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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
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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 March 31, 2004
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)
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 March 31, 2004 the issuer had 5,916,527 of shares of Common Stock,
par value $0.01 per share, outstanding.
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FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-Q
INDEX
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Interim Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 2004
and December 31,2003 3
Consolidated Statements of Income for the three
months ended March 31, 2004 and March 31, 2003 4
Consolidated Statements of Stockholders' Equity for
the three months ended March 31, 2004 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and March 31, 2003 6
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 22
Item 4. Controls and Procedures 22
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 26-29
CONSOLIDATED BALANCE SHEETS (Unaudited)
- ------------------------------------------------------------------------------
Assets March 31,2004 December 31,2003
CASH AND CASH EQUIVALENTS $ 15,328,894 $ 14,418,876
RESTRICTED CASH 428,927 413,443
NOTES RECEIVABLE:
Principal 459,382,163 465,553,870
Purchase discount (26,291,095) (25,678,165)
Allowance for loan losses (50,789,815) (46,247,230)
------------- -------------
Net notes receivable 382,301,253 393,628,475
ORIGINATED LOANS HELD FOR SALE 40,271,957 27,372,779
ORIGINATED LOANS HELD FOR INVESTMENT 6,238,882 9,536,669
ACCRUED INTEREST RECEIVABLE 4,251,059 4,332,419
OTHER REAL ESTATE OWNED 13,293,284 13,981,665
OTHER RECEIVABLES 2,827,073 2,893,735
MARKETABLE SECURITIES 202,071 202,071
DEFERRED TAX ASSET 482,569 681,398
OTHER ASSETS 3,997,414 3,720,163
BUILDING, FURNITURE AND FIXTURES - Net 1,212,811 1,252,711
DEFERRED FINANCING COSTS- Net 4,185,813 4,298,942
------------- ------------
TOTAL ASSETS $ 475,022,007 $ 476,733,346
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 4,677,179 $ 4,979,806
Financing agreements 29,685,759 23,315,301
Notes payable 416,824,117 427,447,844
Tax Liability:
Current 265,565 -
Deferred 1,856,732 1,311,089
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TOTAL LIABILITIES 453,309,352 457,054,040
----------- -----------
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 14,667,520 12,634,171
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 21,712,655 19,679,306
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 475,022,007 $ 476,733,346
============= =============
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Three months ended March 31,
2004 2003
REVENUES:
Interest income $10,636,341 $ 10,561,251
Purchase discount earned 1,341,397 902,903
Gain on sale of notes receivable 844,902 596,114
Gain on sale of originated loans
held for sale 892,955 678,390
Gain on sale of other real estate owned 231,246 303,795
Rental income 12,075 50,461
Prepayment penalties and other income 1,100,849 846,313
---------- ----------
15,059,765 13,939,227
---------- ----------
OPERATING EXPENSES:
Interest expense 5,313,075 5,037,121
Collection, general and administrative 4,446,182 4,107,556
Provision for loan losses 895,876 849,594
Amortization of deferred financing costs 592,901 423,313
Depreciation 113,382 100,298
---------- -----------
11,361,416 10,517,882
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,698,349 3,421,345
PROVISION FOR INCOME TAXES 1,665,000 1,573,800
---------- -----------
NET INCOME $ 2,033,349 $ 1,847,545
=========== ============
NET INCOME PER COMMON SHARE:
Basic $ 0.34 $ 0.31
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Diluted $ 0.30 $ 0.30
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic 5,916,527 5,916,527
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Diluted 6,690,627 6,243,953
========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
MARCH 31, 2004 (Unaudited)
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Additional
Common Stock Paid-In Retained
-----------------
Shares Amount Capital Earnings Total
- ------------------------------------------------------------------------------
January 1, 2004 5,916,527 $59,167 $6,985,968 $12,634,171 $19,679,306
Net income 2,033,349 2,033,349
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March 31, 2004 5,916,527 $59,167 $6,985,968 $14,667,520 $21,712,655
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See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Three Months Ended March 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,033,349 $ 1,847,545
Adjustments to reconcile net income to
net cash (used in) provided by
Operating activities:
Gain on sale of notes receivable (844,902) (596,114)
Gain on sale of other real estate owned (231,246) (303,795)
Depreciation 3,382 100,298
Amortization of deferred financing costs 592,901 423,313
