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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No .
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. []
Issuer's revenues for its most recent fiscal year: $ 29,047,390
As of March 15, 2001 the issuer had 5,916,527 of shares of Common Stock,
par value $0.01 per share, outstanding. On that date, the aggregate market
value of the voting stock held by persons other than those who may be
deemed affiliates of the issuer was $1,952,454 (based on the average of the
reported closing bid and ask price on such date).
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes X No .
Transitional Small Business Disclosure Format: Yes No X
Portions of the registrant's definitive proxy statement, which will be
filed within 120 days of December 31, 2000, are incorporated by reference
into Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS OF REGISTRANT. Franklin Credit Management Corporation ("FCMC", and
together with its wholly-owned subsidiaries, the "Company") is a specialty
consumer finance and asset management company primarily engaged in the
acquisition, servicing and resolution of performing, sub-performing and
non-performing residential mortgage loans and residential real estate. The
Company's portfolio consists primarily of non-conforming subprime assets.
Mortgage loans are purchased at a discount relative to the aggregate unpaid
principal balance of the loans and real estate is acquired in foreclosure
or otherwise at a discount relative to the appraised value of the asset.
During 2000, the Company took advantage of market opportunities to increase
its volume of loan acquisitions and pursued its strategy of acquiring
primarily higher coupon, non-investment grade performing loans. As a
result, the proportion of its portfolio comprised of such loans increased
during 2000. The Company expects to continue this strategy, as well as
increase both the pace and amount of acquisitions, during 2001.
The Company believes it has built a servicing infrastructure and developed
a servicing expertise, which permits the expansion of the Company's
portfolio with a minimal increase in incremental costs. In addition, the
Company believes that its ability to service and rehabilitate loans reduces
its reliance on secondary marketing of portfolios and may provide an
advantage as compared to competitors that rely on the secondary market as
their primary strategy.
In January 1997, the Company formed a wholly owned subsidiary, Tribeca
Lending Corp. ("Tribeca"), to originate primarily subprime residential
mortgage loans made to individuals whose credit histories, income and other
factors cause them to be classified as non-conforming borrowers. Management
believes that lower credit quality borrowers present an opportunity for the
Company to earn superior returns for the risks assumed. Tribeca provides
first and second mortgages that are originated on a retail basis through
marketing efforts that include utilization of the FCMC database. Tribeca is
currently licensed as a mortgage banker in Alabama, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Kentucky, Illinois,
Maryland, Massachusetts, Michigan, Missouri, New York, New Jersey, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Virginia,
Washington State, and 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.
Since commencing operations in 1990, the Company has purchased, in
aggregate, approximately 19,854 loans with a face value of approximately
$554 million. Approximately $175 million, or 32%, of these loans were
purchased from the Resolution Trust Company ("RTC") and, when the RTC
ceased to function, the FDIC. The remaining $379 million of these loans
were purchased from private institutions. The Company seeks to develop
relationships with mortgage bankers, banks, and other specialty finance
companies which may, through on-going purchase arrangements, provide
additional sources of mortgage portfolios, individual mortgage assets and
real estate assets.
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During the year ended December 31, 2000, the Company purchased 2,907 loans
with an aggregate face value of $113 million at an aggregate purchase price
of $96 million or 85% of face value. As of December 31, 2000, the Company's
portfolio included approximately 8,129 loans with an aggregate face value
of $255 million. An allowance for loan losses of approximately $24 million
has been recorded against this face value. At December 31, 2000,
approximately 88% of the Company's loan portfolio consisted of first
mortgages, home equity/home improvement and second mortgages collateralized
by real estate, 9% consisted of loans collateralized by other assets, and
3% consisted of unsecured loans. Although the Company attempts to collect
on all loans in its portfolio, it is unlikely that the Company will be
successful in collecting the full amount due for each loan in its
portfolio. In addition, significant administrative and litigation expenses
are often incurred in its collection efforts. See "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Item 7. Financial Statements".
Occasionally, the Company sells portfolios of performing and reperforming
loans on a whole loan basis. During 2000, the Company sold 94 performing
loans with an aggregate face value of $8 million, and 39 non-performing
loans with an aggregate face value of $5 million. During 1999 the Company
sold 130 performing loans with a face value of $5 million. The Company
expects to continue this strategy, if favorable opportunities to do so
continue to present themselves.
As of December 31, 2000, the Company owed an aggregate of $231 million
("Senior Debt") to a bank (the "Senior Debt Lender"), which was incurred in
connection with the purchase of, and is secured by, the Company's loan and
OREO (Other Real Estate Owned) portfolios. In March 2000, in connection
with continuing increases in the availability extended to the Company, the
Company's Senior Debt agreement was amended to provide that interest on
Senior Debt accrues at variable rates between 0% and 2.00% over a fixed
rate of 8.75%. At December 31, 2000, the weighted average interest rate on
Senior Debt was 9.16%. The Senior Debt Lender has advised the Company that
as of December 31, 2000, there was $23 million of Senior Debt available to
be used by the Company to purchase additional portfolios of mortgage loans.
The continued willingness of the Senior Debt Lender to provide funding is a
critical component of the Company's acquisition strategy, although there
can be no assurance that such willingness will continue.
The Company employs standardized in-house servicing procedures in the
acquisition, origination, and collection of loans. The Company is divided
into five operating departments, which are described below:
Acquisition Department. The Acquisition Department divided into a bulk
purchase unit, which is responsible for acquisitions in excess of $1
million and a flow facility, which is responsible for acquisitions less
than $1 million. The Acquisition Department identifies opportunities to
purchase portfolios of mortgage loans, performs due diligence, and assists
in the integration of the acquired assets into the Company's existing
portfolio. The due diligence process, with respect to loan purchases,
includes an analysis of the majority of loans in a portfolio, evaluating,
among other things, lien position and value of collateral, debt-to-income
ratios, the borrower's creditworthiness, employment stability, years of
home ownership, education, credit bureau reports and mortgage payment
history. The Acquisition Department generally conducts on-sight reviews of
the loan files comprising the portfolio, and where appropriate performs an
on-site evaluation of the seller's loan servicing department. This process
often provides the Company additional information critical to properly
evaluating the portfolio. The information derived from due diligence is
compared to the Company's historical statistical data base, and coupled
with the Company's cumulative knowledge of the sub-prime mortgage industry
enables the Acquisition Department to project a collection strategy and
estimate the collectibility and timing of cash flows with respect to each
loan. Based upon this information, the Acquisition Department prepares a
bid,
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which meets the Company's established pricing and yield guidelines. When
loans are acquired the Acquisition Department, with the assistance of the
Management Information Systems staff ("MIS"), monitors the electronic
transfer of loan data into the Company's data management system.
Service Department. The Service Department manages the Company's performing
loans and seeks to provide quality service to customers and secure full
payment of the total face value and accrued charges, by monitoring monthly
cash receipts, maintaining customer relations and, where appropriate,
entering into extension and modification agreements. The Service Department
is responsible for the maintenance of real estate tax and insurance escrow
accounts. Service Department members continuously review and monitor the
status of collections and individual loan payments in order to proactively
identify and solve potential collection problems as well as identify
potential loans for sale to third parties or refinance though Tribeca. Upon
acquisition of loan portfolios, the Service Department, in conjunction with
MIS: (i) issues introductory letters with information regarding the change
of ownership of the loan, payment information and a toll-free Company
information telephone number; (ii) conducts internal audits of newly
acquired loans to identify and address any disputes or problems relating to
the accounting for these loans; and (iii) issues an audit letter advising
the borrower of the outstanding balance, last payment date and remaining
term of the loan. As of December 31, 2000, the Service Department managed
approximately 6,667 loan accounts, with a total principal outstanding
balance of approximately $212 million.
Legal Department. The Legal Department manages and monitors the progress of
defaulted loans requiring a legal action or other loss mitigation strategy.
These loans are identified and referred by the Acquisition or Service
Departments to the Legal Department, which prepares an analysis of each
loan to determine a litigation or collection strategy to maximize the size
and speed of recovery and minimize costs. This strategy is based upon the
individual borrowers' past payment history, ability to pay, collateral lien
position and current value of the collateral. The Legal Department sets the
collection strategy, negotiates settlements, modification and forbearance
agreements, and when appropriate retains outside counsel, manages their
costs, and monitors ensuing litigation to insure the optimal recovery of
the remaining principal and interest balance. The Legal Department monitors
each defaulted loan through the foreclosure process, recovery of a money
judgment or other settlement, and continues to monitor recovery of
deficiency balances after a foreclosure has been completed. As of December
31, 2000, the Legal Department managed approximately 1,462 loans, with a
total principal outstanding balance of approximately $ 43 million.
Real Estate Department. The Real Estate Department manages all properties
in order to preserve their value, realize rental income and insure that
maximum returns are realized upon sale. The Real Estate Department is
responsible for both the sale of OREO as well as for OREO that are held as
rental properties until such time as an economically beneficial sale can be
arranged. As Of December 31, 2000, the Real Estate Department managed
approximately 104 OREO properties, of which 47 were rental properties. The
Company seeks to rent those properties for which it believes it can realize
a higher return from such rental than from the value expected to be
realized in the sale of the property.
Subprime Residential Lending. Tribeca provides first and second mortgages
to individuals interested in refinancing performing loans in the Company's
existing database. Tribeca focuses on developing an array of niche products
to fulfill needs such as rehabilitation, high loan to value ("LTV"),
sub-prime, non-conforming and second mortgages. Loans are originated by a
retail sales force, which utilizes telemarketers to generate leads from the
Company's database of serviced loans. The majority of loans are expected to
be warehoused until the inventory reaches the critical mass needed to
maximize profits through bulk sales in the secondary market. Tribeca's
staff processes, underwrites and closes all loans in its own name.
