 30, 1999.
Liquidity and Capital Resources
General. During the six months ended June 30, 2000 the Company
purchased 1,115 loans in eleven portfolios with an aggregate face value of$27.6
million at an aggregate purchase price of $23.1 million or 84%of face value and
no OREO properties. 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
aggregate face value.The Company's portfolio acquisitions have been slower than
anticipated during the six months ended June 30,2000 due to competitive market
conditions, with that in mind, however, the pace of acquisitions has
historically increased during the last two-quarters of the year.
The Company's portfolio of notes receivable at June 30,2000 had a face
value of $207.3 million and included net notes receivable of approximately
$166.9 as compared with a face value of $188.3 million and net notes receivable
of approximately $145.5 million as of June 30, 1999. Net notes receivable are
stated at the amount of unpaid principal, net of purchase discount, allowance
for loan losses. 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 30,2000, the Company used cash in the
amount of$2,080,954 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 provided $812,870 in its investing activities,
primarily reflecting purchases of notes receivable which purchases were 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 $1,327,523 of net cash provided by financing activities,including primarily,
a net increase in Senior Debt of $1,525,627 million. The above activities
resulted in a net increase in cash at June 30, 2000 over December 31, 1999 of
$59,439.
In the ordinary course of its business, the Company accelerates and
forecloses upon real estate securing nonperforming notes receivable included in
its portfolio. As a result of such foreclosures and selective direct purchases
of OREO, at June 30, 2000 and 1999, the Company held OREO recorded on the
financial statements at $6.3 million and $10.3 million, respectively. OREO is
recorded on the financial statementsof 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, 2000,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 $6.9
million. 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 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 senior debt
facilities, collections on notes receivable and gain on sale of notes and OREO
properties.
At June 30, 2000, the Company had unrestricted cash, cash equivalents
and marketable securities of $6.0 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
and to repay the long term indebtedness of the Company.
Financing Activities
Senior Debt. As of June 30, 2000, the Company owed an aggregate of
$186.2 million to the Lender of Senior Debt, under 88 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 between 0%,
and 2.00% 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 of restricted cash in such accounts was
$1,225,318 and $1,118,446 on June 30, 2000 and June 30, 1999 respectively.
Total Senior Debt availability was approximately $250 million at June
30, 2000, of which approximately $186.2 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 $4 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
$68 million available to purchase additional portfolios of notes receivable and
OREO.
The Company's Senior Debt Lender has provided Tribeca with a
warehouse financing agreementof $2 million. At June 30,1999, Tribeca had drawn
down $ 488,030 on the line.
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, 2000 and December 31, 1999, $97,048 and $332,176, 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 was due to make a
balloon payment to pay off this debt, however $97,048 was refinanced with a few
of the prior debenture holders, this debt will be repaid over eighteen months.
The remaining balance to debentures holders was paid off with financing
provided
by the Companys Senior Debt Lender.
OREO Line of Credit. The Company has a line of credit with the Senior
Debt Lender permitting it to borrow a maximum of approximately $1,500,000 at a
rate equal to such lender's prime rate plus two percent per annum. Principal
repayment of the lines is due six months from the date of each cash advance and
interest is payable monthly. The total amounts outstanding under the financing
agreements as of June 30, 2000 and December 31, 1999,were $210,545 and $615,720
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
financing agreements and accrued interest, as well as surpass the collectible
value of the original secured notes receivable. Management has reached an
agreement in principal with its Senior Debt Lender to increase the
availability under this credit facility to cover additional properties
foreclosed upon by the Company, which the Company may be required to hold as
rental property to maximize its return.
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. Through the Complaint, the Company sought rescission of
the asset purchase agreement or damages incurred in connection with the
purchase.
By an order dated September 22, 1999, the Court dismissed one of
the Company's fraud claims against PCC and all of the Company's claims against
the individual Defendants. On October 22, 1998, PCC filed an answer and
counterclaim alleging a breach of the purchase agreement and seeking its costs
and fees incurred in connection with the proceeding.
Trial in this matter was held on the remaining claims during
January 2000. At the conclusion of the trial,the Court orally ruled in favor of
the Company and against PCC. On February 10, 2000, he Court entered judgment in
favor of the Company and against PCC in the amount of $1.7million plus interest
from May 7, 1997. With interest, the amount due under the judgment is
approximately $2 million as of February 10, 2000. The Company is currently in
the process of attempting to collect the amount due under the judgment. The
Company does not presently known if PCC has sufficient assets to satisfy the
judgment. The Company has collected $ 55,000 towards this receivable as of July
31, 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
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").