Origination of mortgage loans held for sale (33,358,278) (17,294,052)
Proceeds from the sale of and principal
collections on loans held for sale-net of gain 19,746,182 16,663,800
Purchase discount earned (1,341,397) (902,903)
Provision for loan losses 895,876 849,594
Changes in operating assets and liabilities:
Accrued interest receivable 81,360 136,748
Other receivables 66,662 268,160
Deferred tax asset 198,829 (119,674)
Other assets (277,251) (322,098)
Current tax liability 265,565 -
Deferred tax liability 545,643 627,489
Accounts payable and accrued expenses (302,627) 243,074
Net cash (used in) provided by operating ------------ ----------
activities (11,815,952) 1,621,385
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash (15,484) 131,218
Purchase of notes receivable (38,432,630) (56,060,446)
Principal collections on notes receivable
and loans held for investment 44,438,122 29,685,913
Acquisition and loan fees (449,595) (660,974)
Proceeds from sale of other real estate owned 4,955,454 4,090,227
Proceeds from sale of notes receivable 6,556,853 2,835,696
Purchase of building, furniture and fixtures (73,481) (93,044)
Net cash provided by (used in) investing ------------ ------------
activities 16,979,239 (20,071,410)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 49,771,473 59,378,948
Principal payments of notes payable (60,395,200) (41,104,207)
Proceeds from financing agreements 34,052,232 19,405,920
Payments on financing agreements (27,681,774) (20,890,627)
Net cash (used in) provided by financing ------------ ------------
activities (4,253,269) 16,790,034
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS. 910,018 (1,659,991)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,418,876 10,576,610
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,328,894 $ 8,916,619
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 5,436,345 $ 4,884,683
=========== ===========
Cash payments for taxes $ 636,800 $ 1,065,985
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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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1. ORGANIZATION AND BUSINESS
Nature of Business - Franklin Credit Management Corporation ("FCMC", and
together with its wholly-owned subsidiaries, the "Company") is a specialty
consumer finance and asset management company primarily engaged in the
acquisition, origination, servicing and resolution of performing,
sub-performing and non-performing residential mortgage loans and
residential real estate. The Company acquires these mortgages from a
variety of mortgage bankers, banks, and other specialty finance
companies. These loans are generally purchased in pools at discounts from
their aggregate contractual balances,from sellers in the financial services
industry. Real estate is acquired in foreclosure or otherwise and is
usually cquired at a discount relative to the appraised value of the asset.
The Company conducts its business from its executive and main office in New
York City and through its website www.franklincredit.com.
In January 1997, the Company formed a wholly owned subsidiary, Tribeca
Lending Corp.("Tribeca"), to originate primarily 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. The majority of first and
second mortgages originated are on a retail basis through marketing efforts,
utilization of the FCMC database and the Internet. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2003 as filed with the Securities and
Exchange Commission. The results of operations for the three-ended March
31, 2004 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.
The preparation of 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 revenues 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. The Company's estimates and assumptions
primarily arise from risks and uncertainties associated with interest rate
volatility and credit exposure. Although management is not currently aware
of any factors that would significantly change its estimates and
assumptions in the near term, future changes in market trends and
conditions may occur which could cause actual results to differ materially.
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.
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 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.
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,
Georgia, 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 certain
specific 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. An
allowance of $50,789,815 and $46,247,230 is included in notes receivable at
March 31, 2004 and December 31, 2003, respectively.
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.
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. Any write-down to fair value, less
estimated cost to sell, at the time of acquisition is charged to
purchase discount. 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 valuation
allowances 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 loan.
