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 September 30, 2003
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)
(I.R.S. Employer identification No.)
75-2243266
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices)
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 November 13, 2003 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
As of September 30, 2003
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2003
and December 31,2002 3
Consolidated Statements of Income for the three months
and nine months ended September 30, 2003 and
September 30, 2002 4
Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 2003 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and September 30, 2002 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-22
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERFTIFICATIONS 26-27
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2003 December 31, 2002
CASH AND CASH EQUIVALENTS $ 8,681,230 $ 10,576,610
RESTRICTED CASH 461,946 632,883
NOTES RECEIVABLE:
Principal 484,960,489 435,259,394
Purchase discount (26,819,189) (22,974,310)
Allowance for loan losses (51,394,821) (45,841,651)
----------- -----------
NET NOTES RECEIVABLE 406,746,479 366,443,433
ORIGINATED LOANS HELD FOR SALE 19,200,338 22,869,947
ORIGINATED LOANS HELD FOR INVESTMENT 10,871,430 _
ACCRUED INTEREST RECEIVABLE 4,349,483 4,157,615
OTHER REAL ESTATE OWNED 10,160,786 9,353,884
OTHER RECEIVABLES 3,786,422 2,259,543
DEFERRED TAX ASSET 479,157 387,767
OTHER ASSETS 3,509,244 2,633,082
BUILDING, FURNITURE AND FIXTURES - Net 1,371,185 1,106,865
DEFERRED FINANCING COSTS- Net 4,374,795 3,997,405
------------- -------------
TOTAL ASSETS $ 473,992,495 $ 424,419,034
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 4,297,259 $ 3,818,557
Financing agreements 16,053,732 11,557,369
Notes payable 435,481,992 395,266,144
Deferred tax liability 433,618 783,115
----------- -----------
TOTAL LIABILITIES 456,266,601 411,425,185
----------- -----------
COMMITMENTS AND CONTENGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000
authorized shares; issued and
outstanding: 5,916,527 shares 59,167 59,167
Additional paid-in capital 6,985,968 6,985,968
Retained earnings 10,680,759 5,948,714
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 17,725,894 12,993,849
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 473,992,495 $ 424,419,034
============= =============
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- -------------------------------------------------------------------------------
Three Months Nine Months
Ended Sept 30 Ended Sept 30
2003 2002 2003 2002
----------- ---------- ----------- -----------
REVENUES:
Interest income $10,438,099 $9,452,180 $31,721,768 $27,125,332
Purchase discount earned 1,385,753 882,458 3,366,675 2,601,163
Gain on sale of notes
receivable 36,991 114,019 633,105 114,019
Gain on sale of originated
loans held for sale 895,774 689,432 2,302,819 1,586,017
Gain on sale of other real
estate owned 174,651 271,931 927,845 670,306
Rental income 29,874 44,959 103,674 130,885
Other income 1,096,582 765,523 2,899,019 1,970,539
---------- ---------- ---------- ----------
14,057,724 12,220,502 41,954,905 34,198,261
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Interest expense 5,489,147 4,966,438 16,102,017 14,056,770
Collection, general and
administrative 4,476,633 3,279,258 12,995,727 8,894,753
Recovery of special charge - - - (1,662,598)
Provision for loan losses 783,854 723,603 2,368,299 1,819,367
Amortization of deferred
financing costs 516,483 313,280 1,356,875 957,203
Depreciation 120,283 92,143 327,742 253,787
---------- ---------- ---------- ----------
11,386,400 9,374,722 33,150,660 24,319,282
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,671,324 2,845,780 8,804,245 9,878,979
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES 1,215,900 1,280,601 4,072,200 4,489,351
---------- ---------- ---------- ----------
NET INCOME $ 1,455,424 $1,565,179 $ 4,732,045 $ 5,389,628
=========== ========== ========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.25 $ 0.26 $ 0.80 $ 0.91
Diluted $ 0.22 $ 0.25 $ 0.73 $ 0.86
=========== ========== =========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING BASIC 5,916,527 5,916,527 5,916,527 5,916,527
=========== ========== =========== ==========
WEIGHTED AVERAGE NUMBER
SHARES OUTSTANDING DILUTED 6,573,879 6,261,550 6,506,560 6,248,352
=========== ========== =========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 (Unaudited)
- -------------------------------------------------------------------------------
Common Stock Additional
-------------- Paid-In Retained
Shares Amount Capital Earnings Total
- -------------------------------------------------------------------------------
January 1, 2003 5,916,527 $59,167 $6,985,968 $5,948,714 $12,993,849
Net income 4,732,045 4,732,045
-----------------------------------------------------------
September 30, 2003 5,916,527 $59,167 $6,985,968 $10,680,759 $17,725,894
===========================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- -------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,732,045 $5,389,628
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 327,742 253,787
Amortization of deferred financing costs 1,356,875 957,203
Origination of loans held for sale (67,934,759) (51,497,518)
Proceeds on sale of loans held
for sale and principal collections 59,941,543 25,378,346
Purchase discount earned (3,366,675) (2,601,163)
Gain on sale of other real estate owned (927,845) (670,306)
Gain on sale of notes receivable (633,105) (114,019)
Provision for loan losses 2,368,299 1,819,367
Change in:
Accrued interest receivable 191,868 461,251
Other receivables (1,526,879) 3,318,091
Other assets (876,162) (1,509,603)
Deferred tax asset (91,390) 687,248
Current tax liability - (225,000)
Deferred tax liability (349,497) 346,287
Accounts payable and accrued expenses 478,702 (96,370)
----------- ------------
Net cash used in operating activities (6,309,238) (18,102,771)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and loan fees (1,887,363) (1,549,353)
