Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-17771
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2243266
(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)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 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 .
As of August 14, 2002 the issuer had 5,916,527 of shares of Common Stock, par
value $0.01 per share, outstanding.
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-Q
June 30, 2002
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
----
Item 1.
Financial Statements
The accompanying unaudited interim financial statements have
been prepared in accordance with the instructions to Form 10Q.
In the opinion of management all adjustments necessary for fair
presentations have been included.
Consolidated Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited) for the three
months and six months ended June 30, 2002 and 2001 4
Consolidated Statements of Stockholders' Equity June 30, 2002
(unaudited) 5
Consolidated Statements of Cash Flows (unaudited)for the six
months ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-10
Business Segments 11
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 (unaudited) AND DECEMBER 31, 2001
- ---------------------------------------------------------------------------
ASSETS June 30, December 31,
2002 2001
(unaudited)
CASH AND CASH EQUIVALENTS $ 5,034,239 $ 7,784,162
RESTRICTED CASH 661,392 541,443
NOTES RECEIVABLE:
Principal 372,160,365 331,643,076
Purchase discount (22,684,691) (22,248,344)
Allowance for loan losses (38,876,210) (33,490,456)
------------ -----------
NET NOTES RECEIVABLE 310,599,464 275,904,276
LOANS HELD FOR SALE 45,626,069 28,203,047
ACCRUED INTEREST RECEIVABLE 4,334,538 4,795,789
OTHER REAL ESTATE OWNED 3,974,935 3,819,673
OTHER RECEIVABLES 1,914,793 5,305,409
DEFERRED TAX ASSET 880,340 1,567,588
OTHER ASSETS 2,931,795 1,894,052
BUILDING, FURNITURE AND FIXTURES - Net 1,168,902 1,151,171
DEFERRED FINANCING COSTS- Net 3,603,361 3,195,891
------------- -------------
TOTAL ASSETS $ 380,729,828 $ 334,162,501
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 2,873,740 $ 4,230,203
Financing agreements 7,485,536 7,542,511
Notes payable 357,847,241 313,943,808
Subordinated Debentures 24,262
Tax Liability
Current 225,000
Deferred 2,368,464 1,866,318
----------- -----------
TOTAL LIABILITIES 370,574,981 327,832,102
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000
authorized shares; issued and
outstanding: 5,916,527 and 5,916,527 59,167 59,167
Additional paid-in capital 6,985,968 6,985,968
Retained Earnings (deficit) 3,109,712 (714,736)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 10,154,847 6,330,399
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY $ 380,729,828 $ 334,162,501
============= =============
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Interest income $9,142,691 $6,627,907 $17,673,152 $12,734,080
Purchase discount earned 754,677 1,025,345 1,718,706 1,971,080
Gain on sale of portfolios 0 417,463 0 879,127
Gain on sale of originated loans 683,506 125,800 896,584 192,220
Gain on sale of other real
estate owned 17,258 695,336 398,375 846,610
Rental income 42,518 85,780 85,926 196,767
Other 665,648 352,087 1,205,016 674,858
---------- ---------- ----------- ----------
11,306,298 9,329,717 21,977,759 17,494,742
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Interest expense 4,679,174 4,806,002 9,090,333 10,122,134
Collection,general and
administrative 2,866,044 2,610,519 5,615,495 4,891,669
Recovery of special charge (1,662,598) 0 (1,662,598) 0
Provision for loan losses 841,764 462,440 1,095,764 689,963
Amortization of deferred
financing costs 375,779 278,046 643,923 466,894
Depreciation 85,822 48,778 161,644 88,104
--------- ---------- ---------- ----------
7,185,985 8,205,785 14,944,561 16,258,763
--------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,120,312 1,123,932 7,033,198 1,235,979
--------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES 1,854,250 0 3,208,750 0
---------- ---------- ---------- -----------
NET INCOME $2,266,062 $1,123,932 $3,824,448 $1,235,979
========== ========== ========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.38 $ 0.19 $ 0.65 $ 0.21
Dilutive $ 0.36 $ 0.19 $ 0.63 $ 0.21
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,916,527 5,916,527 5,916,527 5,916,527
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING DILUTIVE 6,243,953 5,916,527 6,080.240 5,916,527
========== ========== ========== ==========
See notes to Consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
JUNE 30, 2002
- -------------------------------------------------------------------------------
Additional Retained
Common Stock Paid-In Earnings
----------------
Shares Amount Capital (Deficit) Total
- -------------------------------------------------------------------------------
December 31, 2001 5,916,527 $59,167 $6,985,968 $(714,736) $6,330,399
Net Income (unaudited) 3,824,448 3,824,448
----------------------------------------------------
June 30, 2002 (unaudited) 5,916,527 $59,167 $6,985,968 $3,109,712 $10,154,847
====================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- -------------------------------------------------------------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,824,448 $1,235,979
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation 161,644 88,104
Amortization of deferred financing costs 643,923 466,894
Origination of loans held for sale (35,969,133) (13,791,854)
Proceeds on sale of loans held for sale 18,546,111 3,293,050
Purchase discount earned (1,718,706) (1,971,080)
Gain on sale of other real estate owned (398,376) (846,610)
Provision for loan losses 1,095,764 689,963
Decrease in deferred tax asset 687,248 0
(Increase) decrease in:
Accrued interest receivable 461,251 (678,206)