Retirement Plan - The Company has a defined contribution retirement 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 - 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, whether or not recognized in the
balance sheets 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
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 fair value of notes receivable at March 31, 2004 and
December 31, 2003 was $382,301,253 and $393,628,475, respectively.
c. Short-Term Borrowings - The interest rates on financing agreements and
other short-term borrowings reset on a monthly basis therefore, the
carrying amounts of these liabilities approximate their fair value.
The fair value at March 31, 2004 and December 31, 2003 was $29,685,759
and $23,315,301, respectively.
d. Long-Term Debt - Fair value of the Company's long-term debt (notes
payable) is estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements. The interest is at a variable rate that resets
monthly therefore, the fair value reported in the balance sheet
approximates fair value at $416,824,117 and $427,447,844 at March 31,
2004 and December 31, 2003 respectively.
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 the three months ended March 31, 2004 and March 31, 2003 therefore
net income was the same as its comprehensive income.
Accounting for Stock Options- The incentive 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, because 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.
Had compensation cost been determined upon the fair value of the stock
options at the grant date consistent with the method of SFAS No.123, the
Company's March 31, 2004 and March 31, 2003 net income and earnings per
share would have been reduced to the pro forma amounts indicated in the
table that follows.
2004 2003
Net income - as reported $ 2,033,349 $ 1,847,545
Net income - pro forma $ 2,026,224 $ 1,831,032
Net income per common share -
basic - as reported $ 0.34 $ 0.3134
Net income per common share -
basic - pro forma $ 0.34 $ 0.3134
Net income per common share -
diluted - as reported $ 0.30 $ 0.3030
Net income per common share -
diluted - pro forma $ 0.30 $ 0.3030
There were no options granted during the three months ended March 31, 2004.
Recent Accounting Pronouncements
The Company adopted SFAS No. 143, Accounting for Asset Retirement
Obligations on January 1, 2003. On January 1, 2003, the Company also
adopted SFAS No. 145, Rescission of SFAS No. 4, 44 and 64, Amendment of
SFAS No. 13, and Technical Corrections and SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. In addition, in 2003,
Interpretation No.45 Guarantors' Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
was adopted by the Company. Implementation of these statements did not
have a material impact 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. Adoption of the
provisions of the Statement in 2003 did not have any impact since the
Company will continue to use the intrinsic value method as set forth in APB
No. 25.
In January of 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No.46, Consolidation of Variable Interest Entities,
which was amended by Interpretation No.46(R) in December of 2003. 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. As it
applies to the Company, Interpretation No. 46(R) will be immediately
effective for all variable interests in variable interest entities created
after December 31, 2003, and to all variable interest entities on March 31,
2004. The adoption of Interpretation No. 46(R) is expected to have no
impact on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 had no
impact 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. In October of 2003, the FASB agreed to defer, indefinitely, the
application of paragraphs 9 and 10 of SFAS No. 150 regarding mandatorily
redeemable non-controlling interests in subsidiaries that would not be
liabilities under SFAS No.150 for the subsidiary. The adoption of the
remaining provisions of this pronouncement on July 1, 2003 had no
impact 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 March 31,
2004 2003
CONSOLIDATED REVENUE
Portfolio asset acquisition
and resolution $ 12,797,836 $ 12,315,747
Mortgage banking 2,261,929 1,623,480
------------ ------------
Consolidated Revenue $ 15,059,765 $ 13,939,227
============ ============
CONSOLIDATED INCOME BEFORE INCOME TAXES
Portfolio asset acquisition and resolution $ 3,271,347 $ 3,096,557
Mortgage banking 427,002 324,788
----------- -----------
Consolidated Income before income taxes $ 3,698,349 $ 3,421,345
=========== ===========
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 such
as 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, 2003. There have been no significant changes in the
Company's critical accounting policies since December 31, 2003.
Acquisition Activity. Acquisitions are fully funded through Senior Debt
in the amount equal to the purchase price plus a 1% loan origination fee.