Acquisition of notes receivable (163,332,881) (134,050,300)
Proceeds from sale of other real estate owned 11,345,657 5,410,057
Proceeds from the sale of notes receivable 4,280,676 910,083
Purchase of building, furniture & fixtures (592,062) (262,652)
Principal collection on notes receivable 109,716,685 77,041,102
(Increase) decrease in restricted cash 170,937 (132,756)
------------ ------------
Net cash used in investing activities (40,298,351) (46,204,724)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on subordinated debentures - (24,262)
Payments on financing agreements (67,722,555) (52,248,536)
Proceeds from financing agreements 72,218,917 53,579,279
Proceeds from notes payable 173,789,284 139,354,638
Payments on notes payable (133,573,437) (77,440,376)
------------- ------------
Net cash provided by financing activities 44,712,209 63,245,005
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,895,380) (1,062,490)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,576,610 7,784,162
CASH AND CASH EQUIVALENTS END OF PERIOD $8,681,230 $6,721,672
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash payments for interest $14,902,010 $12,556,770
============ ===========
============ ===========
Cash payment for taxes $4,742,329 $4,125,000
============ ===========
Notes to Consolidated Financial Statements
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Franklin Credit Management Corporation (the "Company"), a
Delaware corporation, was formed to acquire 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 the original
note term, 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 is as follows.
Basis of Presentation - The accompanying consolidated financial 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 consolidated 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, 2002 as filed with
the Securities and Exchange Commission. The results of operations for the three
and nine months ended September 30, 2003 are not necessarily indicative of the
operating results for the full year.
Principles 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.
Reclassification - Certain prior years amounts have been reclassed to conform
with current year presentation.
Operating Segments - Statement of Financial Accounting Standards ("SFAS") No.131
"Disclosures about Segments of an Enterprise and Related Information" requires
companies to report financial and descriptive information about their reportable
operating segments, including segment profit or loss, certain specific revenue
and expense items, and segment assets. The Company is currently operating in
two business segments:(i) portfolio asset acquisition;and (ii) mortgage banking.
Estimates - The preparation of consolidated financial statements in conformity
with accounting principles generally accepted 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 reporting period. Actual results could
differ from those estimates. The most significant estimates of the Company are
allowance for loan losses.
Earnings per share - Basic earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding during the year.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding, including the dilutive effect, if any, of
stock options outstanding, calculated under the treasury stock method.
Cash and Cash Equivalents - Cash and cash equivalents includes 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 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 these notes until maturity, payoff or liquidation
of collateral. Impaired notes receivable 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. The Company periodically evaluates the collectability of both
interest and principal of its notes receivable to determine whether they are
impaired. A note receivable is considered 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 discounts are amortized into 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.
In the event projected payments do not exceed the carrying value of the loan,
the periodic amortization is suspended and either the loan is written down or
an allowance for uncollectibility is recognized.
Allowance for Loan Losses - The allowance for loan losses, a material estimate
which could change significantly in the near term, is initially established by
an allocation of the purchase loan discount based on management's assessment of
the portion of purchase discount that represents uncollectable principal.
Subsequently, increases to the allowance are made through a provision for loan
losses charged to expense and the allowance is maintained at a level that
management considers adequate to absorb potential losses in the loan portfolio.
An allowance of $51,394,821and $208,677 is included in notes receivable and
loans held for investment, respectively, at September 30 ,2003.
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. 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. In connection with the determination of the
allowance for loan losses, management obtains independent appraisals for the
underlying collateral when considered necessary.
The Company's notes receivable are collateralized by real estate located
throughout the United States with a concentration in California, New York,
Texas, and Florida. 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.
Originated Loans Held for Sale - The loans held for sale consist 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.
The gain/loss on sale is recorded as the difference between the carrying amount
of, the loan and the proceeds from sale on a loan-by-loan basis. The Company
records a sale when the title transfers to the seller.
Originated Loans Held for Investment - Such loans consist primarily of secured
real estate first and second mortgages originated by the Company. Such loans
held for investment are performing and are carried at amortized cost of the
loan. In the second quarter of 2003 the Company's holding strategy on several
loans originated changed. The unamortized cost of these loans were transferred
from the loans held for sale category into loans held for investment. The
Company has both the intent and ability to hold these loans to maturity.
