ITEM 1. BUSINESS
GENERAL
JJFN Services, Inc. (the "Company" or "JJFN"), a Delaware Corporation was organized in November 1995. The Company's principal operations consist of the following three business lines:
1) The purchase and leaseback on a "triple net" basis of fully furnished model homes complete with options and upgrades to major publicly traded homebuilders and real estate developers.
2) The land acquisition and contract development program for major publicly traded homebuilders and real estate developers. The Company purchases the real estate, simultaneously enters into a bonded (not to exceed) development contract with the builder supported by a performance (completion) bond, who then develops the real estate. The builder simultaneously contracts to purchase the finished lots from the Company on a scheduled basis usually not to exceed three (3) years.
3) The purchase and leaseback of model home furnishings to major publicly traded homebuilders and real estate developers.
Model Home Sale-Leaseback Program
Since inception in November 1995 through June 30, 1998, the Company has purchased a total of 246 model homes at a cost of $52,520,361, and sold 75 homes costing $13,832,630, leaving a current model home portfolio at June 30, 1998 of 171 model homes at a cost of $38,687,731. The average purchase price per model home acquired has been approximately $213,500, and the average profit on sale of the 75 homes sold to date has been $5,517 per home.
At June 30, 1998, the Company was negotiating two agreements with existing homebuilder clients to acquire additional model homes. One agreement involves the acquisition of 26 model homes in New Jersey and New York at a cost of approximately $8.5 million. The other agreement involves the acquisition of 54 model homes in Colorado, Georgia, Florida, Arizona, Virginia, and Texas, at a cost of approximately $11.7 million. During July 1998, closings took place on 22 model homes in New Jersey and 1 model home in New York at an aggregate cost of approximately $7.6 million.
At June 30, 1998, the Company has sales contracts pending on 32 model homes at an aggregate sales price of $6,832,489. The model homes were acquired at an aggregate cost of $6,640,662. During July and through August 3, 1998, closings took place on 15 model homes at an aggregate sales price of $3,279,948 and aggregate cost of sales of $3,173,977, resulting in a gain of $105,971.
The following chart outlines the unit totals of model home purchases and sales by geographic region at June 30, 1998:
# of Models # of Models Current Model State Purchased Sold Inventory - ----------------- ----------- ----------- ------------- Colorado 22 6 16 Florida 106 51 55 Georgia 5 5 0 New Jersey 68 5 63 New York 5 0 5 North Carolina 4 1 3 Pennsylvania 25 1 24 Texas 5 2 3 Virginia 6 4 2 ----------- ----------- ------------- Total 246 75 171 =========== =========== =============
The following chart outlines the total costs of model home purchases and sales by geographic region:
Original Cost of Models Cost of Models Current Model State Purchased Sold Inventory - ----------------- ------------ ------------ ------------- Colorado $ 4,715,463 $1,301,157 $ 3,414,306 Florida 19,806,998 8,180,222 11,626,776 Georgia 1,576,755 1,576,755 - New Jersey 15,489,153 976,075 14,513,078 New York 1,987,000 - 1,987,000 North Carolina 882,382 188,010 694,372 Pennsylvania 5,656,283 241,000 5,415,283 Texas 910,481 368,833 541,648 Virginia 1,495,847 1,000,577 495,269 ------------ ------------ ------------- Total $52,520,361 $13,832,629 $ 38,687,731 ============ ============ =============
Land Acquisition and Contract Development Program
Since inception, the Company has completed one land acquisition and development contract. The transaction involved the purchase of 70 acres in western Boca Raton to be subdivided into 370 lots for the development of single family estate homes, zero lot single family homes, townhouses, and villas.
During June 1997, the Company was advised by the homebuilder that it was electing to fully exercise its option to purchase the approximate 70-acre tract of land being developed for 370 residential units and terminate the development agreement. The homebuilder exercised the option on July 3, 1997, and purchased the property for the sum of $8,591,956.
The Company has executed a letter of intent with a major publicly traded homebuilder and real estate developer to acquire 4-5 tracts of land having a fully developed cost of $102,800,000 a with maximum outstanding balance of $75,000,000 to $85,000,000 based on anticipated option takedowns. The agreement provides for a unit takedown schedule of finished lots over a period not to exceed 36 months. The Company intends to seek an increase in the letter of intent to approximately $200,000,000 in net fully-developed costs. The closing is subject to completion of due diligence, receipt of satisfactory appraisals, formal documentation, and successful completion of financing.
The Company is pursuing the following financing options in connection with this transaction:
a) The Company is exploring a syndicated bank loan and is evaluating indicative term sheets received from potential lenders while conducting negotiations with other institutions.
b) The Company is evaluating a private placement of notes to be issued by a wholly-owned, special-purpose vehicle under Rule 144A and anticipates an investment grade rating on the notes.
c) The Company has entered into an agreement of mutual understanding with a major international insurance company whereby the parties have committed to proceed in accordance with the following:
The insurance company will provide an "Insurance Surety Bond" in connection with the planned financing transactions described above. The bond will assure the timely payment of principal and interest on notes issued by the non-consolidated wholly-owned, bankruptcy-remote, special-purpose subsidiary of the Company.
The agreement is subject to the following conditions; (i) satisfactory completion of due diligence regarding the assets to be held in the Special Purpose Entity, (ii) the execution of bank or institutional financing, (iii) final pricing of the insurance surety bond, and, (iv) agreement to final wording of all related legal documentation.
The Company has committed to purchase land and provide development funding of approximately $10,000,000 for a major publicly traded homebuilder. The closing is subject to completion of due diligence, receipt of satisfactory appraisals, formal documentation, and successful completion of financing. The Company has received a verbal commitment from an existing lending institution to provide financing for this transaction.
Competition and Market Factors
The Company's business is highly competitive. It competes with REITs or their subsidiaries, banks, financial subsidiaries of industrial companies, insurance companies, major investment banking firms, and/or their subsidiaries, and other financial institutions competing to do business with or provide financial services to national homebuilders and real estate developers. Almost all competitors have substantially greater financial strength and far longer operating histories than the Company, and these resources make them formidable competitors to the Company in attracting capital and clients.
The home-building industry in general is cyclical, with demand fluctuating with general economic conditions such as recessionary forces, availability of financing, interest rate levels and consumer confidence. In addition to the numerous economic factors affecting housing demand, a variety of other factors affect the housing industry, including the availability of labor and materials and increases in the costs thereof, changes in costs associated with home ownership (such as increases in property taxes and energy costs), changes in consumer preferences, demographic trends, and government regulations and fees.
The success of the Company's business strategy depends in part on important factors, many of which are not within the control of the Company. The availability of desirable loan and investment opportunities and the results of the Company's operations will be affected by the amount of available capital, the level and volatility of interest rates, conditions in the financial markets and general economic conditions. There can be no assurances as to the effects of unanticipated changes in any of the foregoing. The Company's business strategy also depends on the ability to grow its portfolio of invested assets through the use of leverage. There can be no assurance that the Company will be able to obtain and maintain targeted levels of leverage or that the cost of debt financing will increase relative to the income generated from the assets acquired with such financing and cause the Company to reduce the amount of leverage it utilizes. The Company risks the loss of some or all of its assets or a financial loss if the Company is required to liquidate assets at a commercially inopportune time.
Divested Operations
For information on divested operations, see Note 11 to the Company's Consolidated Financial Statements of pages and.
Employees
At August 10, 1998, the Company employed 6 persons, including sales and marketing, executive, and administrative personnel. None of the Company's employees are covered by a collective bargaining agreement and management considers the relationship with its employees to be excellent.
Item 2.
Item 2. Properties
The Company's corporate office is located at 2500 Military Trail North, Suite 260, Boca Raton, Florida 33431, where the Company leases 2,798 square feet of office space for a term expiring January 2002.
Insurance
The Company has comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its Properties. Management believes that such insurance provides adequate coverage.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a Plaintiff in a legal proceeding against Susan Schlapkohl, the Company's former President, for a violation of her restrictive covenant contained in paragraphs 12 and 14 of her employment agreement with the Company. The suit was commenced on May 21, 1997 in the Circuit Court for Palm Beach County, Florida, index number CC-97-4525 AH. In her answer to the Corporation's Complaint and Motion for Preliminary Injunction, Ms. Schlapkohl asserted the following counterclaims; (i) breach of contract relating to misrepresentations and omissions of facts inducing her to enter into an employment contract, and (ii) misrepresentations and omissions relating to her purchase of 1,000,000 shares of the Company's common stock. The Company is vigorously defending the counterclaim. Management believes, after consultation with legal counsel, that Ms. Schlapkohl's counterclaim is without merit, but that even if she were successful, it would not have a material adverse effect on the business, financial position or results of the operations of the Company.
On August 6, 1998, the Company settled the litigation with Susan Schlapkohl, its former President, by entering into a Stipulation of Settlement. Pursuant to the Stipulation of Settlement, Ms. Schlapkohl, her affiliates and her husband, agreed not to compete with the Company in connection with the Company's business as described in this form 10K filing. In addition, Ms. Schlapkohl agreed to sell for $171,000.00 the 1,000,000 shares of JJFN Services, Inc., common stock owned by her to David Miller, the chairman of the Company (or his designees), from whom she originally acquired the shares. The parties also exchanged mutual general releases.
The Company knows of no other material litigation or claims pending, threatened, or contemplated to which the Company is or may become a party.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the fourth quarter of its fiscal year ended June 30, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Registrant has been quoted on the OTC Bulletin Board under the symbol "JJFN" since May 15, 1996. The following table sets forth, for the periods indicated, the high and low closing sales price for the Common Stock, as reported on the OTC Bulletin Board. As of July 10, 1998 there were over 1,000 shareholders of which approximately 515 were shareholders of record. The closing price of the Company's Common Stock as reported on the OTC Bulletin Board on August 10, 1998, was $.20.
Year Ended June 30, ---------------------------- 1998 1997 ---------------------------- High Low High Low ---------------------------- First Quarter 0.56 0.31 7.37 1.00
Second Quarter 0.46 0.14 5.28 0.25
Third Quarter 0.20 0.13 2.90 0.68
Fourth Quarter 0.40 0.12 1.00 0.26 ----------------------------
The Company has not paid any cash dividends on its Common Stock and does not anticipate paying any in the foreseeable future. It intends to continue its present policy of retaining cash flow from the investment in the Company's operations.