The following table sets forth the number of loans, unpaid principal
balance at acquisition, purchases price and purchase price percentage of
the Company's loan acquisitions during the three-month period ended March
31, 2004 and 2003:
Quarter ended March 31,
2004 2003
Number of Loans 1,655 1,041
Unpaid Principal Balance at Acquisitions 47,282,162 66,096,018
Purchase Price 38,432,630 56,060,446
Purchase Price Percentage 81% 85%
Single-Family Residential Lending. Since commencing operations in 1997,
Tribeca has originated approximately $280 million in loans. The following
table sets forth the number of loans and original aggregate principal
balance of loan originated during the three months periods ended March 31,
2004 and March 31, 2003:
Quarter ended March 31,
2004 2003
Number of Loans 223 89
Original Principal Balance 33,358,278 17,294,052
As of March 31, 2004, Tribeca had approximately $40.2 million face value of
loans held for sale and $6.2 million held for investment.
Cost of Funds. As of March 31, 2004, the Company owed an aggregate of
$417 million ("Senior Debt") to a bank (the "Senior Debt Lender"), which
was incurred in connection with the purchase of, and is secured by, the
Company's loan portfolios and Other Real Estate Owned ("OREO") portfolios.
From December 31, 2001 until March 2003, the Company's Senior Debt incurred
after March 1, 2001, accrued interest at the Federal Home Loan Bank of
Cincinnati ("FHLB") thirty-day advance rate (the "Index") plus a spread of
3.25% (the "Spread"). Senior Debt incurred before March 1, 2001 accrued
interest at the prime rate plus a margin of between 0% and 1.75%. On March
19, 2003, the Company and its Senior Debt lender agreed that thereafter (i)
the Spread would be 3.5%, the spread shall remain at 3.5% unless and until
the Index exceeds 2.00%, at which point it will revert back to 3.25% and
(ii) the Spread will be reduced to 3.00% from and after such time as the
Index exceeds 4.75%. At March 31, 2004, approximately $31 million of the
Senior Debt incurred before March 1, 2001 will continue to accrue
interest at the prime rate plus a margin of between 0% and 1.75%. At March
31, 2004, the weighted average interest rate on Senior Debt was 4.76%.
Inflation. The impact of inflation on the Company's operations during
the three months ended March 31, 2004, and 2003 was immaterial.
Results of Operations
Three Months Ended March 31, 2004 Compared to Three Months
Ended March 31, 2003.
Total revenue, comprised of interest income, purchase discount earned,
gains recognized on the sale of notes receivable, gain on sale of notes
originated, gain on sale of OREO, rental income and other income,
increased by $1,120,538 or 8%, to $15,059,765 during the three months
ended March 31, 2004 from $13,939,227 during the three months ended March
31, 2003.
Interest income increased by $75,090 or 1%, to $10,636,341 during the
three months ended March 31, 2004 from $10,561,251 during the three months
ended March 31, 2003. 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 notes acquired
by the Company between April 1, 2003 and March 31, 2004, which was offset
by prepayments, collections and loan sales.
Purchase discount earned increased by $438,494 or 49%, to $1,341,397
during the three months ended March 31, 2004 from $902,903 during the
three months ended March 31, 2003. This increase reflected an increase in
prepayments during the three months ended March 31, 2004 as compared to
the three months ended March 31, 2003.
Gain on sale of notes receivable increased by $248,788 or 42% to $844,902
during the three months ended March 31, 2004 from $596,114 during the
three months ended March 31,2003. The Company consummated an $8.2
million bulk sale of low yielding performing loans at a margin of 13%
during the three months ended March 31, 2004 compared to $4 million
bulk sale of performing and nonperforming loans at a margin of 13% during
the three months ended March 31, 2003.
Gain on sale of originated loans held for sale increased by $214,565 or
32% to $892,955 during the three months ended March 31, 2004, from
$678,390 during the three months ended March 31, 2003. This increase
reflected an increase in the volume of originated loans sold during the
three months ended March 31, 2004, as compared to the three months ended
March 31, 2003. Tribeca sold $19.3 million and $16.3 million in loans
respectively during the three months ended March 31,2004 and March 31, 2003.