Other receivables 3,390,616 (555,613)
Other current assets (1,037,743) (404,306)
Increase (decrease) in:
Deferred tax liability 277,146 0
Accounts payable and accrued expenses (1,356,463) 299,298
203(k) rehabilitation escrow 0 (2,186)
Due to affiliates 0 (82,106)
------------ ------------
Net cash used by operating activities (11,392,270) (12,258,673)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and loan fees (1,126,460) (1,235,402)
Acquisition of notes receivable (90,045,271) (91,330,701)
Proceeds from sale of other real estate
owned 3,815,380 5,063,710
Proceeds from the sale of notes receivable 0 14,420,531
Acquisition of building, furniture & equipment (130,529) (212,776)
Principal collection on notes receivable 52,426,980 30,034,831
(Increase) decrease in restricted cash (119,949) 284,160
------------ ------------
Net cash used by investing activities (35,179,849) (42,775,647)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on subordinated debentures (24,262) (24,001)
Payments on financing agreements (37,054,703) (11,147,878)
Proceeds from financing agreements 36,997,728 11,566,895
Proceeds from notes payable 106,507,117 97,117,724
Payments on notes payable (62,603,684) (40,806,623)
------------ ------------
Net cash provided by financing activities 43,822,196 56,706,117
------------ ------------
NET INCREASE IN CASH (2,749,923) 1,671,797
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,784,162 7,212,346
----------- -----------
CASH AND CASH EQUIVALENTS END OF PERIOD $5,034,239 $8,884,143
=========== ===========
See notes to consolidated financial statements
NOTES TO FINANCIAL STATEMENTS (unaudited)
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 Presentation- The consolidated balance sheet as of June 30, 2002,
the consolidated statements of income for the three and sixth months ended
June 30, 2002 and 2001,and the consolidated statements of cash flows and
stockholder equity for the six months ended June 30, 2002 and June 2001
are unaudited. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position results of operations and changes in cash flows have
been made. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 as filed with the Securities and Exchange
Commission. The results of operations for the six months ended June 30,
2002 are not necessarily indicative of the operating results for the full
year.
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 in the United States of America
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 cash and
short-term investments with original maturities of three months or less,
with the exception of restricted cash. The Company maintains accounts at
banks, which at times may exceed federally insured limits. The Company has
not experienced any losses from such concentrations.
Notes Receivable and Income Recognition - The notes receivable portfolio
consists primarily of secured real estate mortgage loans purchased from
financial institutions, and mortgage and finance companies. Such notes
receivable are generally performing, nonperforming or underperforming at
the time of purchase and are usually purchased at a discount from the
principal balance remaining. Notes receivable are stated at the amount of
unpaid principal, reduced by purchase discount and an allowance for loan
losses. The Company has the ability and intent to hold its notes until
maturity, payoff or liquidation of collateral. Impaired notes are measured
based on the present value of expected future cash flows discounted at the
note's effective interest rate or, as a practical expedient, at the
observable market price of the note receivable or the fair value of the
collateral if the note is collateral dependent. A note receivable is
impaired when it is probable the Company will be unable to collect all
contractual principal and interest payments due in accordance with the
terms of the note agreement.
In general, interest on the notes receivable is calculated based on
contractual interest rates applied to daily balances of the collectible
principal amount outstanding using the accrual 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 collectability of the remaining
interest and principal. A non-accrual note is restored to an accrual
status when it is no longer delinquent and collectability 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 collectability 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 notes receivable are collateralized by real estate located
throughout the United States with a concentration in the TX, FL, NY, and CA.
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.
Loans Held for Sale- The loans held for sale consists primarily of secured
real estate first and second mortgages originated by the Company. Such loans
held for sale are performing and are carried at lower of cost or market.
Other Real Estate Owned - Other real estate owned ("OREO") consists 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 over the term of the related loan.
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. This method provides for deferred income tax assets or
liabilities based on the temporary difference between the income tax basis of
assets and liabilities and their carrying amount in financial statements.
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 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 non-financial assets and liabilities from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent
the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating .
the fair value of its financial instruments:
a. Cash, Restricted Cash, Accrued Interest Receivables, 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
agreements 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 2002 and 2001, therefore net
income was the same as its comprehensive income.