Other Real Estate Owned - Other real estate owned ("OREO") consists of
properties acquired through, or in lieu of, foreclosure or other proceedings and
are held for sale and carried at the lower of cost or fair value less estimated
costs to sell. Subsequent write-downs are charged to operations based upon
management's continuing assessment of the fair value of the underlying
collateral. Property is evaluated periodically to ensure that the recorded
amount is supported by current fair values and write-downs are recorded as
necessary to reduce the carrying amount to fair value less estimated cost to
sell. Revenue and expenses from the operation of OREO and changes in the
valuation allowance are included in operations. Direct costs relating to the
development and improvement of the property are capitalized, subject to the
limit of fair value of the collateral, while costs related to holding the
property are expensed. Gains or losses are included in operations upon disposal.
Building, Furniture and Equipment - Building, furniture and equipment is
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. Maintenance and repairs are expensed as incurred.
Deferred Financing Costs - Costs, incurred in connection with obtaining
financing, are deferred and are amortized over the term of the related debt.
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 matches 50% of the
first 3% of the employees' contribution.
Income Taxes - Income taxes are accounted for under SFAS No. 109 Accounting for
Income Taxes, which requires an asset and liability approach in accounting for
income taxes. 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 the consolidated 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 - SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of fair value information
of financial instruments, 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 Receivable, Other Receivable and
Accrued Interest Payable - The carrying values reported in the consolidated
balance sheets 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, and subordinated debentures) 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 accompanying consolidated balance sheets 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 during
2003 or 2002 therefore net income was the same as its comprehensive income.
Accounting for Stock Options - The stock option plan is accounted for under
the recognition and measurement principles of Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees and related
interpretations. No stock-based employee compensation cost is reflected in
net income for stock options, as all options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Recently Adopted Accounting 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
allowed if they met the specific criteria for extraordinary items included in
APB Opinion-30, Reporting the Results of Operations. The Company adopted this
statement on January 1, 2003 and it did not have an effect on the Company's
consolidated 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
adoption of this statement did not have an effect on the Company's consolidated
financial statements.
In November of 2002, the FASB issued Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure provisions of this Interpretation were effective
for the Company's December 31, 2002 financial statements. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. This interpretation did not have an effect on the Company's
consolidated financial statements.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provisions of the Interpretation are effective for all variable
interests in variable interest entities created after January 31, 2003 and to
all variable interest activities on December 31, 2003. The Company believes
that it does not hold any investments in entities that will be deemed variable
interest entities, and accordingly, that the implementation of this
Interpretation did not have an effect on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation-Transition and Disclosure. This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation
and amends the disclosure requirements of SFAS No. 123. Other than the
additional disclosure requirements below adoption of the provisions of the
Statement on January 1, 2003 did not have any impact because the Company will
continue to use the intrinsic value method as set forth in APB No. 25.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock options. Had the Company determined compensation
costs based on the fair value of the stock options at the grant date consistent
with the method of SFAS No.123, the Company's nine months ended September
30, 2003 and 2002 net income and earnings per share would have been reduced to
the pro forma amounts indicated in the table that follows.
2003 2002
Net income - as reported $ 1,455,424 $ 1,565,179
Net income - pro forma $ 1,438,758 $ 1,549,307
Net income per common share
- - basic - as reported $ 0.25 $ 0.2625
Net income per common share
- - basic - pro forma $ 0.24 $ 0.2624
Net income per common share
- - diluted - as reported $ 0.22 $ 0.2522
Net income per common share
- - diluted - pro forma $ 0.22 $ 0.2522
The Company's nine months ended September 30, 2003 and 2002 net income and
earnings per share would have been reduced to the pro forma amounts
indicated in the table that follows.
2003 2002
Net income - as reported $ 4,732,045 $ 5,389,628
Net income - pro forma $ 4,682,046 $ 5,363,176
Net income per common share
- - basic - as reported $ 0.80 $ 0.9180
Net income per common share
- - basic - pro forma $ 0.79 $ 0.9179
Net income per common share
- - diluted - as reported $ 0.73 $ 0.8673
Net income per common share
- - diluted - pro forma $ 0.72 $ 0.8672
There were 39,000 options granted during the nine months ended September 30,
2003. The weighted average fair value of options granted during the nine
months ended September 30, 2003 was $2.58. The fair value of the options
granted was estimated using the Black-Scholes option-pricing model.
In April 2003, the FASB issued SFAS No.149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.SFAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is
generally effective for contracts entered into or modified after September
30, 2003 and for hedging relationships designated after September 30, 2003.
The adoption of SFAS No.149 on July 1, 2003, as required, had no effect
on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial
instruments be classified as liabilities that were previously considered equity.
The adoption of this standard on July 1, 2003, as required, had no effect on
the Company's consolidated 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 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.