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During 2000, Tribeca originated 118 mortgages with an aggregate principal
balance of $8.2 million. During 1999, Tribeca originated 31 mortgages with
an aggregate principal balance of $2.5 million.
Tribeca Loan Origination Volume for 2000
FHA 1st Mortgage 2nd Mortgage Total
Face Value 0 $6,720,887 $1,571,367 $8,292,254
Loans 0 79 39 118
FORMATION OF THE COMPANY. The Company was organized in Delaware in 1990, by
Thomas J. Axon, and Frank B. Evans, Jr., for the purpose of acquiring
consumer loan portfolios from the RTC and the FDIC. In March 1993, the
Company completed the private placement of $2,000,000 of 15% Debentures
(the "15% Debentures") and warrants for the purchase of the Company's
Common Stock, the proceeds of which were used to acquire interests in loan
portfolios and for operations. In December 1994, the Company merged with
Miramar Resources, Inc., a public oil and gas company organized in Delaware
that had emerged from bankruptcy proceedings on December 6, 1993. In
January 1995, the Company completed the private placement of $705,000 of
12% Debentures (the "12% Debentures"), the proceeds of which were used to
fund the acquisition of a loan portfolio, including amounts advanced by
stockholders, service existing debt obligations and for general working
capital. Additionally, in late 1995, the Company completed the private
placement of $555,000 of 12% Debentures (the "Harrison 1st Debentures"),
the proceeds of which were used to fund the acquisition of an additional
loan portfolio. Prior to 1995 the Company purchased all portfolios through
funds raised through limited partnerships. In 1995, nearly all of the
remaining limited partnership interests were purchased by the Company.
COMPETITION. The Company faces significant competition in the acquisition
of loan portfolios. Many of the Company's competitors have financial
resources, acquisition departments and servicing capacity considerably
larger than the Company's. Among the Company's largest competitors are EMC
Mortgage Corporation and Bayview Financial Trading Group. Competition for
acquisitions is generally based on price, reputation of the purchaser,
funding capacity and timing. See "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations: General - Cost
of Funds".
The market for subprime loan origination is also highly competitive.
Tribeca competes with savings banks, mortgage brokers, and wholesale
originators for the origination of mortgages. Among the largest of these
competitors are First Union, NationsBank, FHB, Household Financial Service
and Champion Mortgage. Many of Tribeca's competitors possess greater
financial resources, longer operating histories, and lower costs of capital
than Tribeca. Competition for mortgage originations is based upon marketing
efforts, loan processing capabilities, funding capacity, loan product
desirability and the ability to sell the loans for a premium in the
secondary market.
The Company also experiences competition from mortgage and finance
companies in the sale of reperforming and newly originated loan portfolios.
The continued tightening of credit requirements in the capital markets has
decreased both the demand for pools of performing mortgages which may later
be packaged in a securitization, as well as the prices paid for portfolios
offered for sale. Important characteristics which impact competition in
this market are price, loan-to-value, size of pools and the
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integrity of portfolio data. The Company faces intense competition from
numerous companies seeking to re-sell mortgage portfolios in the
marketplace. Nearly all of the Company's competitors have greater
experience and volume to supply to buyers. The Company believes that its
management information system and its continuous review and monitoring of
accounts, along with asset availability from new portfolio acquisitions and
originations should position the Company to compete efficiently in the sale
of loan portfolios.
CUSTOMERS. The Company's revenue is derived from interest and purchase
discount recognized from the collection of loans, origination fees, rental
income, gains recorded from the bulk sale of performing, non-performing and
originated loans to banks and other financial institutions, and the result
recorded from the sale of OREO. The Company's borrowers are a diverse
population and no single borrower represents a significant portion of the
Company's loans. The Company will sell bulk portfolios of performing and
non-performing loans, when such sales are economically beneficial to the
Company. As of March 30, 2001, there has been two bulk sales of loans
during 2001 for an aggregate face value of $6.5 million. While the Company
has previously been successful in marketing loan portfolios, which it has
sold, and believes there are sufficient buyers for its products, there can
be no assurance that the Company will be able to successfully market loan
portfolios in the future.
Suppliers. The Company acquires its loans through a variety of sources
including private and public auctions, negotiated sales, ongoing purchase
agreements, and joint-bids with other institutions. The supply of assets
available for purchase by the Company is influenced by a number of factors
including knowledge by the seller of the Company's interest in purchasing
assets, the general economic climate, financial industry regulation, and
new loan origination volume. While the Company continues to pursue
additional sources for purchasing assets, there can be no assurance that
existing and future sources will provide sufficient opportunities for the
Company to purchase assets at favorable prices. Prior to 1996 the RTC, and
the FDIC, represented the source of the majority of the Company's loan
purchases. During the past year, two institutions supplied the Company with
44% all of its portfolio acquisitions, as measured by purchase price. The
Company's sources of loan acquisition have varied from year to year and the
Company expects that this will continue to be the case. During the year the
Company created a niche for itself purchasing small individual loans from
various sources. During the year the Company created a niche for itself
purchasing individual assets, or pools of assets under a million dollars
from various sources. The Company believes that this market is under served
and may open up additional opportunities to establish relationships with a
continuous supply of loans that would not be available through periodic
bulk purchases.
Regulation. The Company's lending activities are subject to the Federal
Truth-in-Lending Act ("TILA") and Regulation Z (including the Home
Ownership and Equity Protection Act of 1994), the Equal Credit Opportunity
Act of 1974, as amended ("ECOA") and Regulation B, the Fair Credit
Reporting Act of 1970, as amended, the Real Estate Settlement Procedures
Act of 1974, as amended ("RESPA") and Regulation X, the Home Mortgage
Disclosure Act ("HMDA") and Regulation C, the Federal Debt Collection
Practices Act and the Fair Housing Act, as well as other federal and state
statutes and regulations affecting the Company's activities. Failure to
comply with these requirements can lead to loss of approved status, demands
for indemnification or mortgage loan repurchases, certain rights of
recision for mortgage loans, class action lawsuits and administrative
enforcement actions.
The Company is subject to the rules and regulations of, and examinations
by, the Department of Housing and Urban Development ("HUD"), the Federal
Housing Administration and other federal and state regulatory authorities
with respect to originating, underwriting, funding, acquiring, selling and
servicing mortgage loans. In addition, there are other federal and state
statutes and regulations affecting such
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activities. These rules and regulations, among other things, impose
licensing obligations on the Company, establish eligibility criteria for
loans, prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers, regulate
payment features and, in some cases, fix maximum interest rates, fees and
loan amounts. The Company is required to submit annual audited financial
statements to various governmental regulatory agencies that require the
maintenance of specified net worth levels.
TILA requires a written statement showing an annual percentage rate of
finance charges and requires that other information be presented to debtors
when consumer credit contracts are executed. RESPA requires written
disclosure concerning settlement fees and charges, mortgage-servicing
transfer practices and escrow or impound account practices. It also
prohibits the payment or receipt of "kickbacks" or referral fees in
connection with the performance of settlement services. The Fair Credit
Reporting Act requires certain disclosures to applicants concerning
information that is used as a basis for denial of credit. HMDA requires
collection and reporting of statistical data concerning the loan
transaction. ECOA prohibits discrimination against applicants with respect
to any aspect of a credit transaction on the basis of sex, marital status,
race, color, religion, national origin, age, derivation of income from
public assistance programs, or the good faith exercise of a right under the
Federal Consumer Credit Protection Act. The Fair Housing Act prohibits
discrimination in mortgage lending on the basis of race, color, religion,
sex, handicap, familial status or national origin.
The interest rates which the Company may charge on its loans are subject to
state usury laws, which specify the maximum rate, which may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that the Company disclose to its borrowers prior to execution of
the loans all material terms and conditions of the financing, including the
payment schedule and total obligation under the loans. The Company believes
that it is in compliance in all-material respects with such regulations.
Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil and criminal penalties
on the Company, class action lawsuits and administrative enforcement
actions. The Company does not expend material amounts of financial
resources complying with federal, state or local laws and regulations.
Environmental Matters. In the course of its business the Company has
acquired, and may acquire in the future, properties securing loans that are
in default. It is possible that hazardous substances or waste,
contamination, pollutants or sources thereof could be discovered on such
properties after acquisition by the Company. In such event, the Company may
be required by law to remove such substances from the affected properties
at its sole cost and expense. There can be no assurance that (i) the cost
of such removal would not substantially exceed the value of the affected
properties or the loans secured by the properties, (ii) the Company would
have adequate remedies against the prior owner or other responsible
parties, or (iii) the Company would not find it difficult or impossible to
sell the affected properties either prior to or following such removal.
Employees. As of December 31, 2000, the Company had 78 full-time employees,
including 7 in the Acquisitions Department, 26 in the Service Department, 8
in the Legal Department, 3 in the Real Estate Department, 5 in the
Accounting Department, 4 in the MIS Department, 7 clerical employees, 8
managerial employees, and 10 employees in Tribeca.
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The Company has never experienced a material work stoppage or slowdown due
to labor disagreements. The Company believes that its relations with all
employees are satisfactory. None of the Company's employees are covered by
a collective bargaining agreement.