Recent Pronouncements
In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS No. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Correction. SFAS No. 145, among
other things, rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and, accordingly, the reporting of gains or losses
from the early extinguishment of debt as extraordinary items will only be
required if they met the specific criteria for extraordinary items included in
Accounting Principles Board Opinion No.30, Reporting the Results of Operations.
The rescission of SFAS No. 4 is effective January 1, 2003. Management believes
that adoption of this statement will not have a material effect on the
Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
anticipate the adoption of this statement will have a material effect on the
Company's financial statements.
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 purch ases,
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.
Three Months Ended June 30,
2002 2001
CONSOLIDATED REVENUE
Portfolio asset acquisition and resolution $ 9,650,176 $ 8,946,971
Mortgage banking 1,656,122 382,746
------------ ------------
Consolidated Revenue $ 11,306,298 $ 9,329,717
============ ============
CONSOLIDATED NET INCOME (LOSS)
Portfolio asset acquisition and resolution $ 1,568,471 $ 1,149,877
Mortgage banking 697,591 (25,945)
----------- -----------
Consolidated Net Income (Loss) $ 2,266,062 $ 1,123,932
=========== ===========
Six Months Ended June 30,
2002 2001
CONSOLIDATED REVENUE
Portfolio asset acquisition and resolution $ 19,228,088 $ 16,587,373
Mortgage banking 2,749,671 907,369
------------ ------------
Consolidated Revenue $ 21,977,759 $ 17,494,742
============ ============
CONSOLIDATED NET INCOME (LOSS)
Portfolio asset acquisition and resolution $ 2,790,107 $ 1,176,439
Mortgage banking 1,034,341 59,540
----------- ------------
Consolidated Net Income (Loss) $ 3,824,448 $ 1,235,979
=========== ============
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
General
Forward-Looking Statements. When used in this report, press releases and
elsewhere by the Company from time to time, the words "believes", "anticipates"
, and "expects" and similar expressions are intended to identify
forward-looking statements that involve certain risks and uncertainties.
Additionally, certain statements contained in this discussion and the Form 10-Q
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, the
rate of inflation, business conditions, interest rates, the level of growth in
the finance and housing markets, the availability for purchase of additional
loans and the quality of such additional loans, the status of relations between
the Company and its Senior Debt Lender, the status of relations between the
Company and its sources for loan purchases, unanticipated difficulties in
collections under loans in the Company's portfolio, prepayments of notes in the
Company's portfolio and other risks detailed from time to time in the Company's
SEC reports. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date thereof. The
Company undertakes no obligation to release publicly the results on any events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Critical Accounting Policies
The following management's discussion and analysis of financial condition and
results of operations is based on the amounts reported in the Company's
consolidated financial statements. These financial statements are prepared in
accordance with accounting principles generally accepted in the United States
of America. In preparing the financial statements, management is
required to make various judgments, estimates and assumptions that affect the
reported amounts. Changes in these estimates and assumptions could have a
material effect on the Company's financial statements. The following is a
summary of the Company's accounting policies that are the most affected by
management judgments, estimates and assumptions:
Notes Receivable-The Company purchases real estate mortgage loans to be held as
long-term investments. Loan purchase discounts are established at the
acquisition date. Management must periodically evaluate each of the purchase
discounts to determine whether the projection of cash flows for purposes of
amortizing the purchase loan discount has changed significantly. 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. 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. Given the nature of the
Company's loan portfolio and the underlying real estate collateral significant
judgment is required in determining periodic amortization of purchase discount,
and allowance for loan losses. The allowance is maintained at a level that
management considers adequate to absorb potential losses in the loan portfolio.
Loans, Other Real Estate Owned and Acquisitions. During the six months ended
June 30, 2002, the Company purchased loans with an aggregate face value of
$103.3 million for an aggregate purchase price of $90 million or 87%, compared
with the purchase during the six months ended June 30, 2001 of $104.3 million
at an aggregate purchase price of $92 million or 88% of aggregate face value.
The purchases during the six months ended June 30, 2002 included forty-one bulk
portfolios consisting primarily of first and second mortgages, with an
aggregate face value of $79.3 million at an aggregate purchase price of $69.1
million or 87% of the face value, and 92 flow purchase transactions consisting
primarily of first and second mortgages with an aggregate face value of $24
million at an aggregate purchase price of $21 million or 87% of 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 will result in increases in the level of interest
income and purchase discount 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, sub
performing, nonconforming and nonperforming first and second mortgages at a
positive interest rate spread based upon the Company's cost of funds. The
Company believes that its current infrastructure is adequate to service
additional loans without any material increases in collection, general and
administrative expenses excluding personnel expenses. There can be no assurance
the Company will be able to acquire any additional loans on favorable terms or
at all.
Single-Family Residential Lending. In January 1997, the Company formed a wholly
owned subsidiary, Tribeca Lending Corp. ("Tribeca"), to originate primarily
subprime residential mortgage loans made to individuals whose credit histories,
income and other factors cause them to be classified as non-conforming
borrowers. Management believes that lower credit quality borrowers present an
opportunity for the Company to earn superior returns for the risks assumed.