During July 1998, David Miller, Chairman of the Company acquired all the issued and outstanding shares of convertible preferred stock. The Company has not paid any distributions on the preferred stock since July 1996, as a result of a dispute as to which of two unaffiliated parties were entitled to the dividend.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the year ended June 30, 1998 and the year ended June 30 ,1997 have been derived from the Company's audited consolidated financial statements. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Report.
SELECTED FINANCIAL DATA Income Statement Data: Inception 11/2/95 Year Ended Year Ended through 6/30/98 6/30/97 6/30/96 ------------- ------------- ------------- Revenues $ 21,302,522 $ 7,524,938 $ 965,168
Expenses 20,575,973 7,167,567 1,002,881 ------------- ------------- ------------- Income(loss) from continuing operations before depreciation and amortization 726,549 357,371 (37,713)
Depreciation and amortization 1,181,860 707,345 124,682 ------------- ------------- ------------- Loss from continuing operations before income tax benefit (455,311) (349,974) (162,395) Income tax benefit 298,000 77,000 - ------------- ------------- ------------- Loss from continuing operations (157,311) (272,974) (162,395)
Discontinued operations, net of taxes Loss from discontinued operations - (54,444) (22,558) Gain on disposal of discontinued operations - 284,876 - ------------- ------------- ------------- - 230,432 (22,558) ------------- ------------- ------------- Net loss (157,311) (42,542) (184,953)
Preferred stock distributions - 5,000 40,000 ------------- ------------- ------------- Loss applicable to common shareholders $ (157,311) $ (47,542) $ (224,953) ============= ============= =============
Earnings (loss) per share data: Continuing operations $ (0.01) $ (0.01) $ (0.02) Divested operations - 0.01 - ------------- ------------- ------------- Net loss per share $ (0.01) $ 0.00 $ (0.02) ============= ============= =============
Weighted average number of common shares outstanding 16,911,168 16,551,091 10,801,114
Balance Sheet Data:
June 30, 1998 June 30, 1997 June 30, 1996 ------------- ------------- -------------
Total assets $ 40,186,076 $ 32,430,295 $ 14,727,388
Mortgages and notes payable 31,538,542 23,658,372 6,477,271
Other liabilities 685,130 682,557 191,875
Stockholders' equity 7,962,404 8,089,366 8,058,242
UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years ended June 30, 1998, 1997, and 1996 is as follows:
Three Months Ended -------------------------------------------------- June March December September 30, 1998 31, 1998 31, 1997 30, 1997 ---------- ---------- ---------- -----------
Revenues $3,346,739 $3,449,413 $3,734,283 $10,772,087 Expenses 3,373,008 3,602,266 3,854,716 10,927,843 Income (loss) before income taxes (26,269) (152,853) (120,433) (155,756) Income tax benefit (298,000) - - - Net income (loss) 271,731 (152,853) (120,433) (155,756) Earnings per common share 0.02 (0.01) (0.01) (0.01) Weighted average number of common shares outstanding 17,012,005 17,012,005 16,814,179 16,811,990
Three Months Ended -------------------------------------------------- June March December September 30, 1997 31, 1997 31, 1996 30, 1996 ---------- ---------- ---------- -----------
Revenues $3,577,995 $1,561,595 $1,978,676 $10,772,087 Expenses 3,654,840 1,659,196 1,815,344 10,927,843 Income (loss) before income taxes (76,845) (97,601) 163,332 (108,428) Income tax benefit (77,000) - - - Net income (loss) 155 (97,601) 163,332 (108,428) Earnings per common share 0.00 (0.01) (0.01) (0.01) Weighted average number of common shares outstanding 16,661,660 16,659,990 16,659,990 16,226,294
Three Months Ended -------------------------------------------------- Inception (11/2/95) to June March December 30, 1996 31, 1996 31, 1995 ---------- ---------- ----------
Revenues $ 835,236 $ 96,816 $ 33,116 Expenses 931,364 185,969 32,788 Income (loss) before income taxes (96,128) (89,153) 328 Income tax benefit - - - Net income (loss) (96,128) (89,153) 328 Earnings per common share (0.01) (0.01) 0.00 Weighted average number of common shares outstanding 12,085,544 10,000,000 10,000,000
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
A summary of the operating results of JJFN Services, Inc. and subsidiaries for the fiscal years ended June 30, 1998, June 30, 1997, and inception (November 2, 1995) through June 30, 1996 are presented below:
Inception Year Year November 2, 1995 Ended Ended through June 30 June 30 June 30 1998 % 1997 % 1996 % ---------------------------------------------- Revenues: Lease revenue $3,544,793 17% $2,068,450 28% $418,507 43% Option fees 8,771 0% 824,207 11% - -% Model home sales 9,027,514 42% 4,528,600 60% 515,000 53% Land development sales 8,591,956 40% - -% - -% Interest income 129,488 1% 103,681 1% 5,411 1% Gain on sale of marketable securities - -% - -% 26,250 3% ---------------------------------------------- Total revenues 21,302,522 100% 7,524,938 100% 965,168 100%
Costs and expenses: Interest expense 2,134,870 10% 1,660,803 22% 249,038 26% Cost of model homes sold 8,701,169 41% 4,448,915 59% 507,244 53% Cost of land development 8,591,956 40% - -% - -% Corporate 1,147,978 5% 1,057,849 14% 246,599 26% ---------------------------------------------- Total costs and expenses 20,575,973 96% 7,167,567 95% 1,002,881 104% ---------------------------------------------- Income from continuing operations before depreciation & amortization 726,549 4% 357,371 5% (37,713) (4%)
Depreciation & amortization 1,181,860 6% 707,345 9% 124,682 13% ---------------------------------------------- Loss from continuing operations before income tax benefit (455,311) (2%) (349,974) (4%) (162,395)(17%)
Income tax benefit 298,000 -% 77,000 1% - -% ---------------------------------------------- Loss from continuing operations (157,311) (1%) (272,974) (3%) (162,395)(17%)
Discontinued operations, net of taxes: Loss from discontinued operations - -% (54,444) (1%) (22,558) (2%) Gain on disposal of discontinued operations - -% 284,876 4% - -% ---------------------------------------------- - -% 230,432 3% (22,558) (2%) ---------------------------------------------- Net loss (157,311) (1%) (42,542) (1%) (184,953)(19%) ==============================================
Note: The operating results for inception (November 2, 1995) through June 30, 1996 has been reclassified to give effect to the divested operations of Iron Eagle Contracting and Mechanical, Inc.
Results of Operations
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997.
The Company's lease revenue during fiscal 1998 increased $1.5 million (or 72%) compared to the prior year period. The increase is attributable to additional lease revenues generated from the purchase of approximately $26 million in model homes during the fiscal year. Option fees decreased $.8 million during fiscal 1998 compared to the prior year period. The decrease was due to the exercise of the client's option to purchase resulting in the sale of a land parcel for $8.5 million on July 3, 1997.
Revenues from the sale of model homes increased $4.5 million (or 99%) compared to the prior year period. The increase is attributable to the maturity of the model home portfolio with the expected turnover of the homes in the 18-24 month range.
Revenues from land sales totaled approximately $8.5 million during fiscal 1998. The Company had no land sales during fiscal 1997.
Interest expense related to lease and option fee revenues increased approximately $475,000 (or 29%) during fiscal 1998 compared to the prior year period, primarily due to the increase in loans utilized to purchase additional model homes. Cost of interest expense as a percentage of lease and option fee revenues is consistent with fiscal 1997.
Cost of model homes sold increased $4.2 million (or 95%) compared to the prior year period, primarily due to the related increase in model home sales revenue. Cost of model home sales as a percentage of model home sale revenues is consistent with fiscal 1997.
The Company's selling, marketing, general & administrative expenses increased $90,000 (or 9%) during fiscal year 1998 as compared to fiscal year 1997. This increase was attributable to the selling, general and administrative costs associated with generating the increased revenue levels. Corporate costs as a percentage of revenues decreased 9% from 14% for fiscal year 1997 to 5% for fiscal year 1998.
Loss from continuing operations before income tax benefit for the period was $455,311 compared to $349,974 for fiscal 1997, an increase of $105,000 (or 30%). Depreciation and amortization increased $475,000 (or 67%) during fiscal year 1998 compared to fiscal 1997, contributing to the increase in net loss.
Year Ended June 30, 1997 Compared to inception (November 2, 1995) through June 30, 1996.
The Company's lease and option fee revenues during fiscal 1997 increased $2.5 million (or 591%) compared to the period from inception through June 30, 1996. On an annualized basis for fiscal 1996, this would represent an increase of 361%. The increase is attributable to additional acquisitions of model homes on lease during fiscal 1997, and option fee revenues from the land acquisition program started in the first quarter of fiscal 1997.
Revenues from the sale of model homes increased $4.0 million (or 780%) compared to the period from inception through June 30, 1996. On an annualized basis for fiscal 1996, this would represent an increase of 486%. The increase is attributable to the maturity of the model home portfolio with the expected turnover of the homes in the 18-24 month range.
Interest expense related to lease and option fee revenues increased approximately $1.4 million (or 567%) compared to the period from inception through June 30, 1996, primarily due to the increase in loans utilized to purchase additional model homes and assets relating to the Company's land acquisition and contract development program. Cost of interest expense as a percentage of lease and option fee revenues is consistent with fiscal 1996.
Cost of model homes sold increased $3.9 million (or 777%) compared to the period from inception through June 30, 1996, primarily due to the related increase in model home sales revenue. Cost of model home sales as a percentage of model home sale revenues is consistent with fiscal 1996.
The Company's selling, marketing, general & administrative expenses increased $811,000 (or 329%) during fiscal year 1997 as compared to the period from inception through June 30, 1996. On an annualized basis for fiscal 1996, this would represent an increase of 186%. This increase was attributable to the hiring of additional personnel and the selling, general and administrative costs associated with generating the increased revenue levels. Corporate costs as a percentage of revenues decreased 12% from 26% for the eight months ended June 30, 1996 to 14% for fiscal 1997.
Net loss for the period was $42,542 of which $272,974 was incurred in the Company's continuing operations, $54,444 from discontinued operations, offset by a gain of $284,876 on disposal of discontinued operations.
The net loss of $42,542 was a decrease of $142,411 (or 335%) as compared to the net loss of $184,953 for the period from inception through June 30, 1996. The decrease in net loss was attributable to the gain on disposal of discontinued operations and increased operations.