Business Segments. The Company has two reportable segments (i) portfolio
asset acquisition and resolution, and (ii) mortgage banking. The portfolio
asset acquisition and resolution segment acquires nonperforming,
nonconforming and subperforming notes receivable and promissory notes from
financial institutions, mortgage and finance companies and services and
collects such notes receivable through enforcement of terms of original
note, modification of original terms and, if necessary, liquidation of the
underlying collateral. The mortgage-banking segment, conducted through
Tribeca, originates residential mortgage loans for individuals whose credit
histories, income and other factors cause them to be classified as
non-conforming borrowers.
ITEM 2. DESCRIPTION OF PROPERTIES
Properties. The Company owns a 6,600 square foot office condominium unit
located on the Sixth Floor of Six Harrison Street, New York, New York,
which houses its principal offices. See "Item 12. Certain Relationships and
Related Transactions." In addition, the Company leases approximately 6,400
square feet of office space at 99 Hudson Street, New York, New York, which
houses the Service Department as well as the Accounting Department. The
lease expires on January 31, 2009 and is at an average approximate annual
rent of $123,000. In November of 2000 the Company sub-leased additional
office space located on the Fifth Floor of Six Harrison Street, New York,
which now houses Tribeca Lending. The lease expires on September 1, 2004
and is at an average approximate annual rent of $48,300.
OREO Properties. The Company owns OREO in various parts of the country that
were acquired through acquisition or foreclosure. The vast majority of
these properties are coops and condos, with the remainder being comprised
of single-family homes and commercial property. The Company acquires or
forecloses on property primarily with the intent to sell such property at a
profit, or rents the property until an economically beneficial sale can be
made. If such a decision is made then a further investment in the property,
in the form of repairs and improvements, may be necessary. Any improvements
to OREO property are evaluated independently and decisions are made based
on whether the additional investment would generate an additional return.
ITEM 3. LEGAL PROCEEDINGS
Asset Purchase Agreement Dispute. On August 19, 1997, the Company commenced
a civil action in the United States District Court for the Southern
District of New York against Preferred Credit Corporation ("PCC") and
certain individuals alleging fraud, breach of contract, and unjust
enrichment in connection with the purchase by the Company of $3.7 million
in face value of notes receivable from PCC for $1.8 million. 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, the Court
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entered judgment in favor of the Company and against PCC in the amount of
$1.7 million 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 $
60,000 towards this receivable, as of December 31, 2000 the current value
of these loans is not currently known.
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. Trial in this matter commenced on October 22, 2000.
During the course of the trial, the Company agreed to pay $55,000 to Rosen
in full settlement of the matter and the case was dismissed. Pursuant to
the settlement, the payment to Rosen was made on November 24, 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's 10-KSB for the year ended December
31, 1996, filed with the SEC on March 31, 1997.
During 1997 the Company initiated efforts to foreclose on its Deed of Trust
on a 4,000-acre ranch owned by the parties to the original Shultz
Settlement. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. The Company's Common Stock is quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System
("Nasdaq") under the symbol "FCSC" since December 26, 1996 and "FCMC"
from December 30,1994 until such date.
The following table sets forth the bid prices for the common stock on
Nasdaq Bulletin Board, for the periods indicated trading during these
periods was limited and sporadic. Therefore, the following quotes may not
accurately reflect the true market value of the securities. Such prices
reflect inter-dealer prices without retail markup or markdown or
commissions and may not represent actual transactions. Information for 2000
and 1999 was compiled from information representing the daily inter-dealer
bid activity during the period.
2000 Bid 1999 Bid
-------- --------
High Low High Low
---- --- ---- ---
First Quarter $0.75 $ 0.55 $1.125 $0.75
Second Quarter $0.75 $ 0.75 $ 1.75 $0.75
Third Quarter $0.45 $0.375 $ 1.75 $0.55
Fourth Quarter $0.50 $0.375 $ 1.00 $0.55
As of March 30, 2001, there were approximately 525 record holders of the
Company's Common Stock.
Dividend Policy. The Company intends to retain any future earnings that may
be generated from operations to help finance the operations and expansion
of the Company and accordingly does not plan to pay cash dividends to
holders of the Common Stock during the reasonably foreseeable future. Any
decisions as to the future payment of dividends will depend on the earnings
and financial position of the Company and such factors as the Company's
Board of Directors deem relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Forward-Looking Statements. When used in this report, press releases and
elsewhere by the Company from time to time, the words "believes",
"anticipates", and "expects" and similar expressions are intended to
identify forward-looking statements that involve certain risks and
uncertainties. Additionally, certain statements contained in this
discussion and the Form 10-KSB, may be deemed forward-looking statements
that involve a number of risks and uncertainties. Among the factors that
could cause actual results to differ materially are the following:
unanticipated changes in the U.S. economy, business conditions and interest
rates and the level of growth in the finance and housing markets, the
availability for purchases of additional loans, the status of relations
between the Company and its Senior Debt Lender, the status of relations
between the Company and its primary sources for loan purchases,
unanticipated difficulties in collections under loans in the Company's
portfolio and other risks detailed from time to time in the Company's SEC
reports. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date thereof. The
Company undertakes no obligation to
10
11
release publicly the results on any events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Loan and OREO Acquisitions. During the year ended December 31, 2000
("fiscal 2000") the Company purchased 2,907 loans consisting primarily of
second mortgages, with an aggregate face value of $113 million at an
aggregate purchase price of $96 million or 85% of the face value compared
with the purchase during the year ended December 31, 1999 ("fiscal 1999")
of 2,368 loans consisting primarily of second mortgages, with an aggregate
face value of $96 million at an aggregate purchase price of $88 million or
92% of the face value. 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 during
future periods. 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 and
non-performing real estate secured loans. The Company believes that its
current infrastructure is adequate to service additional loans without any
material increases in expenses.
Cost of Funds. The increases in the prime rate during 2000, from 8.5% to
8.75%, and 9.00% in February and March respectively, increased the
benchmark rate for the costs of funds on Senior Debt used to fund loan
portfolio acquisitions. As of December 31, 2000, the Company had Senior
Debt outstanding under 94 loans with an aggregate principal balance of $231
million. References herein to the Company's Senior Debt Lender or lending
arrangements refer to such lender. Additionally the Company has financing
agreements, which had an outstanding balance of $2,021,334 at December 31,
2000.
The majority of the loans purchased by the Company bear interest at a fixed
rate, while the Senior Debt is at a variable rate. Consequently, changes in
market interest rate conditions have caused direct corresponding changes in
interest expense. The Company and its Senior Debt Lender agreed to a fixed
base rate on Senior Debt of 8.75% with a premium of between 0% and 2.00%
over the fixed rate on all Senior Debt for the 12-month period April 1,
2000 through March 31, 2001. Increases, during this period in the prime
rate did not negatively impact the net income of the Company. The weighted
average interest rate on borrowed funds for the Senior Debt based on the
balances as of December 31, 2000 and December 31, 1999 was 9.16% and 9.0%,
respectively.
The impact of inflation on the Company's operations during both fiscal 2000
and 1999 was immaterial.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Total revenue, comprised of interest income, purchase discount earned,
gains recognized on the bulk sale of notes, gain on sale of repossessed
collateral, gain on sale of OREO, gain on sale of loans originated, rental
income and other income, increased by $6,595,730 or 29%, to $29,047,390
during fiscal 2000, from $22,451,660 during fiscal 1999.
11
12
Total revenue as a percentage of notes receivable in the Company's
portfolio as of the last day of the fiscal year, net of allowance for loan
losses and joint venture participation during fiscal 2000 was 12.6% as
compared with 12.2% during fiscal 1999. Interest income on notes receivable
increased by $5,383,891 or 35%, to $20,873,504 during fiscal 2000 from
$15,489,613 during fiscal 1999. The Company recognizes interest income on
notes included in its portfolio based upon three factors: (i) interest on
performing notes, (ii) interest received with settlement payments on
non-performing notes and (iii) the balance of settlements in excess of the
carried face value. This increase resulted primarily from the purchase of
$113 million of performing loans during 2000, which increased the size of
the Company's outstanding portfolio of notes receivable by 24%. The
increase in the growth in size of the Company's portfolio lagged behind the
increase in interest income primarily due to prepayments and principal
collections.
Purchase discount earned decreased by $480,309 or 11%, to $3,788,034 during
fiscal 2000 from $4,268,343 during fiscal 1999. The decrease in purchase
discount earned reflected a maturing of the Company's portfolio, the
increased purchase price to purchase primarily performing loans, reserve
increases, and foreclosures of loans in the Company's portfolio, which
converts the purchase discount into potential gain or loss on sale of OREO
when the property is sold. The Company believes that the aggregate sales
proceeds on its OREO portfolio will exceed the lower of cost or market
value at which it is recorded resulting in a gain on sale.
Gains from the bulk sale of loans increased by $1,055,499 or 170%, to
$1,675,107 during fiscal 2000 from $619,608 during fiscal 1999. This
increase reflected the sale of $8 million in performing loans purchased
from a single source, which did not meet the Company's yield criteria and
which sale generated a gain of approximately $800,000. The Company sold
approximately $13.0 million in face value notes receivable during 2000 as
compared to $5.0 million during 1999.
Gain on sale of originated notes by Tribeca increased by $120,741 or 77%,
to $276,911 during 2000 from $156,170 during fiscal 1999. This increase is
due to higher quality loans sold for a greater margin during 2000 as
compared to 1999. Tribeca had loan sales of $5.3 million during 2000 as
compared to $7.0 millions of loans during 1999.
Gain on sale of OREO increased by $388,939 or 125% to $700,939 during
fiscal 2000 from $ 312,000 during fiscal 1999. The increase resulted from
the appreciation in value in the Company's rental portfolio, as well as the
increase in value in the real estate in our portfolio. The Company sold 90
OREO properties during 2000 as compared to 121 OREO properties during 1999.