Tribeca provides first and second mortgages 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, Mississippi, New York,
New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, 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.
During the six months ended June 30, 2002, Tribeca originated 279 loans with an
aggregate principal amount of $35,969,133 compared to origination of 159 loans
with an aggregate principal of $13,791,854 during the six months ended June 30,
2001. During the six months ended June 30, 2002, Tribeca had net income of
$1,034,341 as compared to $59,540 during the six months ended June 30, 2002.
This increase in income reflected increased loan originations and loan sales
during the six months ended June 30, 2002, which generated additional fees and
gain on sale income, as compared to the six months ended June 30, 2001.
Cost of Funds. As of June 30, 2002, the Company had Senior Debt outstanding
under several loans with an aggregate principal balance of $358 million.
Additionally the Company has financing agreements, which had an outstanding
balance of $7.5 million at June 30, 2002.
The majority of the loans purchased by the Company bear interest at a fixed
rate, while the Senior Debt incurred to acquire such loans bears interest at a
variable rate. Consequently, changes in market interest rate conditions have
caused direct corresponding changes in interest expense. On December 31, 2001,
the Company and its Senior Debt Lender agreed that the interest rate for Senior
Debt incurred would be based on the Federal Home Loan Bank of Cincinnati (FHLB)
30-day advance rate plus an additional spread of 3.25%. Under the amendment
approximately $60 million of Senior Debt will accrue interest at a rate equal
to the prime rate plus a margin of between 0% and 1.75%.
The Company believes that this new agreement has increased its competitiveness
in the acquisitions market thereby resulting in additional acquisition
opportunities. The weighted average interest rate on borrowed funds for the
Senior Debt based on the balances as of June 30, 2002 and December 31, 2001,
2001 was 5.33% and 6.98%, respectively.
Inflation. The impact of inflation on the Company's operations during the six
months ending June 30, 2002, and 2001 was immaterial.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Movement in interest rates can pose a major risk to the Company. When interest
rates increase the spread between notes receivable and notes payable decreases
which will result in a decrease in net income. The Company does not currently
hedge this risk.
Three Months Ended June 30 ,2002 Compared to Three Months Ended June 30 ,2001.
Total revenue, which is comprised of interest income, purchase discount earned,
gains on bulk sale of notes receivable, gain on sale of notes receivable
originated, gain on sale of OREO, rental income and other income, increased by
$1,976,581 or 21%, to $11,306,298 during the three months ended June 30, 2002,
from $9,329,717 during the three months ended June 30, 2001.
Interest income on notes receivable increased by $2,514,784 or 38%, to
$9,142,691 during the three months ended June 30, 2002 from $6,627,907 during
the three months ended June 30, 2001. 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 $182 million in
performing notes acquired by the Company between July 2001 and June 2002, which
was only partially offset by collections, prepayments, and loan sales.
Purchase discount earned decreased by $270,668 or 26%, to $754,677 during the
three months ended June 30, 2002, from $1,025,345 during the three months ended
June 30, 2001. This decrease reflected the write-off of various loans during
the quarter in portfolios that would ordinarily earn discount income.
No gain on sale of portfolios was realized during the three months ended June
30, 2002 as compared to the $417,463 realized during the three months ended
June 30, 2001. The Company did not consummate any portfolio sales during
the three months ended June 30,2002.
Gain on sale of notes originated by Tribeca increased by $557,706 or 443% to
$683,506 during the three months ended June 30, 2002, from $125,800 during the
three months ended June 30, 2001, based on an increase in notes sold during the
three months ended June 30, 2002, compared to the three months ended June 30,
2001.
Gain on sale of OREO decreased by $678,078 or 98% to $17,258 during the three
months ended June 30, 2002 from $695,336 during the three months ended June 30,
2001. The Company sold 23 and 51 OREO properties during the three months ended
June 30, 2002 and June 30, 2001 respectively. These decreases reflected the
decrease in the Company's portfolio of OREO held for sale.
Rental income decreased by $43,262 or 50% to $42,518 during the three months
ended June 30, 2002, from $85,780 during the three months ended June 30, 2001.
Rental income decreased due to the sale of rental properties in prior periods.
The Company had 13 and 30 rental properties during the three months ended June
30, 2002 and June 30, 2001 respectively.
Other income increased by $313,561 or 89%, to $665,648 during the three months
ended June 30, 2002 from $352,087 during the three months ended June 30,2001.
This increase reflected increases in prepayment penalty income due to the
growth in the size of the portfolio and increased loans fees associated with
Tribeca loans due an increase in volume.