Gain on sale of OREO decreased by $72,549 or 24% to $231,246 during the
three months ended March 31, 2004 from $303,795 during the three months
ended March 31, 2003. Gain on sale of OREO decreased due to the sale of
lower valued OREO properties during the three months ended March 31, 2004
as compared to the three months ended March 31, 2003. The Company sold 79
and 59 OREO during the three months ended March 31, 2004 and March 31, 2003
respectively.
Rental income decreased by $38,386 or 76% to $12,075 during the three months
ended March 31, 2004, as compared to $50,461 during the three months ended
March 31, 2003. This decrease reflected a decrease in the number of
tenants during the three months ended March 31, 2004 as compared to the
three months ended March 31, 2003. The Company had one and seven rental
properties at March 31, 2004, and March 31, 2003 respectively.
Prepayment penalties and other income increased by $254,536 or 30%, to
$1,100,849 during the three months ended March 31, 2004 from $846,313
during the three months ended March 31, 2003. The increase was due
primarily to increases in prepayment penalties due to an increase in
prepayments during the three months ended March 31, 2004, late charges
resulting primarily from the growth in the size of the portfolio and
increased loan fees due to an increase in origination volume.
Total operating expenses increased by $843,534 or 8% to $11,361,416
during the three months ended March 31, 2004, from $10,517,882 during the
three months ended March 31, 2003. Total operating expenses includes
interest expense, collection, general and administrative expenses,
provisions for loan losses, amortization of deferred financing cost and
depreciation expense.
Interest expense increased by $275,954 or 5% to $5,313,075 during the
three months ended March 31, 2004, from $5,037,121 during the three months
ended March 31, 2003. Total debt increased by $23 million or 5%, to $447
million as of March 31, 2004 as compared with $424 million as of March 31,
2003 as a result of the growth in size of the portfolio. Total debt
includes Senior Debt and financing agreements.
Collection, general and administrative expenses increased by $338,626
or 8% to $4,446,182 during the three months ended March 31, 2004 from
$4,107,556 during the three months ended March 31, 2003. Collection,
general and administrative expense consists primarily of personnel expense,
OREO related expense, litigation expense, and miscellaneous collection
expense.
Personnel expenses increased by $231,859 or 11% to $2,327,932 during
the three months ended March 31, 2004 from $2,096,073 during the three
months ended March 31, 2003. This increase resulted largely from the
expansion of Tribeca sales force, and other staff additions throughout the
Company. All other collection expenses increased by $106,767 or 5% to
$2,118,250 during the three months ended March 31, 2004 from $2,011,483
during the three months ended March 31, 2003. This increase resulted
primarily from increased advertising expenses due to a new advertising
campaign for Tribeca, increased forced placed insurance policy,
increased office expense due to the growth in branch offices, and was
partially offset by a decrease in legal and collection expenses due to a
decrease in the volume of cases sent to outside attorneys during the three
months ended March 31, 2004.
Provisions for loan losses increased by $46,282 or 5% to $895,876
during the three months ended March 31, 2004 from $849,594 during the
three months ended March 31, 2003. This increase was primarily
due to reserve increases in specific portfolios, where there is no longer
purchase discount available to increase reserves.
Amortization of deferred financing costs increased by $169,588 or 40%, to
$592,901 during the three months ended March 31, 2004 from $423,313 during
the three months ended March 31, 2003. This increase resulted primarily
from increased prepayments and collections due to the growth in size of
the portfolio.
Depreciation expense increased $13,084 or 13%, to $113,382 during the three
months ended March 31, 2004, from $100,298 during the three months ended
March 31, 2003. This increase resulted from the purchase of office
equipment.
The Company net income increased by $185,804 or 10% to $ 2,033,349 from
$1,847,545 during the three months ended March 31, 2004 for the reasons set
forth above.
During the three months ended March 31, 2004 the Company had a provision
for income taxes of $1,665,000 as compared to $1,573,800 during the
three months ended March 31, 2003.