Three Months Ended September 30,
2003 2002
CONSOLIDATED REVENUE
Portfolio asset acquisition and
resolution $ 12,067,078 $ 10,495,429
Mortgage banking 1,990,646 1,725,073
------------ ------------
Consolidated Revenue $ 14,057,724 $ 12,220,502
============ ============
CONSOLIDATED INCOME
Portfolio asset acquisition and
resolution $ 2,236,779 $ 2,273,810
Mortgage banking 434,545 571,970
----------- -----------
Consolidated Income before income
taxes $ 2,671,324 $ 2,845,780
=========== ===========
Nine Months Ended September 30,
2003 2002
CONSOLIDATED REVENUE
Portfolio asset acquisition and
resolution $ 36,621,059 $ 29,723,517
Mortgage banking 5,333,846 4,474,744
------------ ------------
Consolidated Revenue $ 41,954,905 $ 34,198,261
============ ============
CONSOLIDATED INCOME
Portfolio asset acquisition and
resolution $ 7,768,991 $ 8,272,668
Mortgage banking 1,035,254 1,606,311
----------- -----------
Consolidated Income before income taxes $ 8,804,245 $ 9,878,979
=========== ===========11
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
General
Forward-Looking Statements. Statements contained herein that are not
historical fact may be forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are subject to a variety of
risks and uncertainties. There are a number of important factors that could
cause actual results to differ materially from those projected or suggested
in forward-looking statements made by the Company. These factors include,
but are not limited to: (i) unanticipated changes in the U.S economy,
including changes in business conditions and interest rates and changes in the
level of growth in the finance and housing markets; (ii) the status of
relations between the Company and its sole Senior Debt Lender and the Senior
Debt Lender willingness to extend additional credit to the Company; (iii) the
availability for purchases of additional loans; (iv) the status of relations
between the Company and its sources for loan purchases; (v) unanticipated
difficulties in collections under loans in the Company's portfolio; and (vi)
other risks detailed from time to time in the Company's SEC reports. Additional
factors that would cause actual results to differ materially from those
projected or suggested or suggested in any forward-looking statements are
contained in the Company's filings with the Securities and Exchange Commission,
including, but not limited to, those factors discussed under the caption
"Real Estate Risk" in the Company's Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q, which the Company urges investors to
consider. The Company undertakes no obligation to publicly release the
revisions to such forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrences of
unanticipated events, except as other wise required by securities and other
applicable laws. 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. In preparing the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America ("GAAP"), management is required to make estimates
and assumptions that affect the financial statements and disclosures.
These estimates require management's most difficult, complex or subjective
judgments. The Company's critical accounting policies are described in its
Form 10-K for the year ended December 31, 2002. There have been no significant
changes in the Company's critical accounting policies since December 31, 2002.
Acquisition Activity. During the nine months ended September 30, 2003, the
Company purchased loans with an aggregate face value of $188 million for an
aggregate purchase price of $163 million or 87%, compared with the purchase
during the nine months ended September 30, 2002 of $154 million at an
aggregate purchase price of $134 million or 87% of aggregate face value. The
purchases during the nine months ended September 30, 2003 included 32 bulk
portfolios consisting primarily of first and second mortgages, with an
aggregate face value of $140 million at an aggregate purchase price of $122
million or 87% of the face value, and 194 flow purchase transactions
consisting primarily of first and second mortgages with an aggregate face
value of $48 million at an aggregate purchase price of $41 million or 85% 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.
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
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
marketing firms that supply leads to the Company. 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, 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
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 1997, Tribeca
has originated approximately $235 million in loans. During the year the
Company changed the holding strategy of several of its originated loans
and reclassified $13.2 million of principal and fees into loans held for
investments.
During the nine months ended September 30, 2003, Tribeca originated 370 loans
with an aggregate principal amount of $67,934,759 loans compared to 385 loans
with an aggregate principal of $51,497,518 during the nine months ended
September 30, 2002. During the nine months ended September 30, 2003, Tribeca
had income before taxes of $1,035,254 as compared to $1,606,311 during the
nine months ended September 30, 2002. This decrease in income reflected the
cost associated with the expansion of a three new branch offices in New
Jersey, Florida and Maryland and salaries for new employees during the period
and slightly decreased margins at point of sale due to originations of higher
quality borrowers. As of September 30, 2003, Tribeca had approximately $19.2
million face value of loans held for sale and $10.9 million held for investment.
Revenues and expenses related to loans held for sale, other than periodic
interest payments, and fee are expected to be realized upon sale of such loans.
Cost of Funds. As of September 30, 2003, the Company had Senior Debt
outstanding under several loans with an aggregate principal balance of
approximately $435 million. Additionally the Company has financing
agreements, which had an outstanding balance of approximately $16 million at
September 30, 2003.
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
caused direct corresponding changes in the Company's interest expense. On
March 1, 2003, the Company and its Senior Debt Lender entered into a two-year
agreement that the interest rate for Senior Debt will be based on the Federal
Home Loan Bank of Cincinnati (FHLB) thirty (30) day advance rate plus an
additional spread of 3.50%. Under the amendment approximately $40 million
of Senior Debt will continue to accrue interest at a rate equal to the prime
rate plus a margin of between 0% and 1.75%. The weighted average cost of funds
was 4.77% and 5.31% during the three months ended September 30, 2003 and
September 30, 2002.
Inflation. The impact of inflation on the Company's operations during the
nine months ending September 30, 2003, and 2002 was immaterial.
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002.