Rental income decreased by $92,804 or 12% to $672,748 during fiscal 2000,
from $765,552 during fiscal 1999. This decrease reflected a decrease in the
number of OREO rental properties held at December 31, 2000 to 47 from 94 at
December 31, 1999.
Other income increased by $219,774 or 26%, to $1,060,147 during fiscal 2000
from $840,374 during fiscal 1999. The increase was due primarily to
increases in prepayment penalties and late charges resulting from the 24%
growth in the size of the portfolio and increased loan fees from
originations by Tribeca.
Total operating expenses increased by $6,156,915 or 28% to $28,476,727
during fiscal 2000 from $22,319,812 during fiscal 1999. Total operating
expenses include interest expense, collection, general and administrative
expenses, provisions for loan losses, service fees, amortization of loan
commitment fees and depreciation expense.
12
13
Interest expense increased by $4,969,386 or 36%, to $18,781,532 during
fiscal 2000 from $13,812,146 during fiscal 2000. This increase resulted
primarily from the increase in debt reflecting the Company's 25% increase
of notes receivable. Total debt increased by $47 million or 25%, to $233
million as of December 31, 2000 as compared with $186 million as of
December 31, 1999. Total debt includes Senior Debt, debentures, financing
agreements and loans from affiliates.
Collection, general and administrative expenses increased by $816,807 or
11% to $8,514,742 during fiscal 2000 from $7,697,934 during fiscal 1999.
The primary components of collection, general and administrative expense
are personnel expense, OREO related expense, litigation expense, office
expense, and collection expense.
Personnel expenses increased by $1,045,384 or 35%, to $4,028,669 during
fiscal 2000 from $2,983,285 during fiscal 1999. This increase resulted from
growth in the size of the Company's legal and servicing staff, changes in
key upper-management positions along with increases in commission expense
due to an increase in originations in Tribeca. OREO related expenses
decreased by $4,371 to $1,262,506 during fiscal 2000 from $1,262,506 during
fiscal 1999. Litigation expenses decreased by $390,303 or 36%, to $704,611
during fiscal 2000 from $1,094,914 during fiscal 1999. This decrease was
due primarily to decreased expenses for corporate litigation (see Item 3.
Legal Proceedings), and increased efforts to recover asset protection legal
fees through legal settlement. Office expenses increased by $55,817 or 12%,
to $ 531,631 during fiscal 2000 from $475,814 due to an increase in office
space for Tribeca on the fifth floor of 6 Harrison Street. Other general
and administrative expenses increased $110,280 or 6% to $1,987,324 during
fiscal 2000 from $1,877,044 during fiscal 1999. This increase resulted
primarily from increased travel for marketing, due diligence, increased
audit and tax preparation fees due to the increase in the number of
subsidiary companies.
Provisions for loan losses increased by $272,302 or 196%, to $411,005
during fiscal 2000 from $138,703 during fiscal 1999. This increase was
primarily due to reserve increases and new REO's in portfolio's, which no
longer have purchase discount left to be earned. Bad debt expense expressed
as a percentage of face value of notes receivable as of the last day of
such years for fiscal 2000 and fiscal 1999 were approximately 0.16% and
0.07%, respectively. Provisions for loan losses are incurred as soon as the
valuation of the asset diminishes and there is no unamortized discount
remaining associated with that asset.
Amortization of deferred financing costs increased by $94,827 or 18%, to
$619,892 during fiscal 2000 from $525,065 during fiscal 1999. This increase
resulted primarily from the growth in size of the portfolio, increased
prepayments, collections, and an increase in the number and dollar amount
of assets and sold, which sales generally accelerate the amortization of
financing costs. On December 31, 2000 and December 31, 1999, deferred
financing costs, as a percentage of Senior Debt outstanding was 1.05 % and
1.09%, respectively.
Depreciation expense increased by $3,592 or 2%, to $149,556 during fiscal
2000 from $145,964 during fiscal 1999. This increase resulted primarily
from the construction of new Tribeca office space, and the purchase of
computer equipment.
The Company's operating income increased by $438,815 to $570,663 during
fiscal 2000 from $131,848 during fiscal 1999 for the reasons set forth
above.
During 2000, and 1999 there was no provision for income taxes due to loss
carryforwards.
13
14
LIQUIDITY AND CAPITAL RESOURCES
General. During fiscal 2000 the Company purchased 2,907 loans with an
aggregate face value of $113 million at an aggregate purchase price of $96
million or 85% of the face value. During fiscal 1999, the Company purchased
2,368 loans with an aggregate face value of $96 million at an aggregate
purchase price of $88 million or 92% of face value. This increase reflected
the Company's focus of acquiring high yielding coupon loans, and the
increased activity to cultivate additional business.
Liquidity. The Company's portfolio of notes receivable at December 31,
2000, had a face value of $255 million and included net notes receivable of
approximately $208 million. Net notes receivable are stated at the amount
of unpaid principal, reduced by purchase discount and allowance for loan
losses. The Company has the ability and intent to hold its notes until
maturity, payoff or liquidation of collateral or sale if it is economically
advantageous to do so.
During fiscal 2000, the Company used cash in the amount of $10.3 million in
its operating activities primarily for interest expense, overhead, ordinary
litigation expense incidental to its collections and for the foreclosure
and improvement of OREO. The Company used $35.5 million in its investing
activities, which reflected primarily the use of $95.7 million for the
purchase of note receivable offset by principal collections of its notes
receivable of $43.6 million and proceeds from sales of OREO of $7.5
million. Net cash provided by financing activities of $47 million was
primarily from an increase in Senior Debt of $98 million. The above
activities resulted in a net increase in cash at December 31, 2000 over
December 31, 1999 of $1,196,779.
In the ordinary course of its business, the Company accelerates its
foreclosures of real estate securing non-performing notes receivable
included in its portfolio. As a result of such foreclosures and selective
direct purchases of OREO, at December 31, 2000 and 1999, the Company held
OREO recorded in the financial statements at $5.3 million and $7.7 million,
respectively. OREO is recorded on the financial statements of the Company
at the lower of cost or fair market value. The Company believes that the
OREO inventory held at December 31, 2000 has a net realizable value (market
value less estimated commissions and legal expenses associated with the
disposition of the asset) of approximately $5.9 million based on market
analyses of the individual properties less the estimated closing costs. The
Company generally holds OREO as rental property or sells such OREO in the
ordinary course of business when it is economically beneficial to do so.
Operating Expenses of Tribeca. During 2000, Tribeca incurred a reduced
operating loss of $166,000. This loss stemmed from a lack of sufficient
closing and loans sales to cover overhead cost. The Company funded the
start-up of Tribeca with $1.1 million of proceeds from the refinancing of
two loan portfolios through its Senior Debt Lender. Additionally, such
lender has provided Tribeca with a warehouse financing agreement of $2
million. Tribeca began originating mortgages on September 1, 1997. There
can be no assurances that Tribeca will earn a profit in the future,
however, management believes that Tribeca's existing cash balances, credit
lines, and anticipated cash flow from operations will provide sufficient
working capital resources for Tribeca's anticipated operating needs. During
the year Tribeca negotiated with it's Warehouse lender to allow Tribeca to
roll its financing agreements into senior debt once the financing agreement
balance hit a critical mass of $2 million dollars. This has allowed Tribeca
to hold its loans longer and possibly maximize profits through bulk sales
in the secondary market.
14
15
CASH FLOW FROM OPERATING AND INVESTING ACTIVITIES
Substantially all of the assets of the Company are invested in its
portfolios of notes receivable. The Company's primary source of cash flow
for operating and investing activities is collections on notes receivable
and gains on sale notes and OREO properties.
At December 31, 2000, the Company had unrestricted cash, cash equivalents
and marketable securities of $7.2 million. A portion of the Company's
available funds may be applied to fund acquisitions of companies or assets
of companies in complementary or related fields. Although the Company from
time to time engages in discussions and negotiations, it currently has no
agreements with respect to any particular acquisition. This may cause the
Company to incur additional capital expenditures, outside the acquisitions
of additional notes receivable.
CASH FLOW FROM FINANCING ACTIVITIES
Senior Debt. As of December 31, 2000, the Company owed an aggregate of $231
million to the Senior Debt Lender, under 94 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 contractual 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 a fixed rate of 8.75% with a premium of between 0% and
2.00% over the base rate. The accelerated payment provisions are generally
of two types: the first requires that all collections from notes
receivable, other than a fixed monthly allowance for servicing operations,
be applied to reduce the Senior Debt, and the second requires a further
amount to be applied toward additional principal reduction from available
cash after scheduled principal and interest payments have been made. As a
result of the accelerated payment provisions, the Company is repaying the
amounts due on the Senior Debt at a rate faster than the contractual
scheduled payments. While the Senior Debt remains outstanding, these
accelerated payment provisions may limit the cash flow, which is available
to the Company.
In February 2001, the Company negotiated with its Senior Debt Lender a
modification to the Senior Debt obligation, pursuant to which the Senior
Debt Lender has provided the Company with a cash advance of $825,000 per
month for the year. Management believes that this modification may reduce
irregular periods of cash flow shortages arising from operations.
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.
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, with 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 contractual monthly payment due if collections from notes receivable
securing the loan are insufficient to satisfy the installment due.
Historically, the Company has not called
15
16
upon these reserves. The aggregate balance of restricted cash in such
accounts was $932,574 on December 31, 2000 and $387,972 on December 31,
1999. The increase in restricted cash at December 31, 2000 was due to cash
deposits returned to restricted cash during 2000 that were previously used
in December 1999 as deposits on portfolio bids.