Financial Condition
Notes Receivable Portfolio- As of March 31, 2004, the Company's notes
receivable portfolio included approximately 10,685 loans with an
aggregate face value of $459 million. An allowance for loan losses of
approximately $51 million has been recorded against this face value. The
following table provides a breakdown of the portfolio as of March 31,
2004 and December 31, 2003 respectively:
31-Mar-04 31-Dec-03
Performing loans $309,620,865 $322,345,537
Allowance for loan losses 14,666,990 15,584,769
Total performing loans ------------ ------------
Net of allowance for loan losses $294,953,875 $306,760,768
------------ ------------
Impaired loans $123,614,554 $126,341,722
Allowance for loan losses 31,689,950 30,111,278
Total impaired loans, ------------ ------------
Net of allowance for loan losses $ 91,924,604 $ 96,230,444
------------ ------------
Not boarded onto servicing system $ 26,146,744 $ 16,866,611
Allowance for loan losses 4,432,875 551,183
Not boarded onto servicing system ------------ ------------
Net of allowance for loan losses $ 21,713,869 $ 16,315,428
------------ ------------
Notes receivable, net of allowance for
loans losses $408,592,348 $419,306,640
============ ============
The following table provides a breakdown of the balance of the Company's
portfolio of Notes Receivable by coupon type, net of allowance for loan
losses and excluding loans purchased but not boarded onto the Company's
servicing system as of March 31, 2004 and December 31, 2003 of
$26,146,744 and $16,866,611 respectively:
Quarter ended Year ended
31-Mar-04 31-Dec-03
Total Performing Loans
Total Fixed Rate Performing Loans $188,979,199 $199,691,299
Total Adjustable Rate Performing Loans $105,974,676 $107,069,469
Total Impaired Loans
Total Fixed Rate Impaired Loans $ 56,076,397 $ 58,752,534
Total Adjustable Rate Impaired Loans $ 35,848,207 $ 37,477,910
Liquidity and Capital Resources
General- During the three months ended March 31, 2004, the Company
purchased 1,655 loans with an aggregate face value of $47 million at
an aggregate purchase price of $38 million or 81% of the face value.
During the three months ended March 31, 2003 the Company purchased 1,041
loans with an aggregate face value of $66 million at an aggregate
purchase price of $56 million or 85% of the face value. This decrease
reflected a very competitive acquisition market during the three months
ended March 31, 2004.
The Company's portfolio of notes receivable at March 31, 2004, had a
face value of $459 million and included net notes receivable of
approximately $382 million. Net notes receivable are stated at the
amount of unpaid principal, reduced by purchase discount and allowance
for loan losses. The Company has the ability and intent to hold its
notes until maturity, payoff or liquidation of collateral or sale if
it is economically advantageous to do so.
During the three months ended March 31, 2004, the Company used cash in
the amount of $12 million in its operating activities primarily for
the origination of mortgage loans, interest expense, overhead,
litigation expense incidental to its collections and for the foreclosure
and improvement of OREO and is partially offset by proceeds from the sale
of originated loans. The Company provided $17 million in its investing
activities, which reflected primarily the use of $38 million for the
purchase of notes receivable offset by principal collections of its notes
receivable of $44 million and proceeds from sales of notes receivable of
$7 million and OREO of $5 million, respectively. Net cash used by
financing activities was $4 million primarily from a decrease in Senior
Debt of $10 million and was partially offset by a $6 million increase
in financing agreements. The above activities resulted in a net
increase in cash at March 31,2004 over December 31, 2003 of approximately
$910,018.
In the ordinary course of its business, the Company accelerates its
foreclosures of real estate securing non-performing notes receivable
included in its portfolio. As a result of such foreclosures and
selective direct purchases of OREO, at March 31, 2004 and December 31,
2003, the Company held OREO recorded in the consolidated financial
statements at $13 million and $14 million, respectively. OREO is recorded
on the consolidated financial statements of the Company at the lower of
cost or fair market value less estimated costs of disposal. The
Company believes that the OREO inventory held at March 31, 2004, has a
net realizable value (market value less estimated commissions and legal
expenses associated with the disposition of the asset) of approximately
$14 million based on market analyses of the individual properties less
the estimated closing costs.