Geographic Lease Revenue Summary A breakdown of lease rental revenues by location is as follows:
Lease revenues Lease revenues Lease Revenues 7/1/97 7/1/96 11/2/95 State through 6/30/98 through 6/30/97 through 6/30/96 - ----------- --------------- --------------- ---------------
Colorado $ 62,664 $ 419,228 $ 62,664 Florida 1,523,285 1,290,731 305,901 Georgia - 49,337 - New Jersey 845,794 - - New York 40,402 - - North Carolina 101,581 88,475 23,317 Pennsylvania 340,269 - - Texas 104,327 60,293 7,702 Virginia 119,383 160,386 19,423 - ----------- ---------- ------------ ---------- Total $3,544,793 $ 2,068,450 $ 418,507 =========== ============ ==========
During fiscal 1998, the Company acquired an additional 110 model homes at a cost of $26,170,860 and an average purchase price of approximately $238,000. The Company sold 49 model homes during fiscal 1998 for total sales price of $9,027,514 less costs of sales of $8,701,169 for a net gain of $326,345.
Trends in Operations
The Company's operations have been and continue to accelerate at a rapid pace. For the fiscal year ended June 30, 1998, total purchases of model homes were in excess of $26 million and involved over $20 million in financing. At June 30, 1998, the Company's lease revenues had risen to a level of over $386,000 per month, as compared to $214,000 per month at June 30, 1997, an increase of 80%.
Liquidity and Capital Resources
The Company's cash uses during the twelve months ended June 30, 1998, were for model home acquisitions, interest, and operating expenses. The Company provided for its cash requirements from outside borrowing, various credit facilities, asset turnover, and cash flow from operations. The Company believes that these sources of cash are sufficient to finance its working capital requirements and other needs.
The Company's borrowings are made pursuant to agreements with several financial institutions which have provided credit facilities in excess of $38,750,000 since the Company's inception. At June 30, 1998, the Company had $6,343,000 available under various credit facilities expiring July 1998 through October 2000. Interest is payable monthly at rates ranging from 2 Year Treasuries plus 2.50% to prime plus 1%. The Company and one of its lenders have mutually agreed to increase an existing $10 million credit facility to $45 million. Participants are required for the full line amount to be funded, which the lender is currently working on obtaining. At July 31, 1998, $14.3 million is outstanding under this facility. The Company has also received verbal commitments from three other existing lending institutions to provide additional loans totaling $26.5 million. The Company believes that it will be able to extend and increase current facilities, or negotiate additional facilities, but there can be no assurance of such extensions, increases or additional facilities. For additional information on the Company's borrowings and financing activities, see Notes 5 and 10 to the Company's Consolidated Financial Statements and Business Section.
Surety / Insurance Activities
The Company has received a commitment from a "AAA" rated major domestic based insurer to issue two Lease Bonds totaling $60,000,000. The Company intends to utilize this commitment for model homes previously acquired or to be acquired. The Lease Bond insures the timely payment by the lessee of the lease payments. In the event of default by the lessee, the surety has an obligation to continue to make the lease payments. The Company negotiates the premium for the surety bonds on a case by case basis.
The Company has received a commitment from a "AA" rated U.S. subsidiary of a major international insurer to issue a Lease Bond in the amount of $132,000,000 in conjunction with the pending acquisition of model homes from a major U.S. homebuilder. The Lease Bond insures the timely payment by the lessee of the lease payments. In the event of default by the lessee, the surety has an obligation to continue to make the lease payments. At its sole option, the surety may acquire the model homes at the Company's original cash closing purchase price thereby terminating its obligation to make additional lease payments. The Company negotiates the premium for the surety bonds on a case by case basis.
The Company has received a commitment from a "A" rated major domestic based insurer to issue a Lease Bond in the amount of $20,000,000. The Lease Bond insures the timely payment by the lessee of the lease payments. In the event of default by the lessee, the surety has an obligation to continue to make the lease payments. The Company negotiates the premium for the surety bonds on a case by case basis.
The intent of these types of arrangements is to reduce cost of funds and thereby increase profitability. The agreements are subject to the following conditions; (i) satisfactory completion of due diligence regarding the assets to be acquired , (ii) the execution of bank or institutional financing, and (iii) agreement to final wording of all related legal documentation.
Cash Flows: Net cash provided by operating activities totaled $508,000, comprised of a net loss of $157,000, plus net adjustments for non-cash items of $906,000, less a net change in other operating assets and liabilities of $241,000.
Net cash provided by investing activities totaled $3,017,000, comprised of $8,929,000 from the sale of model homes, $1,716,000 from the sale of land, and $212,000 from the note receivable of divested segment, offset by $7,840,000 in model home purchases.
Net cash used in financing activities totaled $3,991,000, comprised of principal payments on mortgages payable of $7,614,000, deferred costs of $339,000, and purchase of treasury stock of $20,000, offset by proceeds from mortgages payable of $3,981,000.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") concerning the Company's operations, economic performance and financial conditions, including, in particular, the likelihood of the Company's success in developing and bringing to market the products which it currently has under development. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties, and contingencies, many of which are beyond the control of the Company and reflect future business decisions which are subject to change. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company's results. Consequently, actual results will vary from the statements contained herein and such variance may be material. Prospective investors should not place undue reliance on this information.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
See page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The executive officers and directors of the Registrant are:
Name Age Position - ------------------- --- ------------------------------------ David Miller 53 Chairman of the Board
Samuel G. Weiss 49 President, Secretary, Counsel and Director
John P. Kushay 38 Vice President, Chief Financial Officer, Treasurer and Director
Richard K. LeBlond III 47 Senior Vice President
Don B. Lederman 47 Vice President, Sales & Marketing
Joan E. Kushay 37 Vice President, Assistant Secretary and Director
Ralph Wilson 67 Director
Kenneth MacKenzie 64 Director
All directors will hold office until the next annual meeting of shareholders and until their successors have been elected and qualified. Officers of the Registrant are elected and serve until their death, resignation or removal by the directors. There are no family relationships among the officers and directors, other than the fact that John Kushay and Joan Kushay are husband and wife, and there is no arrangement or understanding between the Company (or any of its directors) and any other person pursuant to which that person was or is to be selected as a director or officer.
David Miller, was appointed Chairman of the Board on July 29, 1997. Mr. Miller has been engaged as a strategic consultant to the Company since its organization. Prior to his consulting engagement, Mr. Miller had been a strategic consultant to several companies, including Antares Resources Corporation, since 1992, and Priority Capital Corporation since 1993. Since 1994, Mr. Miller has served as Chairman of the Board of Lite 'N Low, Inc., a holding company not actively engaged in business.
Samuel G. Weiss, Secretary, General Counsel and Director, has held these positions with the Company since its organization. Effective May 1997, Mr. Weiss was appointed interim President and Chief Executive Officer until such time a replacement can be found. Since 1974, Mr. Weiss has been engaged in the practice of law in Port Washington, New York. Mr. Weiss also served as Secretary, General Counsel, and Director of Antares Resources from June 1993 to December 1996.
John P. Kushay, was appointed Treasurer and CFO in June 1996. Mr. Kushay was elected a Director of the Company in June 1996. In May 1997, Mr. Kushay was appointed Vice President. Prior to joining the Company, Mr. Kushay had been Controller of International Operations, at Xpedite Systems, Inc., from February 1994 through March 1996. From May 1990 to February 1994, he was Controller at Tamco Systems, Inc.
Richard K. LeBlond III, was appointed Senior Vice President in June 1998. Prior to joining JJFN Services, Mr. LeBlond was the Vice President for Strategy and Business Development at the Avon Group, Inc., an insurance brokerage concern, where he concentrated on credit related surety products, since February 1997. From January 1990 to January 1997, Mr. LeBlond was a self-employed sales, marketing and business development consultant, specializing in media and communications business concerns. His services included strategic business plan development, identification of business prospects and sales strategy development.
Don B. Lederman, was appointed Vice President, Sales & Marketing in November 1996. Prior to joining the Company, Mr. Lederman had been Director - Sales & Marketing, at K. Hovnanian Companies of Florida, since July 1993. From September 1988 to July 1993, he was Project and Sales Manager at Kennedy Properties, Ltd. He has over 14 years experience in the sales and marketing of new homes, product design, community and land planning.
Joan E. Kushay, Assistant Secretary and Director, has held these positions since the Company's organization. From June 1994 to November 1995, she was employed as an executive assistant at XYZ Cleaning Contractors in Garden City, New York. From February 1994 through June 1994, Ms. Kushay was employed by Arrow Electronics Inc. of Melville, New York in shareholder and investor relations and, from July 1988 to January 1994, by Action Staffing Inc., a publicly held corporation located in Tampa, Florida, as Executive Assistant to the Chairman. Ms. Kushay was also Assistant Secretary and Director of Antares Resources from December 1994 to December 1996.
Ralph Wilson, Director, has held that position since the Company's organization. From October 1990 through February 1995, Mr. Wilson was President of Antares Resources Corporation and served as a director of that company from December 1994 to December 1996. In addition, since 1971 Mr. Wilson has been a principal officer of Comet Electronics Corp., A privately owned manufacturer of subassemblies in Farmingdale, New York. Mr. Wilson devotes only such time as is necessary to the business of the Company.
Kenneth MacKenzie, was elected a Director of the Company in November 1996. From 1985 to 1996, Mr. MacKenzie served as co-executive director of The Institute of Business Appraisers Inc. and President of Southeast Business Investment Corp. of Boynton Beach, Florida. In January 1997, Mr. MacKenzie founded Southeast Business Appraisal Corporation which specializes in appraisals and valuations of businesses. Mr. MacKenzie devotes only such time as is necessary to the business of the Company.
The Company considers Kenneth MacKenzie and Ralph Wilson to be independent directors, as they are not employees and have no affiliation with the promoters, officers or directors of the Company.
Reporting under Section 16
Based upon a review of the Forms 3, Forms 4 and Forms 5 furnished to the Registrant with respect to its most recent fiscal year by its officers, directors and holders of 10% or more of its outstanding Common Stock, the following persons and entities failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the fiscal year ended June 30, 1998:
Name Type of Report Date filing Date filing Required Made
David Miller Form 4 January 10, 1998 February 27, 1998 Samuel G. Weiss Form 4 January 10, 1998 February 27, 1998 John P. Kushay Form 4 January 10, 1998 February 27, 1998 Joan E. Kushay Form 4 January 10, 1998 February 27, 1998 Ralph Wilson Form 4 January 10, 1998 February 27, 1998 Kenneth MacKenzie Form 4 January 10, 1998 February 27, 1998 Don Lederman Form 4 January 10, 1998 February 27, 1998
Note: The Form 4 Report relates to the issuance of stock options. See Note 8 to the Company's Consolidated Financial Statements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Through June 30, 1998, compensation to current employees, consultants, directors or officers of the Company were paid as follows:
David Miller $ 252,000 (1)
(1) Does not include 200,000 stock options granted in December 1997.