Total revenue, which is comprised of interest income, purchase discount
earned, gain on portfolio sale of notes receivable, gain on sale of notes
receivable originated, gain on sale of OREO, rental income and other income,
increased by $1,837,222 or 15%, to $14,057,724 during the three months ended
September 30, 2003, from $12,220,502 during the three months ended September
30, 2002.
Interest income on notes receivable increased by $985,919 or 10%, to $10,438,099
during the three months ended September 30, 2003 from $9,452,180 during the
three months ended September 30, 2002. 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 net increase
of $77,715,503 or 18% in the size of the portfolio between September 30,
2002 and September 30, 2003 and was partially offset by a reduction in yield
due to prepayments.
Purchase discount earned increased by $503,295 or 57%, to $1,385,753 during
the three months ended September 30, 2003, from $882,458 during the three months
ended September 30, 2002. This increase reflected the growth in size of
the portfolio and prepayments in portfolio's that earn purchase discount which
accelerated the earning of discount income.
Gain on sale of notes receivable decreased by $77,028 or 68% to $36,991
during the three months ended September 30, 2003 as compared to $114,019
realized during the three months ended September 30, 2002. The Company sold $2
million in non-performing loans during the three months ended September 30,
2003 as compared to $1 million of low interest rate performing loans during
the three months ended September 30, 2002.
Gain on sale of notes originated by Tribeca increased by $206,342 or 30% to
$895,774 during the three months ended September 30, 2003, from $689,432
during the three months ended September 30, 2002. This increase is based on
an increase in the volume of notes sold to $21 million during the three months
ended September 30, 2003, compared to sales of $10 million during the three
months ended September 30, 2002 that was partially offset by a decline in
margin.
Gain on sale of OREO decreased by $97,280 or 36% to $174,651 during the three
months ended September 30, 2003 from $271,931 during the three months ended
September 30, 2002. This decrease reflected the lesser quality of several REO
properties sold at losses during the three months ended September 30, 2003 as
compared to the three months ending September 30, 2002. The Company sold 54
and 33 OREO properties during the three months ended September 30, 2003 and
September 30, 2002 respectively.
Rental income decreased by $15,085 or 34% to $29,874 during the three months
ended September 30, 2003, from $44,959 during the three months ended
September 30, 2002. Rental income decreased due to the reduction of rental
properties held during the three months ended September 30, 2003 as compared
to September 30, 2002. The Company had 4 and 12 rental properties during the
three months ended September 30, 2003 and September 30, 2002 respectively.
Other income increased by $331,059 or 43%, to $1,096,582 during the three
months ended September 30, 2003 from $765,523 during the three months ended
September 30, 2002. This increase reflected increases in prepayment penalty
income due to prepayments, the growth in the size of the portfolio and
increased loans fees associated with Tribeca loans sold.
Total operating expenses increased by $2,011,679 or 21% to $11,386,400 during
the three months ended September 30, 2003 from $9,374,721 during the three
months ended September 30, 2002. Total operating expenses includes interest
expense, collection, general and administrative expenses, provisions for loan
losses, amortization of deferred financing costs and depreciation expense.
Interest expense increased by $522,709 or 11%, to $5,489,147 during the
three months ended September 30, 2003, from $4,966,438 during the three
months ended September 30, 2002. This increase resulted primarily from a 17%
increase in debt measured on the last day of the two periods, which was
partially offset by a 10% decrease in costs of funds. The weighted average
cost of funds was 4.77% and 5.31% during the three months ended September 30,
2003 and September 30, 2002. Total debt increased by $66 million or 17%, to
$451 million as of September 30, 2003, from $385 million as of September 30,
2002. Total debt consists principally of Senior Debt and financing agreements.
Collection, general and administrative expenses increased by $1,197,375 or
37% to $4,476,633 during the three months ended September 30, 2003 from
$3,279,258 during the three months ended September 30, 2002. The increase
resulted in part from an 18% increase in the Company's portfolio at
September 30, 2003 as compared with September 30, 2002. Collection,
general and administrative expense consists primarily of personnel expense,
and all other collection expenses including OREO related expense, litigation
expense, and miscellaneous collection expense.
Personnel expenses increased by $775,982 or 52% to $2,266,724 during the
three months ended September 30, 2003 from $1,490,742 during the three
months ended September 30,2002. This increase resulted largely from
increases in staffing in Tribeca as the Company opened three new branch offices
during the quarter and increased commissions due to increased loan production.
All other collection expenses increased by $421,393 or 24% to $2,209,909
during the three months ended September 30, 2003 from $1,788,516 during the
three months ended September 30, 2002. This increase resulted primarily
from increased legal and collection expenses associated with the growth in
size of the Company's nonperforming portfolio and increased professional and
advertising expenses.
Provisions for loan losses increased by $60,251 or 8% to $783,854 during
the three months ended September 30, 2003 from $723,603 during the three
months ended September 30, 2002. This increase resulted primarily from
write-offs in portfolios where there was no longer purchase discount available
to increase reserves.