Total operating expenses exclusive of a "recovery of a special charge"
related to the PCC transaction increased by $642,799 or 8% to $8,848,584 during
the three months ended June 30, 2002 from $8,205,785 during the three months
ended June 30, 2001. Total operating expenses includes interest expense,
collection, general and administrative expenses, provisions for loan losses,
amortization of deferred financing costs and depreciation expense.
Interest expense decreased by $126,828 or 3%, to $4,679,174 during the three
months ended June 30, 2002, from $4,806,002 during the three months ended
June 30, 2001. This decrease resulted primarily from a 24% decrease in costs of
funds, which was partially offset by a 26% increase in debt measured on the
last day of the two periods. The weighted average cost of funds was 5.33% and
6.98% during the three months ended June 30, 2002 and June 30, 2001. Total debt
increased by $75 million or 26%, to $365 million as of June 30, 2002, from $290
million as of June 30, 2001. Total debt consists principally of Senior Debt,
and also includes debentures, and financing agreements.
Collection, general and administrative expenses increased by $255,525 or 10% to
$2,866,044 during the three months ended June 30, 2002 from $2,610,519 during
the three months ended June 30, 2001, as compared to a 28% increase in our
portfolio ended June 30, 2001. Collection, general and administrative expense
consists primarily of personnel expense, and all other collection expenses
including OREO related expense, litigation expense, and miscellaneous
collection expense.
The Company made a $1,662,598 cash settlement representing a recovery of a
special charge taken to income during 1997 to reserve for a portfolio purchase
of $1.8 million.
Personnel expenses increased by $245,093 or 18% to $1,644,009 during the three
months ended June 30, 2002 from $1,398,916 during the three months ended June
30,2001. This increase resulted largely from increases in staffing in Tribeca
and bonus accruals. All other collection expenses increased by $10,432 to
$1,222,035 during the three months ended June 30, 2002 from $1,211,603 during
the three months ended June 30, 2001. This increase resulted primarily from
increased legal fees due to the growth in the portfolio, additional rent
associated with new office space and related office expenses, which were only
partially offset by decreases in OREO expenses.
Provisions for loan losses increased by $379,324 or 82% to $841,764 during the
three months ended June 30, 2002 from $462,440 during the three months ended
June 30, 2001. This increase resulted primarily from higher than anticipated
write-offs in portfolios where there was no longer purchase discount available
to increase reserves.
Amortization of deferred financing costs increased by $97,733 or 35% to
$375,779 during the three months ended June 30, 2002, from $278,046 during the
three months ended June 30, 2001. This increase resulted primarily from an
increase in collections due to prepayments due to the growth in size of the
portfolio. On June 30, 2002 and June 30, 2001, deferred financing costs, as a
percentage of Senior Debt outstanding were 1.01% and 1.03%, respectively
Depreciation expense increased by $37,045 or 76%, to $85,822 during the three
months ended June 30, 2002, from $48,778 during the three months ended June 30,
2001. This increase resulted from increased investments in computer equipment,
furniture, and the renovations of office space.
Operating income increased by $2,996,380 or 266% to $4,120,312 during the three
months ended June 30, 2002 from $1,123,932 during the three months ended June
30, 2001.
During the three months ended June 30, 2002 the Company made a provision for
income taxes of $ 1,854,250. There was no provision for income tax during the
three months ended June 30, 2001, due to a loss carry-forward.
Net income increased by $1,142,130 or 101% to $2,266,062 during the three
months ended June 30, 2002 from $1,123,932 during the three months ended June
30, 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001.
Total revenue, increased by $4,483,017 or 26%, to $21,977,759 during the six
months ended June 30, 2002, from $17,494,742 during the six months ended June
30, 2001.
Interest income on notes receivable increased by $4,939,072 or 39%, to
$17,673,152 during the six months ended June 30, 2002 from $12,734,080 during
the six months ended June 30, 2001. 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 $182 million in
performing notes acquired by the Company between July 2001 and June 2002, which
was only partially offset by collections, prepayments, and loan sales.
Purchase discount earned decreased by $252,374 or 13%, to $1,718,706 during the
six months ended June 30, 2002 from $1,971,080 during the six months ended June
30, 2001. This decrease reflected the write-off of various loans during the six
months ended June 30, 2002 in portfolios that would ordinarily earn discount
income.
Gain on portfolio sale decreased by $879,127, to $0 during the six months ended
June 30, 2002, from $879,127 during the six months ended 2001. The Company did
not consummate any portfolio sales during the six months ending June 30, 2002.
Gain on sale of notes originated by Tribeca increased by $704,364 or 366% to
$896,584 during the six months ended from $192,220 during the six months ended
June 30, 2001. This increase reflected an increase in the number of Tribeca
loans sold during the six months ended June 30, 2002, as compared to the six
months ended June 30, 2001.
Gain on sale of OREO decreased by $448,235 or 53% to $398,375 during the six
months ended June 30, 2002, from $846,610 during the six months ended June 30,
2001. These decreases reflected the decrease in the Company's portfolio of OREO
held for sale. The Company sold 47 OREO properties during the six months ended
June 30, 2002, and 81 OREO properties during the six months ended June 30, 2001.