The Company reimbursed all employees, consultants, officers and directors for out-of-pocket expenses incurred in the pursuit of their duties; such reimbursements were $74,238 in the aggregate through June 30, 1998.
Effective January 1, 1998, the Company entered into an employment contract with David Miller calling for his employment as Chairman for a period of ten (10) years at a starting salary of $225,000 per year. On the same date, the Company entered into any employment contract with John Kushay calling for his employment as Vice President and Chief Financial Officer for a period of five (5) years at a starting salary of $91,000 per year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of August 10, 1998, for (i) each director, (ii) all directors and officers of the Company as a group, (iii) each person known to the Company to own beneficially five percent (5%) or more of the outstanding shares of the Company's Common Stock.
The persons named in the table have sole voting and investment power with respect to all of the Common Stock shown as beneficially owned by them, subject to community property laws where applicable.
Does not include options to purchase Common Stock which can not be exercised within 60 days. See Note 7 of the Company's Consolidated Financial Statements.
Executive Officers and Directors Shares Owned Percentage Owned - ------------------------------------- -------------- ---------------- David Miller 4,084,368 24.0% 3565 NW 61st Circle Boca Raton, FL 33496
Samuel G. Weiss 154,165 0.9% 30 Main Street Port Washington, NY 11050
Joan E. Kushay 154,200 0.9% 618 Cypress Green Circle Wellington, FL 33414
Ralph Wilson 157,500 0.9% 7 Ensign Lane Massapequa, NY 11758
-------------- ---------------- All directors and officers as a group 4,550,233 26.7% -------------- ----------------
5% Stockholders Shares Owned Percentage Owned - ------------------------------------- -------------- ---------------- Scott Miller 1,333,500 7.8% 3565 NW 61st Circle Boca Raton, FL 33496
Rita Miller 1,333,500 7.8% 89 Middle Road Sands Point, NY 11050
Helen Miller Irrevocable 1,250,000 7.3% Trust No.1, Libo Fineberg, Trustee 3500 Gateway Drive Pompano Beach, FL 33069
Lite 'N Low, Inc. 1,050,000 6.2% 50 Commercial Street Plainview, NY 11803
Priority Capital 1,050,000 6.2% 50 Commercial Street Plainview, NY 11803
Susan Schlapkohl 1,000,000 5.9% 199 Shelter Lane Jupiter, FL 33469 See Item 3. LEGAL PROCEEDINGS
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During July 1996, the Company entered into an indemnity agreement with a significant shareholder, which induced JJFN not to sell its shares in Antares. The shareholder agreed that if JJFN, in the future, sold any shares at a price less than the market value of the shares at their date of acquisition ($2.50 per share), the shareholder would contribute additional shares of Antares common stock, or other property, having a fair market value equal to such difference.
During September 1996, JJFN sold 485,000 shares of Antares, which were acquired at a cost of $1,212,500, for $218,250, and in October 1996 sold 100,000 shares of Antares, which were acquired at a cost of $250,000, for $21,000. Since the shareholder agreed to indemnify JJFN if the marketable securities were sold at less than cost, no loss was recorded on the sale. The deficiency of $1,223,250 was satisfied by offsetting $1,223,250 of loans due to the shareholder.
The transaction is summarized as follows:
Original cost $1,462,500 Sale price (239,250) ----------- Deficiency satisfied by offsetting loans due to shareholder $1,223,250 ===========
Notes Payable - Stockholders
Stockholder loans payable arose from advances various stockholders have made to the Company. The notes are payable on demand and accrue interest at 9%. Interest on stockholder notes payable totaled $103,252 for the year ended June 30, 1998, $33,815 for the year ended June 30, 1997, and $82,109 for the period November 2, 1995 through June 30, 1996. On June 30, 1996, stockholder loans totaling $1,442,656 plus accrued interest of $103,265 were converted to 1,288,268 shares of the Company's common stock. At June 30, 1998 and June 30, 1997, stockholder loans of $1,025,907 were still outstanding.
The Company issued 2,101,094 warrants during the year ended June 30, 1998 and 1,026,000 warrants during the year ended June 30, 1997, to stockholders who had made loans to the Company. The warrants are exercisable at the fair value of the stock on the date the warrant was issued.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Item Page Number
Index to consolidated financial statements
Independent Auditors' Report
Consolidated balance sheets as of June 30, 1998 and 1997 -
Consolidated statements of operations for the year ended June 30, 1998 and 1997 and for the period November 2, 1995 (date of incorporation) through June 30, 1996
Consolidated statements of stockholders' equity for the year ended June 30, 1998 and 1997 and for the period November 2, 1995 (date of incorporation) through June 30, 1996
Consolidated statements of cash flows for the year ended June 30, 1998 and 1997 and for the period November 2, 1995 (date of incorporation) through June 30, 1996
Notes to consolidated financial statements -
Other schedules are either not applicable to the Registrant or have been omitted because the required information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of the fiscal year ended June 30, 1998.
(c) Exhibits
(a) Exhibits
Incorporated by Reference to Registration Exhibit No. Statement 333-1842 Description - ----------- ------------------------- -----------------------------------
2.1 X Merger Agreement between the Company, JJFN Inc. and Priority Financial, Inc. dated December 29, 1995
3.1 X Company Certificate of Incorporation, as amended to date
3.2 X Company By-laws, as amended to date
10.1 X Subscription Agreement between JJFN and Tarlton Company Ltd.
10.2 X Consulting Agreement between JJFN and Tarlton Company Ltd. dated December 8, 1995
10.3 X Loan Agreement, Promissory Note and Mortgage of the Company to Capital Bank dated January 24, 1996
10.4 X Form of Sale and Lease-Back Agreements between the Company and K. Hovnanian Company of Florida, Inc.
10.6 X Purchase Agreement, Loan Agreement and Consulting Agreements among JJFN and Iron Eagle Contracting Corp., VJS International Holdings. and Priority Capital Corp.
10.7 X Agreement reforming the Purchase Agreement between JJFN and Iron Eagle Contracting Corp.
10.8 X Form of Purchase Agreement, Lease and and Exclusive Sale Agreement between the Company and Engle Homes Inc.
Incorporated by Reference to Form Exhibit No. 10K June 30, 1997 Description - ----------- ------------------------- -----------------------------------
10.9 X Purchase Contract, Option Contract and Development Contract with Engle Homes, dated September 18, 1996.
10.10 X Loan Agreement with Capital Bank dated September 18, 1996.
10.11 X Loan Agreement with Capital Bank dated July 31, 1996.
10.12 X Employment Contract with David Miller dated as of July 29, 1997.
10.13 X Incentive Stock Plan of the Company.
11.1 (Filed herewith) Statement regarding computation of per share earnings.
12.1 (Filed herewith) Schedule identifying schedules omitted
21.1 (Filed herewith) List of Company subsidiaries.
27 (Filed herewith) Financial Data Schedule
(d) Financial Schedules
None applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JJFN SERVICES, INC.
By: /s/Samuel G. Weiss Samuel G. Weiss, President, Chief Executive Officer
By: _/s/John P. Kushay John P. Kushay, Treasurer, Chief Financial Officer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/David Miller Dated: August 19, 1998 David Miller, Director
/s/Samuel G. Weiss Dated: August 19, 1998 Samuel G. Weiss, Director
/s/Joan E. Kushay Dated: August 19, 1998 Joan E. Kushay, Director
/s/John P. Kushay Dated: August 19, 1998 John P. Kushay, Director
/s/Ralph Wilson Dated: August 19, 1998 Ralph Wilson, Director
/s/Kenneth MacKenzie Dated: August 19, 1998 Kenneth MacKenzie, Director
JJFN SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent auditors Report
Consolidated balance sheets as of June 30, 1998 and 1997 -
Consolidated statements of operations for the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996
Consolidated statements of stockholders equity for the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996
Consolidated statements of cash flows for the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996
Notes to consolidated financial statements -
INDEPENDENT AUDITORS REPORT
The Board of Directors JJFN Services, Inc. and subsidiaries Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of JJFN Services, Inc. and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders equity, and cash flows for the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of JJFN Services, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of its consolidated operations and its consolidated cash flows for the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996, in conformity with generally accepted accounting principles.
HORTON & COMPANY, L.L.C.