Amortization of deferred financing costs increased by $203,203 or 65% to
$516,483 during the three months ended September 30, 2003, from $313,280
during the three months ended September 30, 2002. This increase resulted
primarily from an increase in collections due to prepayments, which
accelerated the pay down of senior debt, which accelerates the amortization
of deferred financing costs. On September 30, 2003 and September 30, 2002,
deferred financing costs, as a percentage of Senior Debt outstanding
was 1.00% and 1.01%, respectively
Depreciation expense increased by $28,140 or 31%, to $120,283 during the three
months ended September 30, 2003, from $92,143 during the three months ended
September 30, 2002. This increase resulted from increased purchases of computer
equipment, furniture, and the leasehold improvements on new office space.
Operating income decreased by $174,457 or 6% to $2,671,324 during the three
months ended September 30, 2003 from $2,845,781 during the three months ended
September 30, 2002.
During the three months ended September 30, 2003 the Company made a provision
for income taxes of $1,215,900 as compared to $1,280,601 during the three
months ended September 30, 2002.
Net income decreased by $109,755 or 7% to $1,455,424 during the three months
ended September 30, 2003 from $1,565,179 during the three months ended
September 30, 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002.
Total revenue, increased by $7,756,644 or 23%, to $41,954,905 during the
nine months ended September 30, 2003, from $34,198,261 during the nine months
ended September 30, 2002.
Interest income on notes receivable increased by $4,596,436 or 17%, to
$31,721,768 during the nine months ended September 30, 2003 from $27,125,332
during the nine months ended September 30, 2002. This increase resulted
primarily from the net increase of $77,715,503 or 18% in the size of the
portfolio between September 30, 2002 and September 30, 2003.
Purchase discount earned increased by $765,512 or 29%, to $3,366,675 during
the nine months ended September 30, 2003 from $2,601,163 during the nine months
ended September 30, 2002. This increase reflected the growth in size of the
portfolio and prepayments in portfolios that earn purchase discount accelerating
the earning of the related discount income.
Gain on sale of notes receivable increased by $519,086 or 455% to $633,105
during the nine months ended September 30, 2003 from $114,019 during the
nine months ended September 30, 2002. The Company sold $6 million of
nonperforming loans during the nine-month period ended September 30, 2003
as compared to $1 million of low-coupon performing loans during the nine
months ended September 30, 2002.
Gain on sale of notes originated by Tribeca increased by $716,802 or 45%
to $2,302,819 during the nine months ended September 30, 2003 from
$1,586,017 during the nine months ended September 30, 2002. This increase
reflected an increase in the number of Tribeca loans sold during the nine
months ended September 30, 2003 to $59 million as compared to $25 million
sold during the nine months ended September 30, 2002 and was partially offset
by a decline in margin due to a competitive loan origination market.
Gain on sale of OREO increased by $257,539 or 38% to $927,845 during the nine
months ended September 30, 2003, from $670,306 during the nine months ended
September 30,2002. This increase resulted from the sale of 164 OREO
properties due to higher inventory during the nine months ended September 30,
2003 as compared to 70 OREO properties sold during the nine months ended
September 30, 2002.
Rental income decreased by $27,211 or 21% to $103,674 during the nine months
ended September 30, 2003, from $130,885 during the nine months ended September
30, 2002. Rental income decreased due to the reduction of properties held for
rent to 4 during the nine months ended September 30, 2003 as compared to 12
during the nine months ended September 30, 2002.
Other income increased by $928,480 or 47%, to $2,899,019 during the nine
months ended September 30, 2003 from $1,970,539 during the nine months ended
September 30, 2002. This increase reflected increased prepayment penalties
and fees associated with increased prepayments, increased late charges
resulting from the increase in size of the Company's portfolio and loan fees
associated with Tribeca loans sold.
Total operating expenses increased by $7,168,780 or 28%, to $33,150,660
during the nine months ended September 30, 2003, from $25,981,880 exclusive of
the special recovery transaction during the nine months ended September 30,
2002.
Interest expense increased by $2,045,247 or 15%, to $16,102,017 during
the nine months ended September 30, 2003 from $14,056,770 during the nine
months ended September 30, 2002. This increase resulted primarily from a 17%
increase in debt measured on the last day of the two periods, which was only
partially offset by a 10% decrease in costs of funds. The weighted average
cost of funds was 4.77% and 5.31% during the nine months ended September 30,
2003 and September 30, 2002. Total debt increased by $66 million or 17%, to
$451 million as of September 30, 2003, from $385 million as of September 30,
2002.
Collection, general and administrative expenses increased by $4,100,974 or
46%, to $12,995,727 during the nine months ended September 30, 2003 from
$ 8,894,753 during the nine months ended September 30, 2002. The increase
resulted in part from a 18% increase in the Company's portfolio at September
30, 2003 as compared with September 30, 2002.
Personnel expenses increased by $1,954,289 or 42%, to $6,617,218
during the nine months ended September 30, 2003 from $4,662,929 during the
nine months ended September 30, 2002. This increase resulted largely from
increases in staffing in Tribeca as the Company staffed three new branch
offices during the period, increased commissions due to increased loan
production and additions to legal and servicing staff. All other collection
expenses increased by $2,146,685 or 51%, to $6,378,509 during the nine
months ended September 30, 2003 from $4,231,824 during the nine months ended
September 30, 2002. This increase resulted primarily from increased legal and
collection expenses associated with the growth in size of the Company's
nonperforming portfolio, increased professional fees associated with the
migration to a new servicing system and increased marketing expenses
associated with leads for Tribeca Lending.