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 March 31, 2004, the Company had unrestricted cash, cash equivalents
and marketable securities of $16 million.
Cash Flow From Financing Activities
Senior Debt. As of March 31, 2004, the Company owed an aggregate of $417
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 $31 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 February 2004, the Company negotiated with its Senior Debt Lender
a modification to the Senior Debt obligation, pursuant to which the
Senior Debt Lender has provided the Company with an increase to $550
million in Senior Debt availability and monthly cash of $2,075,000 per
month for the duration of 2004. Management believes that this
modification will 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 sale of loans,
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 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 $428,927 on March 31, 2004 and $413,443 on
December 31, 2003.
Total Senior Debt availability was approximately $550 million at March
31, 2004, of which approximately $417 million had been drawn down as of
such date. As a result, the Company has approximately $133 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 March 31, 2004, Tribeca had drawn down $ 30 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 March 31,
2004 and December 31, 2003, were $590,320 and $569,451 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 March 31, 2004 and December 31, 2003 $95,736 and $99,736
respectively, were outstanding on the financing agreement.
Financing Activities and Contractual Obligations
Below is a schedule of the Company's contractual obligations and
commitments at March 31, 2004.
(Amounts in Less than
thousands) Total 1 Year 1-3 Years 3-5 Years Thereafter
- ------------------------------------------------------------------------------
Contractual Cash
Obligations:
Notes Payable $416,824,117 $43,072,521 $121,479,120 $35,460,739 $216,811,737
Warehouse Line 29,685,759 29,685,759 - - -
Operating Leases 2,188,284 517,196 1,495,229 175,859 -
Capital Lease 439,613 162,859 276,754
Employment
Agreements 220,000 165,000 55,000
------------ ----------- ------------ ----------- ------------
Total Contractual
Cash Obligations $449,357,773 $73,603,335 $123,306,103 $35,636,598 $216,811,737
============ =========== ============ =========== ============
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 rate ("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 $386 million and $31 million of borrowings outstanding under
this facility at March 31, 2004, a 1% increase in FHLB and prime rate,
would decrease the Company's quarterly net income and net cash flows by
approximately $572,000, absent any other changes. The Company also has a
warehouse line of credit with its Senior Debt lender that funds the
origination of loans held for sale these assets with borrowings, which
have interest rates that are based on the prime rate. Based on
approximately $30 million of borrowings outstanding under this facility
at March 31, 2004, a 1% increase in prime rate, would further decrease the
Company's quarterly net income and net cash flows by approximately $41,000.
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.
As of the end of the period covered by this Quarterly Report on Form 10-Q,
the Company carried out an evaluation, under the supervision and with the
participation of senior management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures. Based upon that
evaluation, the Company's, Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective for gathering, analyzing and disclosing the information that
the Company is required to disclose in reports filed under the Securities
Exchange Act of 1934.
There have been no significant changes in the Company's internal controls
over financial reporting or in other factors during the fiscal quarter
ended March 31, 2004 that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting
subsequent to the date the Company carried out its most recent evaluation.
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 Leftkowitz, board member, and
the Company dated March 31,1999. Previously filed with, and
incorporated herein by reference to, the Company's 10-KSB,
filed with the Commission on March 30, 2000.
10(l) Employment Agreement dated July 17, 2000 between the Company
and Seth Cohen. Previously filed with, and incorporated
herein by reference to, the Company's 10-KSB, filed with the
Commission 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 of Chief Executive Officer pursuant to 18
U.S.C.section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer 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.
May 14, 2004
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 May 14, 2004
---------- ------------
Seth Cohen
(Principal executive officer)
JOSEPH CAIAZZO Senior Vice President,
-------------- Chief Operating Officer, May 14, 2004
Joseph Caiazzo Secretary and Director ------------
(Secretary)
ALAN JOSEPH Executive Vice President,
----------- Chief Financial Officer May 14, 2004
Alan Joseph and Director ------------
(Principal financial officer)