Wayne, New Jersey August 3, 1998
JJFN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, -------------------------- 1998 1997 -------------------------- Revenue producing assets: Model homes on lease, at cost, net of accumulated depreciation of $906,679 in 1998, and $484,176 in 1997 $ 37,781,052 $ 20,925,073 Real estate under contract for development and sale - 8,591,956 ----------- ----------- Total revenue producing assets 37,781,052 29,517,029 ----------- ----------- Other assets: Cash 365,227 831,266 Net assets realizable on divestiture 1,100,000 1,312,500 Deferred charges and goodwill 845,700 606,962 Other 94,097 162,538 ----------- ----------- Total other assets 2,405,024 2,913,266 ----------- ----------- Total assets $40,186,076 $32,430,295 =========== ===========
See notes to consolidated financial statements
JJFN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, -------------------------- 1998 1997 --------------------------
Liabilities: Mortgages payable $ 30,512,635 $ 22,632,465 Accounts payable and accrued expenses 481,763 467,214 Unearned rental revenue 203,367 215,343 Stockholder loans 1,025,907 1,025,907 ----------- ----------- Total liabilities 32,223,672 24,340,929 ----------- -----------
Commitments - -
Stockholders' equity: Convertible preferred stock, $.01 par value 25,000,000 shares authorized, 400,000 shares issued and outstanding in 1998 and 1997 4,000 4,000 Common stock, $.001 par value 50,000,000 shares authorized 17,012,005 shares issued, 16,934,085 outstanding in 1998 17,012 - 16,811,990 shares issued and outstanding in 1997 - 16,812 Additional paid-in capital 8,346,552 8,296,049 Treasury stock, 77,920 shares at cost (20,354) - Accumulated deficit (384,806) (227,495) ----------- ----------- Total stockholders' equity 7,962,404 8,089,366 ----------- ----------- Total liabilities and stockholders' equity $40,186,076 $32,430,295 =========== ===========
See notes to consolidated financial statements
JJFN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
November 2, 1995 (date of Year Ended June 30, incorporation) ------------------------- through 1998 1997 June 30, 1996 ------------ ----------- ------------- Revenues: Lease revenue $ 3,544,793 $ 2,068,450 $ 418,507 Land development income 8,771 824,207 - Sales of model homes 9,027,514 4,528,600 515,000 Land development sales 8,591,956 - - Interest income 129,488 103,681 5,411 Gain on sale of marketable securities - - 26,250 ------------ ----------- ------------- 21,302,522 7,524,938 965,168 ------------ ----------- ------------- Costs and expenses: Interest and financing costs 2,134,870 1,660,803 249,038 Cost of model homes sold 8,701,169 4,448,915 507,244 Cost of land development 8,591,956 - - Corporate 1,147,978 1,057,849 246,599 ------------ ----------- ------------- 20,575,973 7,167,567 1,002,881 ------------ ----------- ------------- Income(loss) before depreciation and amortization 726,549 357,371 (37,713) ------------ ----------- ------------- Depreciation and amortization 1,181,860 707,345 124,682 ------------ ----------- ------------- Loss from continuing operations before income tax benefit (455,311) (349,974) (162,395)
Income tax benefit 298,000 77,000 - ------------ ----------- ------------- Loss from continuing operations (157,311) (272,974) (162,395)
Discontinued operations, net of taxes: Loss from divested operations - (54,444) (22,558) Gain on disposal of divested operations - 284,876 - ------------ ----------- ------------- - 230,432 (22,558) ------------ ----------- ------------- Net loss (157,311) (42,542) (184,953)
Preferred stock distribution - 5,000 40,000 ------------ ----------- ------------- Loss applicable to common shareholders $ (157,311) $ (47,542) $ (224,953) ============ =========== ============= Earnings (loss) per share data: Continuing operations $ (0.01) $ (0.01) $ (0.02) Divested operations - 0.01 - ------------ ----------- ------------- Net loss per share $ (0.01) $ 0.00 $ (0.02) ============ =========== =============
See notes to consolidated financial statements
JJFN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996
Preferred stock Common Stock ------------------ --------------------- Shares Amount Shares Amount -------- -------- ---------- -------- Common stock issued at inception - $ - 10,000,000 $10,000
Preferred stock issued 400,000 4,000 - -
Preferred distributions - - - -
Common stock issued in merger - - 4,084,990 4,085
Common stock issued under option and consulting agreements - - 125,000 125
Common stock issued in conversion of line of credit and stockholder loans - - 1,750,000 1,750
Net loss - - - - -------- -------- ---------- -------- Balances, June 30, 1996 400,000 4,000 15,959,990 15,960 -------- -------- ---------- --------
Common stock issued under option agreements - - 700,000 700
Common stock issued in satisfaction of expenses - - 152,000 152
Preferred Distributions - - - -
Net loss - - - - -------- -------- ---------- -------- Balances, June 30, 1997 400,000 $ 4,000 16,811,990 $ 16,812 -------- -------- ---------- -------- Common stock issued in satisfaction of expenses - - 200,015 200
Net loss - - - - -------- -------- ---------- -------- Balances, June 30, 1998 400,000 $ 4,000 17,012,005 $ 17,012 ======== ======== ========== ========
Additional Treasury Stock Paid-In ---------------- Accumulated Capital Shares Amount Deficit ---------- ---------------- ---------- Common stock issued at inception $1,490,000 - $ - $ -
Preferred stock issued 996,000 - - -
Preferred distributions (40,000) - - -
Common stock issued in merger 3,760,296 - - -
Common stock issued under option and consulting agreements 149,875 - - -
Common stock issued in conversion of line of credit and stockholder loans 1,867,064 - - -
Net loss - - - (184,953) ---------- ---------------- ----------- Balances, June 30, 1996 8,223,235 - - (184,953) ---------- ---------------- -----------
Common stock issued under option agreements - - - -
Common stock issued in satisfaction of expenses 77,814 - - -
Preferred Distributions (5,000) - - -
Net loss - - - (42,542) ---------- ---------------- ----------- Balances, June 30, 1997 $8,296,049 - - $ (227,495) ---------- ---------------- ----------- Common stock issued in payment of indebtedness 50,503 - - -
Treasury stock purchased - (77,920) (20,354) -
Net loss - - - (157,311) ---------- ------------------ ----------- Balances, June 30, 1998 $8,346,552 (77,920) $(20,354) $ (384,806) ========== ================== =========== See notes to consolidated financial statements
JJFN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
11/2/95 (date of Year Ended June 30, incorp.) --------------------- through 1998 1997 6/30/96 ---------- ---------- ----------
Net loss $(157,311) $ (42,542) $(184,953) Adjustments to reconcile net loss to net cash ---------- ---------- ---------- provided by (used in) operating activities: Amortization expense 455,911 242,050 27,863 Depreciation expense 725,949 465,295 96,819 Non-cash expenses of divested operations - 28,618 13,504 Gain on sale of model homes (326,345) (79,685) (7,756) Gain on sale of marketable securities - - (26,250) Gain on sale of divested operations - (284,876) - Operating expenses satisfied through issuance of common stock 50,703 77,966 - Changes in assets and liabilities, net of effects from business combination: Increase in net operating assets of divested segment - (224,175) (185,981) Increase in miscellaneous assets 54,896 59,577 62,176 Increase in deferred income tax asset (298,000) (77,000) - Increase in accounts payable and accrued expenses 14,550 345,475 18,763 Increase in unearned rental revenue (11,976) 155,207 60,136 ---------- ---------- ---------- Total adjustments 665,688 708,452 59,274 ---------- ---------- ---------- Net cash provided by (used in) operating activities 508,377 665,910 (125,679) ---------- ---------- ---------- Cash flows from investing activities: Cash acquired in business combination - - 1,044,480 Purchase of model homes and real estate (7,840,827)(4,442,544)(2,018,818) Proceeds from sale of model homes 8,929,429 4,457,977 229,520 Proceeds from sale of land 1,716,956 - - Proceeds from sale of marketable securities - 239,250 313,750 Capital expenditures (607) (27,838) (53,568) Acquisition costs - - (36,121) Proceeds from note receivable of divested segment 212,500 - - ---------- ---------- ---------- Net cash provided by (used in) investing activities 3,017,451 226,845 (520,757) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from mortgages payable 3,981,691 1,577,688 1,383,099 Principal payments on mortgages payable (7,614,045)(3,846,200) (148,462) Deferred finance charges (330,829) (254,400) (104,579) Deferred offering costs (8,330) - - Proceeds from stockholder loans - 1,705,000 158,250 Loans from affiliates - - 158,851 Preferred distributions - (15,000) (30,000) Proceeds from issuance of common stock - 700 - Purchase of treasury stock (20,354) - - ---------- ---------- ---------- Net cash provided by (used in) financing activities (3,991,867) (832,212) 1,417,159 ---------- ---------- ---------- Net increase (decrease) in cash (466,039) 60,543 770,723
Cash at beginning of period 831,266 770,723 - ---------- ---------- ---------- Cash at end of period $ 365,227 $ 831,266 $ 770,723 ========== ========== ==========
See notes to consolidated financial statements
JJFN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996
1. Summary of significant accounting policies
This summary of significant accounting policies of JJFN Services, Inc. and subsidiaries (hereinafter JJFN or the Company) is presented to assist in understanding the consolidated financial statements. The consolidated financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of JJFN Services, Inc. for the years ended June 30, 1998 and 1997, and for the period November 2, 1995 (date of incorporation) through June 30, 1996, and of its inactive, wholly-owned subsidiary, JJFN Holdings, Inc. (Holdings) from its date of acquisition, May 15, 1996 (Note 2) and of its wholly-owned subsidiary, Model Funding I, L.L.C. (MFI) from its date of inception, July 7, 1997. Intercompany transactions and balances have been eliminated in consolidation.
History and business activity
The Company is engaged in two lines of business, both with major homebuilders and real estate developers:
1) The purchase and leaseback of fully-furnished model homes.
2) The contract acquisition, development and sale of real estate.
From its inception through June 30, 1998, the Company has purchased a total of 246 model homes and sold 75, resulting in a portfolio of 171 model homes owned at June 30, 1998. All such purchases have been from seven nationally-known, publicly-traded homebuilders and real estate developers. Concurrent therewith, the Company entered into arrangements to lease the units back to the builders under operating lease agreements (Note 4). The Company also acquired and sold a tract of land which was being developed by a homebuilder (Note 4).
1. Summary of significant accounting policies (continued)
Bankruptcy-remote special-purpose subsidiary
During 1997, the Company formed Model Funding I, L.L.C. (MFI), a wholly-owned, bankruptcy-remote, special-purpose subsidiary. A bankruptcy-remote entity is established in a fashion intended to minimize the possibility that the entity could become a debtor in a bankruptcy or insolvency proceeding. A special-purpose entity is established with a limited purpose. It is generally not authorized under its certificate of incorporation to incur liabilities or engage in business except in ways that are necessary or advisable in connection with the securitization in which it is to be involved. MFI was formed for the exclusive purpose of acquiring model homes and leasing them back to a single major real estate developer and homebuilder until such time as they are sold to third parties.
On March 31, 1998, MFI acquired 29 model homes from the homebuilder for an aggregate purchase price of $7,091,507. Simultaneously, MFI closed on a $10,000,000 revolving credit facility (Note 5) with a New England financial institution (a financial services subsidiary of a major U.S. industrial corporation) and utilized $5.8 million of the facility to finance the acquisition. On April 29 and 30, 1998, MFI acquired an additional 17 model homes from the homebuilder for an aggregate purchase price of $4,081,484. MFI utilized an additional $3,627,000 of the revolving credit facility to finance the acquisition. The balance necessary to effect the purchases was provided by the Company on a subordinated basis as required by the loan agreements. The interest on the loan is based on two-year treasuries plus a premium fixed at closing.
MFI and the financial institution have mutually agreed to increase the credit facility up to $20 million for this homebuilder as additional model homes are acquired. The loan agreements impose severe restrictions applicable only to MFI. These restrictions are not applicable to the Company. The restrictive covenants impose limits on the following: (a) employees, (b) operating costs, (c) asset acquisitions, (d) a single lessee, (e) minimum dollar value of lease payments, (f) incurring additional debt without prior approval, and (g) transaction duration.
Due to the limited nature and short life of MFI's business and the restrictive covenants of the loan documents, MFI has elected not to depreciate the model homes acquired.
Fair value of financial instruments
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 107, disclosure about Fair Value of Financial Instruments, which requires the disclosure of the fair market value of off- and on-balance sheet financial instruments. The carrying value of all financial instruments, including long- term and short-term debt, cash and temporary cash investments, approximates their fair value at year end.