Total Senior Debt funding capacity was $250 million at March 29, 2001 of
which approximately $231 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 the Senior Debt Facility. As a result, the
Company has approximately $23 million available to purchase additional
portfolios of notes receivable.
In April 2000, the Company's Senior Debt agreement was amended to provide
that the interest rate on Senior Debt incurred to finance portfolio
acquisitions between after April 1,2000 and March 31, 2001 will be 8.75%.
At December 31, 2000, the weighted average interest rate on Senior Debt was
9.16%.
The Company's Senior Debt Lender has provided Tribeca with a warehouse
financing agreement of $2 million. At December 31, 2000, Tribeca had drawn
down $1.8 million 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
issued. As of December 31, 2000 and 1999, $72,525 and $332,976,
respectively, of these debentures were outstanding. The Harrison 1st 12%
Debentures bear interest at the rate of 12% per annum and were payable in
quarterly installments. The principal was 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. On June 30, 2000 the Company made a balloon payment of $232,952
funded (through the incurrence of Senior Debt) and agreed with the holders
of $97,048 of 12% Debentures to the extension of payment of such principal
amount to December 31, 2001. 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.
Financing Agreement. The Company has a financing agreement with the Senior
Debt Lender permitting it to borrow a maximum of approximately $1,500,000
at a rate equal to the bank's prime rate plus two percent per annum.
Principal repayment of the line is due six months from the date of each
cash advance and interest is payable monthly. The total amounts outstanding
under the financing agreement as of December 31, 2000 and December 31,
1999, were $117,600 and $615,720 respectively. Advances made under the
financing agreement were used to satisfy senior lien positions and fund
capital improvements on certain real estate assets owned by the Company.
Management believes the ultimate sale of these properties will satisfy the
related outstanding financing agreement. 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.
16
17
ITEM 7. FINANCIAL STATEMENTS
See the financial statements and notes related thereto, beginning on page
F-1, included elsewhere in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
17
18
PART III
INFORMATION WITH RESPECT TO ITEMS 9, 10, 11, 12 AND ON FORM 10KSB IS SET FORTH
IN THE DEFINITIVE PROXY STATEMENT, WHICH WILL BE FILED WITHIN 120 DAYS OF
DECEMBER 31, 2000, THE COMPANY'S MOST RECENT FISCAL YEAR. SUCH INFORMATION IS
INCORPORATED HEREIN BY REFERENCE.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
18
19
PART IV
(a) EXHIBIT TABLE
EXHIBIT
NO. DESCRIPTION
--- -----------
3(a) Restated Certificate of Incorporation. Previously filed
with, and incorporated herein by reference to, the
Company's 10-KSB, filed with the Commission on December 31,
1994.
(b) Bylaws of the Company. Previously filed with, and
incorporated herein by reference to, the Company's
Registration Statement on Form S-4, No. 33-81948, filed
with the Commission on November 24, 1994.
4(a) 15% Convertible Subordinate Debentures. Previously filed
with, and incorporated herein by reference to, the
Company's Registration Statement on Form S-4, No. 33-81948,
filed with the Commission on November 24, 1994.
(b) Warrants associated with principal repayment of the 15%
Convertible Subordinated Debentures. Previously filed with,
and incorporated herein by reference to, the Company's
Registration Statement on Form S-4, No. 33-81948, filed
with the Commission on November 24, 1994.
10(d) Employment Agreement dated December 4, 1996, between the
Company and Joseph Caiazzo. Previously filed with, and
incorporated herein by reference to, the Company 10KSB,
filed with the Commission on March 31,1997.
10(e) Agreement dated March 29, 1997 between the Company and the
Citizens Banking Company. Filed with the Commission.
Previously filed with, and incorporated herein by reference
to, the Company 10QSB, filed with the Commission on May
15,1997.
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 8-K, filed with the Commission on
November 23, 1998.
10(g) Form of Subscription Agreement and Investor Representation,
dated as of September 8,1998 between the Company and
certain subscribers. Filed with the Commission. Previously
filed with, and incorporated herein by reference to, the
Company's 8-K, filed with the Commission on November 23,
1998.
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 10-KSB, filed with the Commission on
April 14, 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 10-KSB,
filed with the Commission on April 14, 1999.
10(j) Promissory Note between Steve Leftkowitz, board member, and
the Company dated March 31,1999. Previously filed with, and
incorporated herein by reference to, the Company's 10-KSB,
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 10-KSB, filed with the Commission on March 30,
2000.
10(l) Employment Agreement dated July 17, 2000 between the
Company and Seth Cohen. Filed herewith.
11 Earnings per Share. Filed herewith.
19
20
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.
March 30, 2001 FRANKLIN CREDIT MANAGEMENT
CORPORATION
By: THOMAS J. AXON
------------------------------------
Thomas J. Axon
Chairman
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
SETH COHEN President, Chief Executive Officer March 30, 2001
--------------- ---------------
Seth Cohen
(Principal executive officer)
JOSEPH CAIAZZO Executive Vice President, Chief Operating March 30, 2001
-------------- --------------
Joseph Caiazzo Officer, Secretary and Director
(Secretary)
KIMBERLEY SHAW Vice President, Chief Financial Officer March 30, 2001
-------------- --------------
Kimberley Shaw (Principal financial and accounting officer)
20
21
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999:
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-23
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Franklin Credit Management Corporation and Subsidiaries
We have audited the consolidated balance sheets of Franklin Credit Management
Corp. and Subsidiaries (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
March 23, 2001
23
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
CASH AND CASH EQUIVALENTS $ 7,212,346 $ 6,015,567
RESTRICTED CASH 932,574 387,972
NOTES RECEIVABLE:
Principal 255,055,677 206,262,651
Purchase discount (23,392,400) (18,449,141)
Allowance for loan losses (24,086,322) (22,185,945)
------------- -------------
Net notes receivable 207,576,955 165,627,565
LOANS HELD FOR SALE 8,670,691 3,288,568
ACCRUED INTEREST RECEIVABLE 3,396,405 2,425,358
OTHER REAL ESTATE OWNED 5,290,053 7,699,468
OTHER RECEIVABLES 1,934,443 2,827,301
DEFERRED TAX ASSET 3,481,002 3,408,903
OTHER ASSETS 1,442,687 1,155,097
BUILDING, FURNITURE AND FIXTURES - Net 868,471 884,903
DEFERRED FINANCING COSTS- Net 2,429,661 2,016,394
------------- -------------
TOTAL ASSETS $ 243,235,288 $ 195,737,096
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 2,932,611 $ 3,098,648
Financing agreements 2,021,334 791,075
Notes payable 231,050,485 185,019,806
203(k) rehabilitation escrows payable 2,186 18,691
Subordinated debentures 72,525 332,976
Notes payable, affiliates and stockholders 146,835 109,350
Deferred tax liability 3,561,061 3,488,962
------------- -------------
Total liabilities 239,787,037 192,859,508
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000 authorized shares;
issued and outstanding: 5,916,527 59,167 59,167
Additional paid-in capital 6,985,968 6,985,968
Accumulated deficit (3,596,884) (4,167,547)
------------- -------------
Total stockholders' equity 3,448,251 2,877,588
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 243,235,288 $ 195,737,096
============= =============
See notes to consolidated financial statements.
F - 2
24
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
REVENUES:
Interest income $20,873,504 $15,489,613
Purchase discount earned 3,788,034 4,268,343
Gain on sale of notes receivable 1,675,107 619,608
Gain on sale of notes originated 276,911 156,170
Gain on sale of other real estate owned 700,939 312,000
Rental income 672,748 765,552
Other 1,060,147 840,374
----------- -----------
29,047,390 22,451,660
----------- -----------
OPERATING EXPENSES:
Interest expense 18,781,532 13,812,146
Collection, general and administrative 8,514,742 7,697,934
Provision for loan losses 411,005 138,703
Amortization of deferred financing costs 619,892 525,065
Depreciation 149,556 145,964
----------- -----------
28,476,727 22,319,812
----------- -----------
NET INCOME $ 570,663 $ 131,848
=========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.10 $ 0.02
=========== ===========
Dilutive $ 0.10 $ 0.02
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,916,527 5,916,527
=========== ===========
See notes to consolidated financial statements.
F - 3
25
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
------------
SHARES AMOUNT CAPITAL DEFICIT TOTAL
BALANCE, JANUARY 1, 1999 5,916,527 $ 59,167 $6,985,968 $(4,299,395) $2,745,740
Net Income 131,848 131,848
--------- -------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1999 5,916,527 59,167 6,985,968 (4,167,547) 2,877,588
Net Income 570,663 570,663
--------- -------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 2000 5,916,527 $ 59,167 $6,985,968 $(3,596,884) $3,448,251
========= ======== ========== =========== ==========
See notes to consolidated financial statements.