K sought to recover 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 principal 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. Prior to trial, the claims asserted by K against Mr. Axon were
voluntarily dismissed. 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. On March 6, 2000, and June 26, 2000 the Court entered an opinion
directing Tribeca to pay $20,000 to one creditor of K and dismissed all further
claims against Tribeca. K Mortgage has requested the Court to reconsider its
prior orders, however,the Company believes that the Court is unlikely to modify
its March 6 and June 26, 2000 Orders.
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 that is no longer pending. Rosen withdrew
from representation of the Company when James Jacobs,the lead attorney for the
Company in the trademark action, joined a firm that was representing the
Company's adversary in other matters. The complaint seeks $145,000 in damages.
Rosen's motion for summary judgment was denied by the court. The Company plans
to continue its vigorous defense of this action. Trial in this matter is
currently scheduled for October 22, 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. Trial in this matter was held in November of 1999 and the Company
obtained a judgment of $600,000. In connection with this judgment, the parties
entered into a Settlement Agreement pursuant to which certain additional
collateral was provided to the Company to secure the payment of the judgment
amount.
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 24, 2000 at the Company's annual meeting the shareholders voted to
ratify the amendment and restatement of the Company's Certificate of
Incorporation, to elect seven directors to the Company's Board of Directors,and
to ratify the appointment of Deloitte & Touche LLP as the Company's independent
public auditors for the fiscal year ended December 31,2000.
Amendment and Restatement of Certificate of Incorporation
<TABLE>
<CAPTION>
For Against Abstain Not Voting Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amendment 4,197,779 223,670 1,495 1,494,583 5,917,527
For Against Abstain Not Voting Total
Election of Directors 4,198,299 0 224,645 1,494,583 5,917,527
Independent Public Auditors For Against Abstain Not Voting Total
-----------------------------------------------------------------------------------------------------------------
Deloitte & Touche LLP 4,197,719 224,215 1,010 1,494,583 5,917,527
</TABLE>
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on form 8-K
None
<TABLE>
(a)
EXHIBIT TABLE
Exhibit
No. Description
<S> <C>
3(a) Restated Certificate of Incorporation. Previously filed with
and incorporated herein by reference to, the Companys 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.
10(f) Loan and Real Estate Purchase Agreement dated September 17, 1998 by
and among Franklin credit Management Corporation and Home Gold
Financial Inc. f/k/a Emergent Mortgage Corp. 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, 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. 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.
10(j) Promissory Note between Steve Leftkowitz, board member, and the Company
dated March 31, 1999. Filed with the Commission on March 30,2000.
10(k) Loan Purchase Agreement dated March 31, 1999 between the
Company and Steve Leftkowitz, board member.Previously filed with and
incorporated herein by reference to,the Company's Form 10KSB.Filed with
the Commission on March 30, 2000.
11 Computation of earnings per share. Filed here with.
</TABLE>
<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, 2000 FRANKLIN CREDIT MANAGEMENT CORPORATION
By: 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 August 11,2000
--------------- -----------------
Thomas J. Axon and Director
(Principal executive officer)
JOSEPH CAIAZZO Executive Vice President and Acting August 11,2000
-------------- -----------------
Joseph Caiazzo Chief Financial Officer,
Secretary Chief Operating Officer and
Director
<PAGE>
Exhibit 11.
Computation of earnings per share second quarter 2000.
<TABLE>
<CAPTION>
No. of Shares Weight
<S> <C> <C>
09/30/99 Common stock 5,916,527
----------------------- 25% 1,479,132
5,916,527
12/31/99 Common stock 5,916,527
----------------------- 25% 1,479,132
5,916,527
03/31/00 Common stock 5,916,527
----------------------- 25% 1,479,132
5,916,527
06/30/00 Common stock 5,916,527
---------------------- 25% 1,479,132
5,916,527
23,266,108
Weighted average number of shares 5,916,527
Earnings per Common share:
Net Income (96,895) $ (.02)
</TABLE>
<PAGE>
<TABLE>
Exhibit 11.
Computation of earnings per share second quarter 1999
No. of Shares Weight
<S> <C> <C>
09/30/99 Common stock 5,916,527
--------------
5,916,527 25% 1,479,132
12/31/99 Common stock 5,916,527 25% 1,479,132
--------------
5,916,527
03/31/00 Common stock 5,916,527 25% 1,479,132
----------------
5,916,527
06/30/00 Common stock 5,916,527 25% 1,479,132
-------------
5,916,527
23,266,108
Weighted average number of shares 5,916,527
Earnings per Common share:
Net Income $461,179 $ .08
</TABLE>