Year 2000
The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company has addressed this risk to the availability and integrity of financial systems and the reliability of operational systems. The Company believes that it will not be adversely affected by the Year 2000 conversion.
1. Summary of significant accounting policies (continued)
Concentration of credit risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and net assets realizable on divestiture which consists of a note receivable (Note 11).
At June 30, 1998, the Company had cash balances with two banks which were, in the aggregate, $84,793 in excess of the $100,000 limit insured by the Federal Deposit Insurance Corporation. In addition, there is off-balance sheet risk to the extent of outstanding checks. Based on credit analysis of the financial institutions with which it does business, the Company believes it is not exposed to any significant credit risk on cash. The Company also has one cash account with a restricted balance of $50,000 at June 30, 1998.
Through June 30, 1998, the model homes that the Company has purchased are located in Florida, Colorado, North Carolina, Virginia, Texas, New Jersey, New York, Georgia and Pennsylvania. All such homes have been leased to seven different major homebuilders and real estate developers (Note 4).
Depreciation
Property and equipment are carried at cost. Depreciation is provided on the straight-line method over the following estimated useful lives:
Model homes on lease 30 years Office furniture and equipment 5 years (included in miscellaneous other assets)
Maintenance and repairs are the responsibility of the lessee under the terms of the leases. Gains or losses or disposition of model homes are included in income.
Depreciation expense was $725,949, $465,295 and $96,819 for the years ended June 30, 1998, 1997 and for the period November 2, 1995 (date of incorporation) through June 30, 1996, respectively.
Accounting standards changes
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 accounting for the Impairment of long-lived Assets and for long-lived Assets to be Disposed of ("SFAS 121") which is effective for fiscal years beginning after December 15, 1995. The Company has adopted SFAS 121 for the fiscal year beginning July 1, 1996. However, its adoption has not had any material impact on the Company's consolidated financial position. SFAS 121 provides additional guidance on when long-lived assets should be reviewed for possible impairment, how impairment losses should be measured and when such losses should be recognized. In addition to long-lived assets, SFAS 121 amended the accounting standards for valuing real estate assets to the lower of cost or fair value less cost to sell (for certain assets the lower of cost or fair value) from the lower of cost or net realizable value.
1. Summary of significant accounting policies (continued)
Accounting standards changes (continued)
In October 1995, the Financial Accounting Standards Board issued accounting for Stock Based Compensation ("SFAS 123") which is effective for fiscal years beginning after December 15, 1995. With respect to stock options granted to employees, SFAS 123 permits companies to continue using the accounting method promulgated by the Accounting Principles Board Opinion No. 25 (APB 25), accounting for Stock Issued to Employees to measure compensation or to adopt the fair value-based method prescribed by SFAS 123. The Company has elected to continue to account for stock-based compensation in accordance with APB 25 and therefore, SFAS 123 has no effect on the financial statements of the Company for the year ended June 30, 1997. Under APB 25, the Company does not recognize compensation expense for its stock option plans as options are granted at an exercise price equal to, or greater than, the market price, the Company would then recognize compensation expense in an amount equal to the excess of the market value of the underlying stock over the exercise price of the stock option. If the APB 25 method is continued and if the differences are material, pro forma disclosures are required as if SFAS 123 accounting provisions were followed. No pro forma disclosures have been presented since, in the opinion of management, the effect of the application of such provision is immaterial to the financial statements for the years ended June 30, 1998 and 1997, and the period ended June 30, 1996.
In June 1997, the Financial Accounting Standards Board issued reporting Comprehensive Income ("SFAS 130") which is effective for years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income consists of foreign currency translation adjustments, unrealized gain and losses on certain investments in debt and equity securities and minimum pension liability adjustments. The Company currently has no items of comprehensive income and therefore is not required to adopt SFAS 130.
Loss per common share
Loss per common share is computed by dividing the net loss applicable to common stock shareholders by the weighed average number of shares of common stock outstanding during the period. For the years ended June 30, 1998 and 1997, the weighted average number of shares used in the calculation was 16,911,168 and 16,551,091, respectively. For the period November 2, 1995 through June 30, 1996, the weighted average number of shares used in the calculation was 10,801,114. Basic loss per common share does not include the effect of common stock equivalents because the effect of such inclusion would be to reduce loss per common share. Diluted loss per share amounts are not presented because they are anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards earnings Per Share, ("SFAS 128") which require companies to present basic earnings per share (EPS) and diluted earnings per share, instead of the primary and fully diluted EPS that was formerly required. The new standard requires additional informational disclosures, and also makes certain modifications to the currently applicable EPS calculations defined in Accounting Principles Board No. 15. The new standard is required to be adopted by all public companies for reporting periods ending after December 15, 1997, and requires restatement of EPS for all prior periods reported. Under the requirements of SFAS 128, the Company's basic loss per share for the year ended June 30, 1997 and 1998 and the period November 2, 1995 through June 30, 1996 remains the same.
1. Summary of significant accounting policies (continued)
Reclassifications
Certain reclassifications have been made to the 1997 financial statements to conform the 1998 presentation.
2. Business combination
In a statutory merger which became effective May 15, 1996, the Company acquired all of the stock of Holdings in exchange for 4,084,990 shares of its $.001 par value common stock. The value of the stock issued was $3,764,381, based on the fair market value of the net assets acquired. The acquisition has been accounted for under the purchase method and accordingly, the operating results of Holdings and its wholly-owned subsidiary, Iron Eagle Contracting and Mechanical, Inc. (IECM), have been included in the consolidated operating results since the date of acquisition. Effective October 1, 1996, the Company divested itself of the operations of IECM (Note 11).
Holdings was a publicly-held company which was inactive until it commenced operations as a construction contractor through its wholly-owned subsidiary, IECM, on December 29, 1995. Under the terms of the merger agreement, Priority Financial, Inc. (PFI), a wholly- owned subsidiary of the Company, merged into Holdings which became the surviving subsidiary corporation. On the effective date of the merger, each non-dissenting Holdings shareholder received one share of the Company's common stock for each 50 shares of preferred stock owned. On the effective date of the merger, the Company also assumed the rights and obligations of Holdings.
The merger agreement also provided that the Company file a registration statement with the Securities and Exchange Commission in order to register all shares issued, or to be issued, to Holdings shareholders. The registration statement became effective on May 8, 1996, and the merger was completed on May 15, 1996. As a result, JJFN Services, Inc. became a publicly-held company.
The following unaudited information has been prepared on a pro forma basis as if Holdings had been acquired as of the beginning of the period November 2, 1995 through June 30, 1996:
Revenues $ 1,318,007 Costs and expenses 1,882,084 ------------ Loss from operations (564,077) Other income 38,143 ------------ Net loss $ (525,934) ============ Net loss per share $ (.04) ============ Average shares outstanding 14,050,871 ============
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Holding acquisition been consummated as of the beginning of the period presented, nor are they necessarily indicative of future operating results.
3. Deferred charges and goodwill
Deferred charges and goodwill consist of the following:
June 30, ----------------------- 1998 1997 -------- -------- Deferred finance charges $373,712 $429,191 Deferred offering costs 62,160 53,829 Deferred income tax asset 375,000 77,000 Goodwill 34,828 46,942 -------- -------- $845,700 $606,962 ======== ========
Deferred finance charges are carried at cost. Amortization is provided on the straight-line method over the lives of the loans to which the deferred finance charges relate. Amortization expense of deferred finance charges was $443,797 for the year ended June 30, 1998, $229,936 for the year ended June 30, 1997 and $26,349 for the period ended June 30, 1996. Accumulated amortization of deferred finance charges totaled $697,783 and $256,285 at June 30, 1998 and 1997, respectively.
Goodwill is carried at cost and is being amortized over a fifteen-year period. For the years ended June 30, 1998 and 1997, and for the period ended June 30, 1996, amortization expense of goodwill totaled $12,114, $12,114 and $1,514, respectively. Accumulated amortization of goodwill was $25,742 and $13,628 at June 30, 1998 and 1997, respectively.
4. Leasing and option fee arrangements
Leasing arrangements
The Company has entered into a series of operating leases with seven different major homebuilders and real estate developers (the Lessee) (Note 1) which provide for monthly lease payments equal to 1% of the Company's purchase price of each premises. Under the terms of the lease agreements, all expenses arising during the term of the lease shall be paid by the Lessee including, but not limited to, utilities, homeowner association assessments, maintenance, insurance and real estate taxes. Monthly revenue from leases existing at June 30, 1998, 1997 and 1996 was $386,877, $214,093 and $113,293, respectively.
The leases terminate only upon the sale of the model homes. In connection therewith, the Company has entered into listing agreements with brokerage affiliates of some of the Lessees. Such agreements specify that the commission to the affiliate shall range from 2% to 5% of the sales price of the home. The agreements also provide for sales incentives to the brokers. The sales price may not be less than the original cash closing purchase price unless the Lessee elects to fund any deficiency at the closing.
4. Leasing and option free arrangements (continued)
Leasing agreements (continued)
The Lessees have provided surety bonds, letters of credit or cash in order to assure the performance of their obligations. The financial instruments provided by Lessees are equal to 5% of the Company's purchase price including related costs.
For the year ended June 30, 1998, the Company sold 49 of its model homes for a total sales price of $9,027,514. The Company recognized a net gain on the sales of $326,345. For the year ended June 30, 1997, the Company sold 23 of its model homes for a total sales price of $4,528,600. The Company recognized a net gain on the sales of $79,685. During the period November 2, 1995 through June 30, 1996, the Company sold three of its model homes for a total sales price of $515,000. The Company recognized a net gain on the sales of $7,756.
Option fee arrangements
During September 1996, the Company acquired a 70-acre tract of land to be developed by a homebuilder for 370 residential units at a cost of $8,591,956. In addition, the Company entered into a development agreement to reimburse the homebuilder up to a maximum of $4,500,000 for site development costs. Any excess costs are for the sole account of the homebuilder. In addition, the Company entered into a purchase option agreement whereby the developer agreed to purchase the property on a finished-lot basis over a scheduled three- year period and to provide a $1,719,000 deposit and post a performance bond to secure their performance under the development agreement. During the period from the Company's original acquisition of the land until the developer purchases the finished lots, the developer was obligated to pay a non-refundable monthly option fee equal to 1% of the Company's total costs including acquisition cost, closing costs, plus sums paid under the development agreement.
During June 1997, the Company was advised by the homebuilder that it was electing to fully exercise its option to purchase the approximate 70-acre tract of land being developed for 370 residential units and terminate the development agreement. The homebuilder exercised the option on July 3, 1997, and purchased the property for the sum of $8,591,956.