Rental income decreased by $110,841 or 56% to $85,926 during the six months
ended June 30, 2002, from $196,767 during the six months ended June 30, 2001.
This decrease reflected a decrease in the number of rental properties during
the six months ended June 30, 2002 as compared to the six months ended June 30,
2001. The Company had 15 and 30 rental properties during the six months ended
June 30, 2002 and June 30, 2001 respectively.
Other income increased by $530,158 or 79%, to $1,205,016 during the six months
ended June 30, 2002 from $674,858 during the six months ended June 30, 2001.
This increase reflected increases in prepayment penalties, and late charges,
resulting from the increase in size of the Company's portfolio and loan fees
associated with Tribeca loans sold.
Total operating expenses exclusive of the special recovery transaction
increased by $348,396 or 2%, to $16,607,159 during the six months ended June
30, 2002, from $16,258,763 during the six months ended June 30, 2001.
Interest expense decreased by $1,031,801 or 10%, to $9,090,333 during the six
months ended June 30, 2002 from $10,122,134 during the six months ended June
30, 2001. This decrease resulted primarily from a 24% decrease in costs of
funds, which was partially offset by a 26% increase in debt measured on the
last day of the two periods. The weighted average costs of funds were 5.33%
and 6.98% during the six months ended June 30, 2002 and June 30, 2001. Total
debt increased by $75 million or 26%, to $365 million as of June 30, 2002 from
$290 million as of June 30, 2001. Total debt includes Senior Debt, debentures,
and financing agreements and loans from affiliates.
Collection, general and administrative expenses increased by $723,826 or 15%,
to $5,615,495 during the six months ended June 30, 2002 from $ 4,891,669 during
the six months ended June 30, 2001 while the portfolio increased 28%.
The Company made a $1,662,598 cash settlement representing a recovery of a
special charge taken to income during 1997 to reserve for a portfolio purchase
of $1.8 million.
Personnel expenses increased by $641,443 or 25%, to $3,172,186 during
the six months ended June 30, 2002 from $2,530,744 during the six months ended
June 30, 2001. This increase resulted largely from increases in staffing in
Tribeca and bonus accruals during the six months ended June 30, 2002. All other
collection expenses increased by $82,383 or 3% to $2,443,309 during the six
months ended June 30, 2002 from $2,360,925 during the six months ended June 30,
2001. This increase resulted primarily from increased legal fees due to the
growth in the portfolio, additional rentassociated with new office space and
related office expenses, which were only partially offset by decreases in OREO
expenses.
Provisions for loan losses increased by $405,801 or 59% to $1,095,764 during
the six months ended June 30, 2002 from $689,963 during the six months ended
June 30, 2001. This increase resulted primarily from higher than anticipated
write-offs in portfolios where there is no longer purchase discount available
to increase reserves.
Amortization of deferred financing costs increased by $177,029 or 38%, to
$643,923 during the six months ended June 30, 2002, from $466,894 during the
six months ended June 30, 2001. This increase resulted primarily from the
growth in size of the portfolio.
Depreciation expense increased by $73,540 or 83%, to $161,644 during six months
ended June 30, 2002, from $88,104 during the six months ended June 30,2001.
This increase resulted from increased investments in computer equipment,
furniture, and the renovations of office space.
Operating income increased by $5,797,219 or 469% to $7,033,198 during the six
months ended June 30, 2002, from $1,235,979 during the six months ended June
30, 2001.
During the six months ended June 30, 2002 the Company made a provision for
income taxes of $3,208,750. There was no provision for income tax during the
six months ended June 30, 2001, due to a loss carry-forward.
Net income increased by $2,588,470 or 209% to $3,824,448 during the six months
ended June 30, 2002 from $1,235,979 during the six months ended June 30, 2001.
Liquidity and Capital Resources
General. During the six months ended June 30, 2002 the Company purchased 1,959
loans in several portfolios with an aggregate face value of $103 million at an
aggregate purchase price of $90 million or 87% of face value. During the six
months ended June 30, 2001 the Company purchased 2,406 loans in several
portfolios with an aggregate face value of $104 million at an aggregate
purchase price of $92 million or 88% of aggregate face value.
The Company's portfolio of notes receivable at June 30, 2002 had a face value
of $372 million and included net notes receivable of approximately $311 as
compared with a face value of $332 million and net notes receivable of
approximately $276 million as of December 31, 2001. Net notes receivable are
stated at the amount of unpaid principal, net of purchase discount and
allowance for loan losses. The Company has the ability to hold its notes until
maturity, payoff or liquidation of collateral or, where deemed to be
economically advantageous, sale.