F - 4
26
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 570,663 $ 131,848
Adjustments to reconcile income (loss) to net cash used in
operating activities:
Gain on sale of notes receivable (1,675,107) (619,608)
Gain on sale of other real estate owned (700,939) (312,000)
Depreciation 149,556 145,964
Amortization of deferred financing costs 619,892 525,065
Purchase discount earned (3,788,034) (4,268,343)
Provision for loan losses 411,005 138,703
Changes in assets and liabilities:
(Increase) in accrued interest receivable (971,047) (500,757)
Decrease (increase) in other receivables 892,858 (1,595,634)
(Increase) decrease in other assets (287,590) 298,061
(Increase) decrease in loans held for sale (5,382,123) 2,411,009
(Increase) decrease in accounts payable and accrued expenses (166,037) 152,577
Increase (decrease) in notes payable, affiliates and stockholders 37,485 (71,779)
(Decrease) in 203(k) rehabilitation escrows payable (16,505) (53,695)
------------ ------------
Net cash used in operating activities (10,305,923) (3,618,589)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash (544,602) 715,474
Purchase of notes receivable (95,738,251) (88,461,011)
Principal collections on notes receivable 43,610,229 36,954,321
Joint venture participation -- 260,473
Acquisition and loan fees (1,405,446) (1,045,180)
Foreclosures on real estate (4,776,609) (4,272,222)
Reclassification of notes receivable for foreclosures 4,993,298 2,297,823
Proceeds from sale of other real estate owned 7,522,394 6,900,502
Proceeds from sale of notes receivable 10,974,326 4,322,678
Purchase of building, furniture and fixtures (133,125) (279,355)
------------ ------------
Net cash used in investing activities (35,497,786) (42,606,497)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 98,024,623 92,706,737
Principal payments of notes payable (51,993,943) (39,914,188)
Proceeds from financing agreements 8,296,532 2,696,043
Payments on financing agreements (7,066,273) (8,102,771)
Principal payments of subordinated debentures (260,451) (265,074)
------------ ------------
Net cash provided by financing activities 47,000,488 47,120,747
------------ ------------
NET INCREASE IN CASH 1,196,779 895,661
CASH, BEGINNING OF YEAR 6,015,567 5,119,906
------------ ------------
CASH, END OF YEAR $ 7,212,346 $ 6,015,567
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash payments for interest $ 18,116,762 $ 12,518,563
============ ============
Cash payments (receipts) for taxes $ 43,584 $ 65,563
============ ============
See notes to consolidated financial statements.
F - 5
27
FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Franklin Credit Management Corporation (the
"Company"), incorporated under the laws of the State of Delaware, acquires
performing, nonperforming, nonconforming and subperforming notes
receivable and promissory notes from financial institutions, and mortgage
and finance companies. The Company services and collects such notes
receivable through enforcement of terms of original note, modification of
original note terms and, if necessary, liquidation of the underlying
collateral.
In January 1997, a wholly owned subsidiary was formed, to originate or
purchase, sub prime residential mortgage loans to individuals whose credit
histories, income and other factors cause them to be classified as
nonconforming borrowers.
A summary of the Company's significant accounting policies follows.
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents 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 nonperforming or underperforming at the time of
purchase and, accordingly, are usually purchased at a discount from the
principal balance remaining.
Notes receivable are stated at the amount of unpaid principal, reduced by
purchase discount and an allowance for loan losses. The Company has the
ability and intent to hold its notes until maturity, payoff or liquidation
of collateral. Impaired notes are measured based on the present value of
expected future cash flows discounted at the note's effective interest
rate or, as a practical expedient, at the observable market price of the
note receivable or the fair value of the collateral if the note is
collateral dependent. A note receivable is impaired when it is probable
the Company will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the note agreement.
F-6
28
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.
F-7
29
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.
RETIREMENT 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
deductions based on employees' pretax wages. Currently, the Company offers
a company match of 50% of the first 3% of the employees' contribution.
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.
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
F-8
30
by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all
nonfinancial assets and liabilities from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
a. CASH, RESTRICTED CASH, ACCRUED INTEREST RECEIVABLE, OTHER RECEIVABLE
AND ACCRUED INTEREST PAYABLE - The carrying values reported in the
balance sheet are a reasonable estimate of fair value.
b. NOTES RECEIVABLE - Fair value of the net note receivable portfolio is
estimated by discounting the future cash flows using the interest
method. The carrying amounts of the notes receivable approximate fair
value.
c. SHORT-TERM BORROWINGS - The carrying amounts of the financing
agreement 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.
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 - Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition
of a derivative. The Company adopted SFAS 133 effective January 1, 2001.
The adoption of SFAS 133 did not have a significant impact on the
financial position, results of operations, or cash flows of the Company.
F-9
31
2. NOTES RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Notes receivable consists principally of real estate mortgage as of
December 31, 2000 and 1999 and are classified as follows:
2000 1999
Real estate secured $ 239,860,880 $ 183,501,093
Consumer unsecured 7,171,016 9,463,179
Mobile homes 5,601,175 11,327,459
Other 2,422,606 1,970,920
============= =============
255,055,677 206,262,651
Less:
Purchase discount (23,392,400) (18,449,141)
Allowance for loan losses (24,086,322) (22,185,945)
------------- -------------
$ 207,576,955 $ 165,627,565
============= =============
As of December 31, 2000, contractual maturities of classified notes
receivables net of the allowance for loan losses were as follows:
YEAR ENDING AMOUNT
DECEMBER 31,
2001 $ 37,323,641
2002 33,239,010
2003 29,651,223
2004 16,835,220
2005 14,049,329
Thereafter 82,971,875
------------
$214,070,298
============
Excluded from the contractual maturities reflected above are the notes
receivable acquired during the last two weeks of 2000 with $23,400,000 of
aggregate principal balances, net of allowance for loan losses. Management
is in the process of performing the analyses to determine the final
discount allocation and the initial determination of the allowance for
loan losses associated with these purchases that are necessary to develop
the related contractual maturities of the underlying notes receivable.
It is the Company's experience that a portion of the notes receivable
portfolio may be renewed or repaid before contractual maturity dates. The
above tabulation, therefore, is not to be regarded as a forecast of future
cash collections. During the years ended December 31, 2000 and 1999, cash
collections of principal amounts totaled approximately $43,600,000 and
$36,950,000, respectively, and the ratios of these cash collections to
average principal balances were approximately 18.8% and 19.5%,
respectively.
F-10
32
Changes in the allowance of loan losses for the years ended December 31,
2000 and 1999 are as follows:
2000 1999
Balance, beginning $ 22,185,945 $ 22,168,345
Initial allowance allocated on purchased portfolio 2,264,703 1,929,165
Loans charged to allowance (775,331) (2,050,268)
Provision for loan losses 411,005 138,703
------------ ------------
Balance, ending $ 24,086,322 $ 22,185,945
============ ============
At December 31, 2000 and 1999, principal amounts of notes receivable
included approximately $56,000,000 and $60,000,000, respectively, of notes
for which there was no accrual of interest income. At December 31, 2000,
approximately $23,400,000 of such notes at principal amounts relates to
recent portfolio acquisitions whose performance and collection
classification by management was in the process of being determined.
The following information relates to impaired notes receivable which
include all nonaccrual loans as of and for the year ended December 31,
2000 and 1999:
2000 1999
Total impaired notes receivable $56,069,711 $60,383,787
=========== ===========
Allowance for loan losses related to impaired
notes receivable $20,117,598 $19,225,925
=========== ===========
Average balance of impaired notes receivable
during the year $56,997,519 $59,496,713
=========== ===========
Interest income recognized $ 1,801,068 $ 1,502,136
=========== ===========
In the normal course of business, the Company restructures or modifies
terms of notes receivable to enhance the collectibility of certain notes
that were impaired at the date of acquisition and were included in certain
portfolio purchases.
F-11
33
3. BUILDING, FURNITURE AND FIXTURES
At December 31, 2000 and 1999, building and improvements, and furniture
and equipment consisted of the following:
2000 1999
Building and improvements $ 907,890 $ 874,238
Furniture and equipment 603,336 503,864
---------- ----------
1,511,226 1,378,102
Less accumulated depreciation 642,755 493,199
---------- ----------
$ 868,471 $ 884,903
========== ==========
4. NOTES PAYABLE
Notes payable consists primarily of loans made to the Company from a bank
("Senior Debt Lender") to acquire portfolios of notes receivable. The
Company has a credit facility with the Senior Debt Lender. The facility
provides the Company with the ability to borrow up to an aggregate of
$250,000,000 at rates ranging from prime to prime plus 2.00% per annum. As
a result, the Company has approximately $23 million available to purchase
additional portfolios of notes receivable. All notes payable are secured
by a security interest in the notes receivable, payments to be received
under the notes and the underlying collateral securing the notes. As of
December 31, 2000 and 1999, the Company had 94 and 73 loans outstanding to
its Senior Debt Lender with an aggregate principal balance of $230,760,549
and $184,713,345, respectively. The loans accrue interest at various
interest rates. The principal balances and interest rates are as follows:
2000 1999
8.75% Fixed 2000 and Prime 1999 (2000: 8.75% and 1999: 8.50% ) $ 121,054,427 $ 62,538,304
0.50% over fixed and over prime (2000: 9.00% and 1999: 9.00% ) 2,426,260 85,315,787
1.00% over fixed and prime (2000: 9.75% and 1999: 9.50% ) 83,561,379 4,297,986
1.75% over fixed and prime (2000: 10.50% and 1999: 10.25%) 23,153,762 31,886,316
2.00% over fixed and prime (2000: 10.75% and 1999:10.50%) 564,721 674,952
------------- -------------
$ 230,760,549 $ 184,713,345
============= =============
The above financing agreements also provide for additional monthly
principal reduction based on cash collections received by the Company.
The remaining note payable consists of a bank loan made to the Company to
acquire its principal offices. The note payable is secured by the
principal offices. As of December 31, 2000 and 1999, the Company had a
note payable of $289,937 and $306,461, respectively, which accrues
interest at 8.93%.
Certain agreements require that a non-interest bearing cash account be
established at the closing of the loan and may require additional
deposits based on a percentage of monthly collections up to a specified
dollar limit. The aggregate balance of restricted cash at December 31,
2000 and 1999 was $932,574 and $387,972, respectively.