4. Leasing and option free arrangements (continued)
Major customers
Revenues derived from two lessees, Hovnanian Enterprises, Inc. and subsidiaries (Hovnanian) and Engle Homes, Inc. and subsidiaries (Engle), represent 87%, 86% and 100% of total lease and option fee revenue for the years ended June 30, 1998, June 30, 1997, and the period ended June 30, 1996, respectively. Summaries of operating results and net assets of Hovnanian and Engle follows:
Hovnanian Enterprises, Inc. and subsidiaries Results of Operations (In thousands) Six-months ended Year ended October 31, April 30, 1998 1997 1996 1995 ---------------- -------- -------- -------- Revenues $212,320 $784,136 $807,464 $777,745 Operating expenses $204,710 $796,260 $782,458 $756,091 Net income (loss) $ 5,013 $ (6,970) $ 17,287 $ 14,128 Total assets $624,906 $637,082 $614,111 $645,378 Total liabilities $435,098 $458,320 $420,489 $469,043 Total stockholders equity $189,808 $178,762 $193,622 $176,335
Engle Homes, Inc. and subsidiaries Results of Operations (In thousands) Six-months ended Year ended October 31, April 30, 1998 1997 1996 1995 ---------------- -------- -------- -------- Revenues $214,752 $425,295 $332,088 $244,528 Operating expenses $203,996 $403,396 $318,387 $234,992 Net income $ 5,805 $ 13,468 $ 8,495 $ 5,912 Total assets $405,749 $288,412 $284,789 $251,918 Total liabilities $252,457 $195,232 $203,297 $177,812 Total stockholders equity $153,292 $ 93,180 $ 81,492 $ 74,106
5. Mortgages payable
Mortgages payable consist of the following:
June 30, 1998 1997 ---------- ----------- Mortgage payable to a bank, bearing interest at prime $12,051,393 $ 9,649,109 plus 1/2% for Florida properties and prime plus 1% for non-Florida properties, with interest only payable monthly. The note is part of a revolving loan agreement with a limit of $15 million at June 30, 1998 and $13 million at June 30, 1997, which is payable on July 31, 1999. Upon renewal of the facility in July 1998, the interest rate was reduced to prime for Florida properties and prime plus 1/2% for non-Florida properties. The loan is secured by model homes purchased and by the related leases described in Note 4.
Mortgage payable to a New England financial 9,418,437 - institution, bearing interest from 8.7% to 8.8% payable in monthly installments totaling $94,497. The notes are part of a $10 million revolving loan agreement which is payable in September and October of 2000. The loan is secured by model homes purchased and by the related leases described in Note 4.
Mortgage payable to a bank, bearing interest at the 5,410,053 - banks prime rate plus 1% with interest only payable monthly. The note is part of an $8 million revolving loan agreement which is payable on January 31, 2000. The loan is secured by model homes purchased and by the related leases described in Note 4.
Mortgage payable to a bank in monthly installments of 1,498,865 2,156,062 $32,191, including interest at 9.25%, until maturity in April 1999. The loan is secured by model homes purchased and by the related leases described in Note 4.
Mortgage payable to a bank, bearing interest at 7.95% 976,908 - with interest only payable monthly. The note is part of a $1.2 million revolving loan agreement which is payable on March 26, 2000. The loan is secured by model homes purchased and by the related leases described in Note 4.
Mortgage payable to a bank in monthly installments of 731,458 - $10,100, including interest at 9.5%, until maturity in June 2000 when the remaining principal balance will be paid. The loan is secured by model homes purchased and by the related leases described in Note 4.
Mortgage payable to a bank in monthly installments of 243,071 416,499 $5,502, including interest at 9.25%, until maturity in January 2000. The loan is secured by model homes purchased and by the related leases described in Note 4.
Mortgage payable to a bank in monthly installments of 182,450 801,557 $5,063, plus interest at the LIBOR rate plus 2.85%, until maturity in June 1998. The loan is secured by model homes purchased and by the related leases described in Note 4. The Company is currently in the process of refinancing this mortgage payable. This loan was repaid in full in July 1998.
5. Mortgages payable (continued)
June 30, 1998 1997 ---------- ----------- Mortgage payable to a bank, bearing interest at prime - $ 6,875,000 plus 1% with interest only payable monthly. The loan balance is due October 1997. The loan is secured by real estate purchased and by a related opinion fee agreement described in Note 4. This loan was repaid in-full in July 1997.
Mortgage payable to a bank, bearing interest at 8.625% - 1,532,235 with interest only payable monthly. The loan balance is due May 1998. The loan is secured by model homes purchased and by the related leases described in Note 4. This loan was repaid in full in January 1998.
Mortgage payable to a bank, bearing interest at prime - 1,202,003 plus 1% with interest only payable monthly. The loan balance is due February 1998. The loan is secured by model homes purchased and by the related leases described in Note 4. This loan was repaid in full in January 1998. ----------- ----------- $30,512,635 $22,632,465 =========== ===========
At June 30, 1998, maturities of mortgages payable are as follows:
Year ending June 30, 1999 $ 2,087,560 Year ending June 30, 2000 19,682,972 Year ending June 30, 2001 8,742,103 ------------ $30,512,635 ============ 6. Stockholder loans payable
Stockholder loans payable arose from advances various stockholders made to the Company. The notes are payable on demand and accrue interest at 9%. Interest on stockholder notes payable totaled $103,252 for the year ended June 30, 1998, $33,815 for the year ended June 30, 1997, and $82,109 for the period November 2, 1995 through June 30, 1996. On June 30, 1996, the stockholder loans totaling $1,442,656 plus accrued interest of $103,265 were converted to 1,288,268 shares of the Company's common stock.
During the years ended June 30, 1998 and 1997, the Company issued a total of 2,101,094 and 1,026,000 warrants, respectively, to stockholders who had made loans to the Company. The warrants are exercisable at the fair value of the stock on the date the warrant was issued. The exercise price ranges from $0.12 to $0.47 per share. To date, none of the warrants have been exercised.
Under the terms of an indemnity agreement described in Note 10, during September and October 1996, $1,223,250 of stockholder loans were utilized to offset stockholder obligations which arose from sales of marketable securities.
7. Stockholders equity
Convertible preferred stock
On November 2, 1995, the Company issued 400,000 shares of its 6% participating non-cumulative preferred stock. Each share is convertible into one share of the Company's common stock commencing in December 1996. Dividends may be declared on the basis of a 50% participation in the rental revenue stream up to $60,000 per year. The preferred stock is redeemable at the option of the Company, on the basis of 105% within the first six-month period, 104% within the second six-month period, 103% within the third six-month period, 102% within the fourth six-month period, 101% within the fifth six-month period and 100% thereafter.
The Company paid regular quarterly distributions of $15,000 in February, May, and July 1996. Through June 30, 1996, $10,000 was accrued as a preferred distribution payable. All distributions paid and accrued have been made out of additional paid-in capital due to the lack of available retained earnings. No dividends have been declared or paid since July 1996, as a result of a dispute as to which of two unaffiliated parties were entitled to receive the dividends. During July 1998, the Company's Chairman acquired the preferred stock thereby ending the dispute.
Warrants
In conjunction with a loan agreement entered into by a former subsidiary, IECM (Notes 2 and 11) in December 1995, the Company issued 1,200,000 warrants which are convertible into 1,200,000 shares of the Company's common stock at $.001 per share. In August 1996, 700,000 warrants were exercised and the Company issued 700,000 shares of common stock.
Stock option plan
During August 1996, the Company established an Equity Incentive Plan (the Plan) to attract and retain key employees, to provide an incentive for them to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company. Under the terms of the plan, the Company may award Incentive Stock Options which are intended to qualify under Section 422A of the Internal Revenue Code.
During October 1996, the Company awarded a total of 450,000 stock options to purchase common stock at an option price of $.125 per share. During May 1997, 200,000 of the options previously awarded were canceled and the Company awarded a total of 725,000 additional options to purchase common stock at an option price of $0.25 per share. During December 1997, the Company awarded a total of 700,000 options to purchase common stock at an option price of $0.14 per share. All such options may be exercised during a four-year period commencing one year from the date of the option grant and terminating five years from date of issuance.
8. Income taxes
The Company has net operating losses available for carryforward to offset future years taxable income. The amounts and dates of expiration are as follows:
June 30, -------- 2008 $ 69,550 2009 68,450 2010 393,869 2011 263,033 2012 455,311 ------------ $1,250,213 ============
Deferred income taxes arise from temporary differences in reporting assets and liabilities for income tax and financial accounting purposes primarily resulting from net operating losses. The components of the deferred tax asset and the related tax effects of the temporary differences are as follows:
June 30, 1998 1997 -------- ------- Non-current deferred income tax asset arising from net operating loss carryforward $375,000 $77,000
Valuation allowance - - -------- ------- Net deferred income tax asset $375,000 $77,000 ======== =======
During the year ended June 30, 1997, the Company eliminated its deferred tax asset valuation allowance which stood at $46,000 as of June 30, 1996. Based on estimates of future revenues and profitability, management believes that the Company will utilize its net operating losses to offset future taxable income prior to their expiration date.
9. Supplemental cash flow information
The Company's non-cash investing and financing activities were as follows:
During the years ended June 30, 1998 and 1997, and for the period November 2, 1995 through June 30, 1996, the Company acquired model homes and real estate at a cost of $26,170,860, $23,104,728 and $11,835,986, respectively. Such purchases were financed as follows:
Year ended June 30, Period ended 1998 1997 June 30, 1996 ------------- -------------- ------------- Model homes acquired $26,170,860 $14,512,772 $11,835,986 Real estate acquired - 8,591,956 - Funds deposited into escrow by stockholders and affiliates - - (4,374,913) Bank borrowings (18,330,033) (18,662,184) (5,442,255) ------------- -------------- ------------- Expenditures for acquisition of model homes and real estate $ 7,840,827 $ 4,442,544 $ 2,018,818 ============= ============== =============
9. Supplemental cash flow information (continued)
In connection with the Company's initial capitalization, the Company issued common and preferred stock as follows:
Common stock issued $ 1,500,000 Preferred stock issued 1,000,000 Consideration received: Marketable securities received (1,500,000) Funds deposited into escrow in connection with acquisition of model homes (1,000,000) ------------- Proceeds from issuance of common and preferred stock $ - =============
During the period ended June 30, 1996, the Company completed a business combination in which it acquired all of the capital stock of JJFN Holdings, Inc. in exchange for 4,084,990 shares of the Company's common stock as follows:
Cash acquired $ 1,044,480 Fair value of non-cash assets acquired 3,468,990 Liabilities assumed (749,089) ------------- Common stock and additional paid-in capital issued in business combination $ 3,764,381 =============
During the period ended June 30, 1996, the Company converted the $164,814 balance of a line of credit to 330,000 shares of the Company's common stock. In addition, $1,545,921 of stockholder loans and accrued interest were converted to 1,288,268 shares of the Company's common stock.