Provisions for loan losses increased by $548,932 or 30% to $2,368,299 during
the nine months ended September 30, 2003 from $1,819,367 during the nine
months ended September 30, 2002. This increase resulted primarily from higher
write-offs in maturing portfolios where there is no longer purchase discount
available to increase reserves.
Amortization of deferred financing costs increased by $399,672 or 42%, to
$1,356,875 during the nine months ended September 30, 2003, from $957,203
during the nine months ended September 30, 2002. This increase resulted
primarily from an increase in collections due to prepayments, which
accelerated the pay down of senior debt, which accelerates the amortization
of deferred financing costs.
Depreciation expense increased by $73,955 or 29%, to $327,742 during the nine
months ended September 30, 2003, from $253,787 during the nine months ended
September 30,2002. This increase resulted from increased purchases of computer
equipment, furniture, and the renovations of office space.
Operating income decreased by $1,074,734 or 11% to $8,804,245 during the
nine months ended September 30, 2003, from $9,878,979 during the nine months
ended September 30, 2002. This was primarily due to the nonrecurring recovery
of special charge of $1,662,598 received during the nine months ended September
30, 2002.
During the nine months ended September 30, 2003 the Company made a provision
for income taxes of $4,072,200 as compared to $4,489,351 during the nine
months ended September 30, 2002.
Net income decreased by $657,583 or 12% to $4,732,045 during the nine months
ended September 30, 2003 from $5,389,628 during the nine months ended
September 30, 2002 for the reasons set forth above.
Liquidity and Capital Resources
General. During the nine months ended September 30, 2003 the Company
purchased 2,622 loans in several portfolios with an aggregate face value of
$188 million at an aggregate purchase price of $163 million or 87% of face
value. During the nine months ended September 30, 2002 the Company purchased
3,120 loans with an aggregate face value of $154 million at an aggregate
purchase price of $134 million or 87% of aggregate face value.
The Company's portfolio of notes receivable at September 30, 2003 had a
face value of $485 million and included net notes receivable of approximately
$407 as compared with a face value of $435 million and net notes receivable of
approximately $366 million as of December 31, 2002. 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. The Company's portfolio of originated
loans, which includes mortgages originated by Tribeca and held for sale and
investment at September 30, 2003, had a combined face value of $30 million as
compared to $23 million at December 31, 2002. Originated loans held for
investment are stated at the amount of unpaid principal, reduced by net
deferred cost and fees. The Company has the ability to hold its originated
loans held for investment, that have a higher coupon than cost of funds, until
maturity, payoff or liquidation of collateral.
During the nine months ended September 30, 2003, the Company used cash in
the amount of $6.3 million in its operating activities primarily for the
originations of loans, interest expense, 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 $40.3 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 $44.7 million of net cash provided by financing activities, including
primarily, a net increase in Senior Debt of $40 million. The above activities
resulted in a net decrease in cash at September 30, 2003 over December 31, 2002
of $1.9 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 September 30, 2003 and December 31, 2002, the Company held OREO
recorded on the financial statements at $10.1 million and $9.4 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 September 30, 2003, in the aggregate, had a net realizable value
(market value less estimated commissions and legal expenses associated with
the disposition of the asset) of approximately $11.1 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 From Operating and Investing Activities
Substantially all of the assets of the Company are invested in its portfolios
of notes receivable and OREO. Primary sources of the Company's cash flow for
operating and investing activities are borrowings under its senior debt
facilities, collections on notes receivable and gain on sale of notes and
OREO properties.
At September 30, 2003, the Company had unrestricted cash, cash equivalents and
marketable securities of $8.7 million.
Cash Flow From Financing Activities
Senior Debt. As of September 30, 2003, the Company owed an aggregate of
$435 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 3.50%. Approximately $40 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 March 2003, 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 $1,825,000 per
month. 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, 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 do so 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 $461,946 on September 30, 2003
and $632,883 on December 31, 2002. The decrease in restricted cash at
September 30, 2003 was due to funding the originations of OREO properties
during the nine months ended September 30, 2003.
Total Senior Debt availability was approximately $500 million at September 30,
2003, of which approximately $435 million had been drawn down as of such date.
As a result, the Company has approximately $65 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 $30 million. This Senior Debt accrues interest based
on prime. At September 30, 2003, Tribeca had drawn down $ 15.2 million on the
line. 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
$2,500,000 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 September 30, 2003 and
December 31, 2002, were $666,297 and $1,250,451 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
September 30, 2003 and December 31, 2002, $101,736 and $109,942 respectively,
were outstanding on the financing agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate fluctuations can adversely affect the Company's income and
value of its common shares in many ways and present a variety of risks,
including the risk of mismatch between asset yields and borrowing rates,
variances in the yield curve and changing prepayment rates.