During the six months ended June 30, 2002, the Company used cash in the amount
of $11.2 million in its operating activities primarily for the originations of
loans, interest expense, and increased infrastructure in the Company's core
business, litigation expense incidental to its ordinary collection activities
and for the foreclosure and improvement of OREO. The Company used $35.2 million
in its investing activities, primarily reflecting purchases of notes receivable
which purchases were offset by principal collections upon its notes receivable
and proceeds from sales of loans and OREO. The amount of cash used in operating
and investing activities was funded by $44 million of net cash provided by
financing activities, including primarily, a net increase in Senior Debt of
$44 million. The above activities resulted in a net decrease in cash at June
30, 2002 over December 31, 2001 of $2.8 million.
In the ordinary course of its business, the Company accelerates and forecloses
upon real estate securing non-performing notes receivable included in its
portfolio. As a result of such foreclosures and selective direct purchases of
OREO, at June 30, 2002 and 2001, the Company held OREO recorded on the
financial statements at $3.9 million and $4.2 million, respectively. OREO is
recorded on the financial statements of the Company at the lower of cost or
fair market value. The Company estimates, based on third party appraisals and
broker price opinions, that the OREO inventory held at June 30, 2002, in the
aggregate, had a net realizable value (market value less estimated commissions
and legal expenses associated with the disposition of the asset) of
approximately $4.4 million. There can be no assurance, however, that such
estimate is substantially correct or that an amount approximating such amount
would actually be realized upon liquidation of such OREO. The Company generally
holds OREO as rental property or sells such OREO in the ordinary course of
business when it is economically beneficial to do so.
Cash Flow
Substantially all of the assets of the Company are invested in itsportfolios of
notes receivable and OREO. Primary sources of the Company's cash flow for
operating and investing activities are borrowings under its senior debt
facilities, collections on notes receivable and gain on sale of notes and OREO
properties.
At June 30, 2002, the Company had unrestricted cash, cash equivalents
and marketable securities of $5 million.
Management believes that sufficient cash flow from the collection of notes
receivable will be available to repay the Company's secured obligations, and
that sufficient additional cash flows will exist through collections of notes
receivable, the bulk sale of performing loan portfolios, sales and rental
of OREO, continued modifications to the secured debt credit agreements or
additional borrowing, to repay the current liabilities arising from operations
and to repay the long term indebtedness of the Company.
Financing Activities
Senior Debt. As of June 30, 2002, the Company owed an aggregate of $358
million to the Lender of Senior Debt, under several loans.
The Senior Debt is collateralized by first liens on the respective loan
portfolios for the purchase of which the debt was incurred and is guaranteed by
the Company. The monthly payments on the Senior Debt have been, and the Company
intends for such payments to continue to be, met by the collections from the
respective loan portfolios. The loan agreements for the Senior Debt call for
minimum interest and principal payments each month and accelerated payments
based upon the collection of the notes receivable securing the debt during the
preceding month. The Senior Debt accrues interest based on the Federal Home
Loan Bank of Cincinnati (FHLB) 30-day advance rate plus an additional spread of
3.25%. Approximately $60 million of Senior Debt will accrue interest at a rate
equal to the prime rate plus a margin of between 0% and 1.75%. 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 weekly additional principal reduction from cash collected before
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 that is available to the Company.
In December 2001, the Company negotiated with its Senior Debt Lender a
modification to provisions of the Senior Debt, pursuant to which the Senior
Debt Lender has provided the Company with a cash advance of $1,345,000 per
month for the year 2002. 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 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
Company is no longer required to maintain these restricted accounts but has
continued to under the prior agreement. The Company typically uses these funds
to place deposits on loan portfolio bids and to refinance loans in the
Company's own portfolio. The restricted cash is maintained in an interest
bearing account, with the Company's Senior Debt Lender. The aggregate balance
of restricted cash in such accounts was $661,392 on June 30, 2002 and $541,443
on December 31, 2001. The increase in restricted cash at June 30, 2002 was due
to the reimbursement of funds from loans closed which funds are returned to the
restricted account once payoff has taken place.
Total Senior Debt availability was approximately $500 million at June 30, 2002,
of which approximately $358 million had been drawn down as of such date. As a
result, the Company has approximately $142 million available to purchase
additional portfolios of notes receivable and OREO.
The Company's Senior Debt Lender has provided Tribeca with a warehouse
financing agreement of $7 million. This Senior Debt accrues interest based on
prime plus an additional spread of 3.25%. At June 30, 2002, Tribeca had drawn
down $ 6.5 million on the line. The Company is in negotiations with its current
warehouse facility provider to increase the amount available on the line
although there can be no assurance that this will take place. The Company is
actively seeking other sources of financing for Tribeca.
Financing Agreements. 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 such lender's prime rate plus two percent per annum. Principal
repayment of the lines is due six months from the date of each cash advance and
interest is payable monthly. The total amounts outstanding under the financing
agreements as of June 30, 2002 and December 31, 2001, were $774,909 and
$647,791, respectively. Advances made under the financing agreement were used
to satisfy senior lien positions and fund capital improvements in connection
with foreclosures of certain real estate loans financed by the Company.