F-12
34
Substantially all of the Company's outstanding financing with respect to
its notes receivable portfolio acquisition activities is provided by the
Senior Debt Lender.
Aggregate maturities of all long-term debt at currently effective
principal payment requirements, including subordinated debentures (Note
6), financing agreements (Note 8) and notes payable, affiliates and
stockholders (Note 7), at December 31, 2000 are as follows:
NOTES
YEAR ENDING NOTES SUBORDINATED FINANCING PAYABLE,
DECEMBER 31, PAYABLE DEBENTURES AGREEMENTS AFFILIATE TOTAL
2001 $ 15,975,595 $ 72,525 $ 2,021,334 $ 146,835 $ 18,216,289
2002 16,172,125 - - - 16,172,125
2003 75,501,551 - - - 75,501,551
2004 76,257,417 - - - 76,257,417
2005 28,542,539 - - - 28,542,539
Thereafter 18,601,258 - - - 18,601,258
--------------- ------------ ----------- --------- ----------------
$ 231,050,485 $ 72,525 $ 2,021,334 $ 146,835 $ 233,291,179
=============== ============ =========== ========= ================
5. CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS
During 1993, the Company issued $2,000,000 of 15% convertible
subordinated debentures and, during 1995, the Company fully repaid the
remaining outstanding obligation of $526,600. The debentures were
convertible into common stock of the Company at the rate of $2.00 per
share. Warrants, exercisable to the extent that conversion rights have
not been exercised, to purchase common stock at the rate of $2.00 per
share, were issued on principal repayment dates and were due to expire
one year thereafter. In December 1997, the Company extended the warrants
provision, due to expire on December 31, 1997, through December 31, 1998.
These warrants expired during 1999.
6. SUBORDINATED DEBENTURES
In connection with the acquisition of a notes receivable portfolio during
1995, the Company offered $800,000 in subordinated debentures. The
debentures bear interest at a rate of 12% per annum payable in quarterly
installments. The principal was payable over 3 years in 10 equal
quarterly installments of $22,200 commencing September 30, 1997 with the
remaining balance of $310,800 payable on June 30, 2000. On June 30, 2000,
the Company made a balloon payment of $232,952 funded (through the
incurrence of senior debt) and agreed with the holder of $97,048 of 12%
debentures to the extension of payment of such principal amount to
December 31, 2001, at December 31, 2000 $72,525 of the extended debenture
remains payable.
The debentures are secured by a lien on the Company's interest in certain
notes receivable and are subordinate to a note payable with a December
31, 2000 balance of $3,141,276 encumbering the notes receivable
portfolio.
F-13
35
7. NOTES PAYABLE, AFFILIATES AND STOCKHOLDERS
Notes payable, affiliates and stockholders consist of the following at
December 31, 2000 and 1999:
2000 1999
Note payable to a company affiliated through certain common
ownership due on demand, with interest payable monthly at a
rate of 8.5% per annum $ 8,772 $109,350
Note payable to a company affiliated through certain common
ownership due on demand, with interest payable monthly at a
rate of 8.5% per annum 138,063 --
-------- --------
$146,835 $109,350
======== ========
8. FINANCING AGREEMENTS
The Company has a financing agreement with a bank. The agreement provides
the Company with the ability to borrow a maximum of $1,500,000 at a rate
equal to the bank's prime rate plus two percent per annum. The credit
facility is to be utilized through a series of loans made to purchase the
underlying collateral of certain nonperforming real estate secured loans.
Principal repayment of each resulting loan is due six months from the
date of each advance and interest is payable monthly. As of December 31,
2000 and 1999, $117,600 and $615,721, respectively, are outstanding on
this credit facility.
The financing agreement is secured by a first priority security interest
in the notes receivable, the individual real estate that may be
purchased, payments to be received under the notes receivable, an
unconditional suretyship by one of the stockholders of the Company, and
collateral securing the notes of certain loan portfolios.
Further, in 1998, the Company opened a financing agreement with a bank.
The agreement provides the Company with the ability to borrow a maximum
of $150,000 at a rate equal to the bank's prime rate plus one percent per
annum. As of December 31, 2000, and 1999, $127,014 and $136,134,
respectively, are outstanding on the financing agreement.
The Company also has a warehouse financing agreement with another bank.
It provides the Company with the ability to borrow a maximum of
$2,000,000 at a rate equal to the bank's prime rate plus 2.00%. This
credit facility is to be utilized for the purpose of originating mortgage
loans. As of December 31, 2000 and 1999, $1,776,720 and $39,220,
respectively, are outstanding on the financing agreement.
F-14
36
9. INCOME TAX MATTERS
The components of income tax provision (benefit) for the years ended
December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Current provision:
Federal $ -- $ --
State and local -- --
--------- -------
-- --
--------- -------
Deferred provision (benefit):
Federal 216,899 --
State and local 68,480 --
--------- -------
285,379
---------
Valuation allowance (285,379) --
--------- -------
Provision (benefit) $ -- $ --
========= =======
A reconciliation of the anticipated income tax expense (computed by
applying the Federal statutory income tax rate of 35% to income before
income tax expense) to the provision for income taxes in the statements
of income for the years ended December 31, 2000 and 1999 follows:
2000 1999
---- ----
Tax (benefit) determined by applying U.S. statutory rate
to income (loss) $ 194,025 $ 46,147
Increase (decrease) in taxes resulting from:
State and local income taxes, net of Federal benefit 68,480 11,741
Meals and Entertainment (net of adjustments) 22,874 (4,736)
Valuation allowance (285,379) (51,017)
Other items, net -- (2,135)
--------- ---------
$ -- $ --
========= =========
F-15
37
A valuation allowance has been established for a portion of the deferred
tax asset because management could not assert that it is more likely than
not that, the total benefit of the deferred tax asset will be realized.
The tax effects of temporary differences that give rise to significant
components of deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are presented below:
2000 1999
---- ----
Deferred liabilities:
Purchase discount $ 3,561,061 $ 3,488,963
Joint venture participation -- --
----------- -----------
Gross deferred tax liabilities $ 3,561,061 $ 3,488,963
=========== ===========
Deferred tax assets:
Inventory, repossessed collateral $ 84,881 $ 402,261
Special charge on purchased loans 598,205 649,847
Net operating loss carryforward 2,643,234 3,632,296
Bad Debt Reserve 1,195,104 1,249,426
----------- -----------
Gross deferred tax assets 4,521,424 5,933,830
Less valuation allowance (1,040,422) (2,524,927)
----------- -----------
Deferred tax assets - net of valuation allowance $ 3,481,002 $ 3,408,903
=========== ===========
The Company has net operating loss carryforwards of approximately
$5,623,902 for Federal income tax purposes, available to reduce future taxable
income. Such net operating loss carryforwards begin to expire in 2001.
10. STOCK OPTION PLAN
During 1996, the Company adopted an incentive stock option plan (the
"Plan") for certain of its officers and directors. Under the terms of the
Plan, options to purchase an aggregate of up to 800,000 shares of the
Company's common stock may be granted. Each option has an exercise price
at least equal to the fair market value of the shares of common stock at
the time the option is granted. Options become exercisable at various
times after the date granted and expire ten years after the date granted.
During 1999, the Company granted 25,000 options to the Vice President of
Loan Administration. During 2000, the Company granted 532,500 options to
six members of the Company's Board of Directors and 532,500 options to
various management employees within the Company. Also during 2000,
140,000 options were forfeited by the Company's prior Chief Financial
Officer.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock options; accordingly, no compensation cost has been
recognized. Had compensation cost been determined upon the fair value of
the stock options at the grant date consistent with the method of FAS
123, the Company's 2000 and 1999 net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated in
the table that follows. The following pro forma effect on net income
(loss) 2000 and 1999 is not representative of the pro forma effect on net
income (loss) in future years
F-16
38
because it does not take into consideration pro forma compensation
expense related to grants made prior to 1997.
2000 1999
---- ----
Net income (loss) - as reported $ 570,663 $ 131,848
Net income (loss) - proforma 426,847 120,028
Net income (loss) per common share - basic - as reported 0.10 0.02
Net income (loss) per common share - basic - pro forma 0.07 0.01
Net income (loss) per common share - dilutive - as reported 0.10 0.02
Net income (loss) per common share - dilutive - pro forma 0.07 0.01
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000:
Dividend yield 0 %
Volatility 241 %
Risk-free interest rate 3.62
Weighted average expected lives 3 years
Transactions in stock options under the Plan are summarized as follows:
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39
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Options outstanding at January 1, 1999 306,000 $1.56
Granted 25,000 $1.56
Exercised -- --
Expired (11,000) --
-------- -----
Options outstanding at December 31, 1999 320,000 $1.56
Granted 532,500 $0.75
Exercised -- --
Forfeitured (140,000) $1.56
Expired -- --
-------- -----
Options outstanding at December 31, 2000 712,500 $1.00
======== =====
As of December 31, 2000 and 1999, 712,500 and 320,000 options are
exercisable.
11. SALE OF NOTES RECEIVABLE WITH RECOURSE
In June 1996, the Company sold notes receivable with a net carrying value
of approximately $5,400,000 for approximately $6,400,000 to the Company's
primary lender and retained the servicing rights. Such loans were sold
with recourse. The recourse provision amounted to approximately $600,000
and provides that the Company either buy back or replace a note with a
note that is approximately equivalent to the outstanding principal and
accrued interest should the note receivable become sixty days past due.