The Company's operating results will depend in large part on differences
between the income from its assets (net of credit losses) and its borrowing
costs. Most of the Company's assets, consisting primarily of mortgage notes
receivable, generate fixed returns and have terms in excess of five years. The
Company funds the origination and acquisition of a significant portion of these
assets with borrowings, which have interest rates that are based on the
monthly Federal Home Loan Bank of Cincinnati 30-day advance rateb ("FHLB").
In most cases, the income from assets will respond more slowly to interest rate
fluctuations than the cost of borrowings, creating a mismatch between yields
and borrowing rates. Consequently changes in interest rates, particularly
short-term rates may influence the Company's net income. The Company's
borrowing under agreements with its Senior Debt Lender bear interest at rates
that fluctuate with the FHLB rate of Cincinnati and the prime rate. Based on
approximately $435 million of borrowings outstanding under this facility at
September 30, 2003, a 1% increase in FHLB and prime rate, would decrease the
Company's quarterly net income and net cash flows by approximately $592,240,
absent any other changes. Increases in these rates will decrease the net
income and market value of the Company's net assets. Interest rate fluctuations
that result in interest expense exceeding interest income would result in
operating losses.
The value of the Company's assets may be affected by prepayment rates on
investments. Prepayments rates are influenced by changes in current interest
rates and a variety of economic, geographic and other factors beyond the
Company's control, and consequently, such prepayment rates cannot be
predicted with certainty. When the Company originates and purchases mortgage
loans, it expects that such mortgage loans will have a measure of protection
from prepayment in the form of prepayments lockout periods or prepayment
penalties. In periods of declining mortgage interest rates, prepayments on
mortgages generally increase. If general interest rates decline as
well, the proceeds of such prepayments received during such periods are
likely to be reinvested by the Company in assets yielding less than the yields
on the investments that were prepaid. In addition the market value of
mortgage investments may, because the risk of prepayment, benefit less from
declining interest rates than from other fixed-income securities. Conversely,
in periods of rising interest rates, prepayments on mortgage, generally
decrease, in which case the Company would not have the prepayment proceeds
available to invest in assets with higher yields. Under certain interest rate
and prepayment scenarios the Company may fail to recoup fully its cost of
acquisition of certain investments.
Real Estate Risk
Multi-family and residential property values and net operating income
derived from such properties are subject to volatility and may
be affected adversely by number of factors, including, but not limited to,
national, regional and local economic conditions (which
may be adversely affected by industry slowdowns and other factors);
local real estate conditions (such as the over supply of housing). In the
event net operating income decreases, a borrower may have difficultly
paying the Company's mortgage loan, which could result in losses to the
Company. In addition, decreases in property values reduce the value of
the collateral and the potential proceeds available to a borrower to repay the
Company's mortgage loans, which could also cause the Company to suffer losses.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer evaluated the
Company's disclosure controls and procedures within the 90 days preceding the
filing of this quarterly report on Form 10Q and judged such controls and
procedures to be adequate and effective.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect those controls subsequent
to the date of that evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Part II Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(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.
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 Lefkowitz, 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 Lefkowitz. 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 with the Commission with form 10KSB on
March 31, 2001.
31.1 Chief Executive Officer Certification required by Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934 as amended.
31.2 Chief Financial Officer Certification required by Rules 13a- 14
and 15d-14 under the Securities Exchange Act of 1934 as amended.
32.1 Certification pursuant to 18 U.S.C section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
'
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
November 14, 2003
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 November 14, 2003
- ------------ -----------------
Seth Cohen
(Principal executive officer)
JOSEPH CAIAZZO Senior Vice President, November 14, 2003
- -------------- Chief Operating Officer, -----------------
Joseph Caiazzo Secretary and Director
(Secretary)
ALAN JOSEPH Executive Vice President, November 14, 2003
- ----------- Chief Financial Officer -----------------
Alan Joseph and Director
(Principal financial officer)
Exhibit 31.1
CERTIFICATION
I, Seth Cohen, Chief Executive Officer of Franklin Credit Management
Corporation (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation (the
"Evaluation Date"); and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the Company's
most recent fiscal quarter (the Company's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Company's internal
control over financial reporting; and
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting
to the Company's auditors and the Audit Committee of the Board of
Directors:
a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls over financial reporting; and
DATE: November 14, 2003 By: /s/
--------------------------
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Alan Joseph, Chief Financial Officer of Franklin Credit Management
Corporation (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations
and cash flows of the Company as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Audit Committee
of the Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
DATE: November 14, 2003 By: /s/
--------------------------
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Seth Cohen, Chief Executive Officer of Franklin Credit Management
Corporation (the "Company") and Alan Joseph, Chief Financial Officer of the
Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
quarterly report of the Company on Form 10-Q for the fiscal quarter ended
September 30, 2003 (the "Quarterly Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and that information contained in the Quarterly Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Date: November 14, 2003
By: ___________________
Name: Seth Cohen
Title: Chief Executive Officer
By:____________________
Name: Alan Joseph
Title: Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Nastech and will be retained by Nastech and furnished to the
Securities Exchange Commission or its staff upon request.