Management believes the ultimate sale of these properties will satisfy the
related outstanding financing agreements and accrued interest, as well as
surpass the collectible value of the original secured notes receivable.
Management has reached an agreement in principal with its Senior Debt Lender
to increase the availability under this credit facility to cover additional
properties foreclosed upon by the Company, which the Company may choose to hold
as rental property to maximize its return. The Company uses when available OREO
sales proceeds to pay down financing agreements to help reduce interest expense.
Additionally, the Company has a financing agreement with Citibank. 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 June
30, 2002 and December 31, 2001 $114,372 and $118,239 respectively, were
outstanding on the financing agreement.
Part II Other Information
Item 1. Legal Proceedings
As previously disclosed, on or about February 9, 2000 the United States
District Court for the Southern District of New York entered judgment in the
approximately amount of $1.7 million, plus interest, in favor of the Company
against Preferred Credit Corporation. Also as previously disclosed, the Company
was made party to an action filed by NJK Holding Corporation against Preferred
Credit Corporation and the Company. Through this second action, NJK sought a
declaration that it had a senior lien against certain funds. On or about May 29
, 2002, the Company and NJK entered into a settlement agreement pursuant to
which the parties agreed to the respective lien priorities to the disputed
funds and all remaining claims among the parties were dismissed, with prejudice.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Maters to a Vote of Security Holders
On May 9, 2002 at the Company's annual meeting the shareholders voted to elect
nine directors to the Company's Board of Directors, and to ratify the
appointment of Deloitte & Touche LLP as the Company's independent public
auditors for the fiscal year ended December 31, 2001.
- -------------------- ---------- --------- ----------- ----------- -------------
Election of
Directors For Against Abstained No-votes Total
Director
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
Thomas J. Axon 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- ------- ---------- ---------- ----------
Seth Cohen 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
Joseph Caiazzo 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
Michael Bertash 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
Frank B. Evans 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
Alan Joseph 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
Steven W. Lefkowitz 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
Allan R. Lyons 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
- -------------------- ---------- -------- ---------- ---------- ----------
William F. Sullivan 4,837,434 790 5,479 1,072,824 5,916,527
- -------------------- ---------- -------- ---------- ---------- ----------
Independent Public
Auditors For Against Abstained No Votes Total
- ------------------------------------------------------------------------------
Deloitte & Touche
LLP 1,691,319 615 3,118,615 1,105,978 5,916,527
Item 5. Other Information
"In compliance with Section 906 of the Sarbanes-Oxley Act of 2002, we have
provided certifications of our chief executive officer and chief financial
officer to the Securities and Exchange Commission. These certifications were
provided accompanying this report as supplemental correspondence and have not
been filed pursuant to the Securities Exchange Act of 1934."
Item 6. Exhibits and Reports on form 8-K
None
EXHIBIT TABLE
(a)
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 Statementon
Form S-4, No.33-81948, filed with the Commission on November
24, 1994.
10(i) Promissory Note between Thomas J. Axon and the Company dated
December 31, 1998. Filed with the Commission on December 31,
1998. Previously filed with, and incorporated herein by
reference to, the Company's Form 10KSB, filed with the
Commission on April 16, 1999.
10(j) Promissory Note between Steve Leftkowitz, board member, and the
Company dated March 31, 1999. Filed with the Commission with
form 10KSB on March 30, 2000.
10(l) Employment Agreement dated July 17, 2000 between the Company
and Seth Cohen. Filed with the Commission with form 10KSB on
March 31, 2001.
11 Earnings per share. Filed here with.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
August 14, 2002
FRANKLIN CREDIT MANAGEMENT CORPORATION
By: THOMAS J. AXON
---------------
Thomas J. Axon
Chairman of the Board
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 Chief Executive Officer August 14, 2002
- ------------- and Director ---------------
Seth Cohen
(Principal executive officer)
JOSEPH CAIAZZO Senior Vice President, August 14, 2002
- ------------- Chief Operating Officer, ---------------
Joseph Caiazzo Secretary and Director
(Secretary)
ALAN JOSEPH Chief Financial Officer, August 14, 2002
- ------------- Director ----------------
Alan Joseph
Principal financial officer
Exhibit 11.
Computation of earnings per share second quarter 2002.
No. of Shares Weight
06/30/02 Common stock 5,916,527 100%
Weighted average number of shares 5,916,527
Earnings per Common share:
Net Income $3,824,448 $.65
Exhibit 11.
Computation of earnings per share second quarter 2001
No. of Shares Weight
06/30/01 Common stock 5,916,527 100%
Weighted average number of shares 5,916,527
Earnings per Common share:
Net Income $1,235,979 $.21