At December 31, 2000 and 1999, the remaining obligation under the
recourse provision is approximately $425,000. In addition, the buyer of
the notes has the right to proceed to foreclose on the delinquent note
and, after sale of the collateral, require the Company to pay any
deficiency balance on the note.
In June 1997, the Company sold notes receivable with a net carrying value
of approximately $3,900,000 for approximately $4,900,000 to the Company's
primary lender and retained the servicing rights. Such loans were sold
with recourse. The recourse provision amounted to approximately $500,000
and provides that the Company either buy back or replace a note with a
note that is approximately equivalent to the outstanding principal and
accrued interest should the note receivable become sixty days past due.
At December 31, 2000 and 1999, the remaining obligation under the
recourse provision was approximately $48,183 and $262,000, respectively.
In addition, the buyer of the notes has the right to proceed to foreclose
on the delinquent note and, after sale of the collateral, require the
Company to pay any deficiency balance on the note. The Company recognized
a gain of approximately $920,000 on this sale.
As of December 31, 2000 and 1999, unpaid balances of mortgage loans
serviced for others were $3,580,347 and $5,175,000, respectively.
Mortgage loans serviced for others are not included in the Company's
consolidated balance sheet.
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40
12. BUSINESS SEGMENTS
The Company has two reportable operating segments: (i) portfolio asset
acquisition and resolution; and (ii) mortgage banking. The portfolio
asset acquisition and resolution segment acquires performing,
nonperforming, nonconforming and subperforming notes receivable and
promissory notes from financial institutions, mortgage and finance
companies, and services and collects such notes receivable through
enforcement of terms of original note, modification of original note
terms and, if necessary, liquidation of the underlying collateral. The
mortgage-banking segment originates or purchases, sub prime residential
mortgage loans for individuals whose credit histories, income and other
factors cause them to be classified as nonconforming borrowers.
The Company's management evaluates the performance of each segment based
on profit or loss from operations before unusual and extraordinary items
and income taxes. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (see
Note 1).
PORTFOLIO ASSET ACQUISITION AND RESOLUTION
2000 1999
---- ----
REVENUES:
Interest income $20,292,305 $15,163,658
Purchase discount earned 3,788,034 4,268,343
Gain on sale of notes receivable 1,675,107 619,608
Gain on sale of other real estate owned 700,939 312,000
Rental income 672,748 765,552
Other 1,039,037 828,585
----------- -----------
28,168,170 21,957,746
----------- -----------
OPERATING EXPENSES:
Interest expense 18,489,548 13,519,865
Collection, general and administrative 7,859,020 7,108,484
Provision for loan losses 370,674 113,191
Amortization of deferred financing costs 593,624 496,182
Depreciation 118,901 96,597
----------- -----------
27,431,767 21,334,319
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND NET INCOME (LOSS) $ 736,403 $ 623,427
=========== ===========
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41
MORTGAGE BANKING
2000 1999
---- ----
REVENUES:
Interest income $ 581,199 $ 325,955
Gain on sale of notes originated 276,911 156,170
Other 21,110 11,789
------------- -------------
879,220 493,914
------------- -------------
OPERATING EXPENSES:
Interest expense 291,984 292,281
Collection, general and administrative 655,722 589,450
Provision for Loan Loss 40,331 25,512
Amortization of deferred financing costs 26,268 28,883
Depreciation 30,655 49,367
------------- -------------
1,044,960 985,493
------------- -------------
LOSS BEFORE PROVISION FOR INCOME
TAXES AND NET LOSS $ (165,740) $ (491,579)
============= =============
CONSOLIDATED ASSETS:
Portfolio asset acquisition and resolution assets $ 233,728,060 $ 192,140,894
Mortgage banking assets - Tribeca 9,507,228 3,596,202
------------- -------------
Consolidated assets $ 243,235,288 $ 195,737,096
============= =============
TOTAL ADDITIONS TO BULIDING, FURNITURE
AND FIXTURES:
Portfolio asset acquisition and resolution assets $ 68,419 $ 257,738
Mortgage banking assets 64,706 21,617
------------- -------------
Consolidated additions to building,
furniture and fixtures $ 133,125 $ 279,355
============= =============
CONSOLIDATED REVENUE:
Portfolio asset acquisition and resolution assets $ 28,168,170 $ 21,957,746
Mortgage banking assets 879,220 493,914
------------- -------------
Consolidated Revenue $ 29,047,390 $ 22,451,660
============= =============
CONSOLIDATED NET INCOME (LOSS):
Portfolio asset acquisition and resolution asset $ 736,403 $ 623,427
Mortgage banking assets (165,740) (491,579)
------------- -------------
Consolidated Net Income (Loss) $ 570,663 $ 131,848
============= =============
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42
13. CERTAIN CONCENTRATIONS
Geographic Concentrations of Notes Receivable - Approximately 25% of the
Company's secured consumer real estate notes receivable are with
customers in the northeastern region of the U.S. Such real estate notes
receivable are collateralized by real estate with a concentration in this
region. Accordingly, the collateral value of a substantial portion of the
Company's real estate notes receivable and real estate acquired through
foreclosure is susceptible to changes in market conditions. In the event
of sustained adverse economic conditions, it is possible that the Company
could experience a negative impact in its ability to collect on existing
loans, or liquidate foreclosed assets in this region which could impact
the Company's related loan loss estimates.
Financing - Substantially all of the Company's existing debt and
available credit facilities are with one financial institution. The
Company's purchases of new portfolios is contingent upon the continued
availability of these credit facilities.
14. COMMITMENTS AND CONTINGENCIES
Employment Agreement - Effective March 25, 1996, the Company entered into
a five-year employment agreement with its Chief Operating Officer. The
agreement provides for, among other things, a stipulated base salary, and
a bonus of up to 3.5% of the Company's net income in excess of $500,000.
Effective July 17, 2000, the Company entered into a three-year employment
agreement with its Chief Executive Officer. The agreement provides for,
among other things, a stipulated base salary, and a bonus of up to 10% of
the Company's net income in excess of $500,000.
Operating Leases - Certain secondary office and file space is leased
under an operating lease. The lease commenced on December 1, 1998 and
expires on November 30, 2007. New office space leased during 2000 is
leased under an operating lease. The lease commenced on September 30,
2000 and expires on September 1, 2004. The combined future minimum lease
payments for are as follows:
2001 $ 193,124
2002 196,020
2003 198,974
2004 198,974
Thereafter 457,019
----------
$1,244,111
==========
Other Legal Actions - The Company is also involved in legal proceedings
and litigation arising in the ordinary course of business. In the opinion
of management, the outcome of such proceedings and litigation currently
pending will not materially affect the Company's financial statements.
15. RELATED PARTY TRANSACTIONS
On March 31, 1999, Mr. Steven W. Leftkowitz, a board member and
stockholder, purchased from the Company without recourse a note held by
the Company. The consideration given included a note for $270,000 of
indebtedness to the Company. In addition, the Company recognized a gain
of $72,566.
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43
The note bears interest at a rate of 8% per annum payable monthly and is
secured by a mortgage on real estate and is due May 31, 2001, but can be
extended at his option to November 30, 2001. The Company believes that
the terms of the sale of the note were similar to those available to the
Company in arm's-length transactions.
During 1999, Mr. Axon provided the Company's Senior Debt Lender with a
$350,000 personal guarantee in connection with the financing of the
acquisition by the Company of certain high LTV loans. Mr. Axon is being
compensated on the outstanding balance of this guarantee at the rate of
-1/4% per annum which the Company believes is no greater than would be
payable to an outside guarantor.
During 2000, Mr. Axon, the Company's Chairman purchased from the Company
a New York condominium held by the Company in its OREO inventory
available for sale. The consideration included the issuance by Mr. Axon
of a note to the Company in the amount of $165,000. The note bears
interest at a rate of 8% per annum, is secured by the condominium
property, and is due together with all accrued interest and other charges
on January 30, 2001 the note was extended by Mr. Axon for one year. The
Company believes that the terms of the sale were at least as advantageous
to the Company as those available from an arm's-length purchaser.
16. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The table below sets forth selected unaudited financial information for
each quarter of the last two years.[OBJECT OMITTED]
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44
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2000
Revenue $ 6,498,458 $ 6,669,756 $ 6,707,978 $ 9,171,198
Operating expenses 6,619,278 6,645,831 7,112,337 8,099,281
----------- ----------- ----------- -----------
Income (Loss) before benefit for
income taxes and net income (loss) $ (120,820) $ 23,925 $ (404,359) $ 1,071,917
=========== =========== =========== ===========
Income (Loss) per common share
Basic $ (0.02) $ 0.00 $ (0.07) $ 0.18
=========== =========== =========== ===========
Diluted $ (0.02) $ 0.00 $ (0.07) $ 0.18
=========== =========== =========== ===========
1999
Revenue $ 5,156,188 $ 5,385,172 $ 5,690,252 $ 6,220,048
Operating expenses 4,938,348 5,141,833 5,816,751 6,422,880
----------- ----------- ----------- -----------
(Loss) income before benefit
for income income taxes and
net (loss) income $ 217,840 $ 243,339 $ (126,499) $ (202,832)
=========== =========== =========== ===========
(Loss) income per common share
Basic $ 0.04 $ 0.04 $ (0.02) $ (0.03)
=========== =========== =========== ===========
Diluted $ 0.04 $ 0.04 $ (0.02) $ (0.03)
=========== =========== =========== ===========
17. SUBSEQUENT EVENTS
Subsequent to year-end, the Company has purchased approximately
$13,900,000 in notes receivable at a cost of approximately $11,800,000.
******
F-23