On June 30, 1998, at the request of one law firm, the Company issued 200,000 shares of stock in payment of $50,703 of fees owed to that firm. On June 30, 1997, at the request of three different law firms, the Company issued 152,000 shares of stock in payment of an aggregate of $77,966 of fees owed to those firms.
In connection with the divestiture described in Note 11, the Company sold $1,027,624 in net assets of the divested segment in exchange for a note receivable in the amount of $1,312,500.
As a result of an indemnity agreement entered into with a significant shareholder (Note 10) the Company satisfied losses on sales of marketable securities in September and October 1996, by off-setting $1,223,250 of stockholder loans.
Interest paid totaled $2,112,778, $1,496,206 and $249,940 during the years ended June 30, 1998 and 1997, and for the period ended June 30, 1996, respectively.
At June 30, 1996, net assets realizable in divestiture includes $195,668 of cash which has been excluded from the cash balances reflected in the balance sheet and in the statement of cash flows.
10. Commitments and contingencies
Line of credit
From the date of the business combination described in Note 2 (May 15, 1996) through June 30, 1996, the Company had a $250,000 credit line with Damill Capital Corp. (Damill), a corporation which is owned by a principal stockholder of the Company. The line of credit accrued interest at the rate of 16% per annum on the outstanding portion of principal and loan origination fee of 7.5% of the committed amount. Interest is payable on a monthly basis. The line of credit was secured by all assets of Holdings, including stock in any subsidiaries.
On June 30, 1996, Damill exercised its right to convert the loan plus unpaid interest and origination fees into common stock at a conversion price of $.50 per share. A total of 330,000 shares were issued in full satisfaction of the line of credit thereby terminating the credit facility.
Lease agreement
The Company leases its office space under an operating lease for a five-year term ending in January 2002. Rent expense for the years ended June 30, 1998 and 1997, and for the period November 2, 1995 through June 30, 1996 was $71,389, $42,968 and $7,979, respectively. The following is a schedule of future minimum lease payments:
Year ending June 30, 1999 $ 67,795 Year ending June 30, 2000 69,278 Year ending June 30, 2001 70,761 Year ending June 30, 2002 41,782 ---------- $249,616 ==========
Consulting and employment agreements
Effective June 1996, the Company entered into a ten-year consulting agreement with a principal stockholder. The agreement specifies that the consultant shall receive annual compensation of $180,000 with 10% annual increases during the second through tenth years. In addition, the consultant is entitled to certain benefits and participation in any Company bonus or retirement plan.
Effective July 29, 1997, the Board of Directors elected the shareholder to the position of Chairman of the Board. The consulting agreement was terminated and the Company entered into an employment agreement with the shareholder on substantially the same terms of the consulting agreement. Effective January 1, 1998, the employment agreement provides for annual compensation of $225,000.
Effective January 1, 1998, the Company entered into a five-year employment agreement with its Vice President. The agreement specifies that the Vice President shall receive annual compensation of $91,000 with 10% annual increases during the second through fifth years.
10. Commitments and contingencies (continued)
Real estate purchase agreement
The Company has executed a letter of intent with a major publicly-traded homebuilder and real estate developer to acquire 4-5 tracts of land having a fully-developed cost of approximately $103,000,000, of which the maximum cost outstanding at any point in time is anticipated to be $75,000,000 to $85,000,000. The agreement provides for a parcel takedown schedule of finished lots at minimum dollar amounts over a period not to exceed 36 months. The Company intends to seek an increase in the letter of intent to approximately $200,000,000 in net fully-developed costs. The closing is subject to completion of due diligence, securing a financing commitment and formal documentation among other events.
The Company has committed to purchase land and provide development funding of approximately $10,000,000 for a major publicly traded homebuilder. The closing is subject to completion of due diligence, receipt of satisfactory appraisals, formal documentation, and successful completion of financing. The Company has received a verbal commitment from an existing lending institution to provide financing for this transaction.
Model home purchase commitments
At June 30, 1998, the Company was in the process of negotiating two agreements with existing homebuilder clients to acquire additional model homes. One agreement involves the acquisition of 26 model homes in New Jersey and New York at a cost of approximately $8.5 million. The other agreement involves the acquisition of 54 model homes in Colorado, Georgia, Florida, Arizona, Virginia and Texas, at a cost of approximately $10.7 million. During July 1998, closings took place on 23 of the above model homes at an aggregate cost of approximately $7.6 million.
Qualified retirement plan
During the year ended June 30, 1997, the Company adopted the provisions of a savings incentive match plan for employees (SIMPLE) which covers substantially all employees of the Company. The SIMPLE is a qualified plan under the provisions of The Internal Revenue Code which permits employees to make elective contributions to a retirement plan on a pre-tax basis. The Company makes a matching contribution which totaled $6,159 and $3,180 for the years ended June 30, 1998 and 1997, respectively.
Legal proceedings
During 1997, the Company commenced a legal proceeding against Susan Schlapkohl, the Company's former President, for a violation of her restrictive covenant with the Company. In her answer to the Company's Complaint and Motion for Preliminary injunction, Ms. Schlapkohl asserted certain counterclaims. On August 6, 1998, the Company settled the litigation by entering into a stipulation of settlement. Pursuant to the stipulation of settlement, Ms. Schlapkohl, her affiliates and her husband, agreed not to compete with the Company. In addition, Ms. Schlapkohl agreed to sell for $171,000, the 1,000,000 shares of JJFN common stock owned by her, to the Company's Chairman (or his designees) from whom she originally acquired the shares. The parties also exchanged mutual general releases.
The Company is not aware of any other legal proceedings pending or threatened to which the Company is a party or to which any property of the Company is subject.
10. Commitments and contingencies (continued)
Indemnity agreement
During July 1996, the Company entered into an indemnity agreement with a significant shareholder, which induced JJFN not to sell its shares of Antares Resources Corporation (Antares), a publicly-held company whose stock was traded on the NASDAQ Small-Cap Stock Market. The company's investment, represented approximately 3% of the outstanding common stock of Antares. The shareholder agreed that if JJFN, in the future, sold any shares at a price less than the market value of the shares at their date of acquisition ($2.50 per share), the shareholder would contribute additional shares of Antares common stock, or other property, having a fair market value equal to such difference.
During September 1996, JJFN sold 485,000 shares of Antares, which were acquired at a cost of $1,212,500, for $218,250, and in October 1996 sold 100,000 shares of Antares, which were acquired at a cost of $250,000, for $21,000. Since the shareholder agreed to indemnify JJFN if the marketable securities were sold at less than cost, no loss was recorded on the sale. The deficiency of $1,223,250 was satisfied by offsetting $1,223,250 of loans due to the shareholder.
Model home sale contracts
As of June 30, 1998, the Company had sales contracts pending on 32 model homes at an aggregate sales price of $6,832,489. The model homes were acquired at an aggregate cost of $6,640,663.
Financing activities
At June 30, 1998, the Company had approximately $6.3 million of unused credit facilities available under existing revolving loan agreements which may be utilized to acquire real estate in accordance with the terms of those agreements. Such credit facilities expire July 1998 through October 2000.
The Company and one of its lenders have mutually agreed to increase an existing $10 million credit facility to $45 million. Participants are required for the full line amount to be funded, which the lender is currently working on obtaining. The Company has also received verbal commitments from three other existing lending institutions to provide additional loans totaling $26.5 million
As a part of its ongoing business, the Company is in constant discussion with financial institutions for credit facilities, as well as private or public placements of its debt or equity securities. An offering or private placement of senior notes with warrants, convertible preferred stock or similar type of security is currently being evaluated.
10. Commitments and contingencies (continued)
Surety / insurance activities
The Company has received a commitment from a "AAA" rated major domestic based insurer to issue two lease bonds totaling $60,000,000. The Company intends to utilize this commitment for model homes previously acquired or to be acquired. The Lease Bond insures the timely payment by the lessee of the lease payments. In the event of default by the lessee, the surety has an obligation to continue to make the lease payments. The Company negotiates the premium for the surety bonds on a case by case basis.
The Company has received a commitment from a "AA" rated U.S. subsidiary of a major international insurer to issue a Lease Bond in the amount of $132,000,000 in conjunction with the pending acquisition of model homes from a major U.S. homebuilder. The Lease Bond insures the timely payment by the lessee of the lease payments. In the event of default by the lessee, the surety has an obligation to continue to make the lease payments. The Company negotiates the premium for the surety bonds on a case by case basis.
The Company has received a commitment from a "A" rated major domestic based insurer to issue a Lease Bond in the amount of $20,000,000. The Lease Bond insures the timely payment by the lessee of the lease payments. In the event of default by the lessee, the surety has an obligation to continue to make the lease payments. The Company negotiates the premium for the surety bonds on a case by case basis.
The intent of these types of arrangements is to reduce cost of funds and thereby increase profitability. The agreements are subject to the following conditions: (i) satisfactory completion of due diligence regarding the assets to be acquired, (ii) the execution of bank or institutional financing, and (iii) agreement to final wording of all related legal documentation.
11. Divested operations
Effective October 1, 1996, the Company disposed of its construction subsidiary, Iron Eagle Contracting and Mechanical, Inc. (IECM). The results of IECM have been reported separately as a divestiture in the consolidated statements of operations.
11. Divested operations (continued)
Assets and liabilities of IECM which were divested consist of the following:
September 30, 1996 June 30, 1996 ------------------ --------------- Cash $ 56,641 $ 195,668 Contract receivables 601,976 319,500 Land and development costs 556,826 388,980 Furniture and equipment 276,953 282,570 Intangibles and other assets 339,038 355,505 ------------------ --------------- Total assets 1,831,434 1,542,223 Liabilities (803,809) (710,155) ------------------ --------------- Net assets of divested segment $1,027,624 $ 832,068 ================== ===============
The following table summarizes selected financial data of the Company's divested operation.
May 15, 1996 (date of acquisition) Three months ended through September 30, 1996 June 30, 1996 ------------------ --------------------- Revenues $ 596,730 $ 190,000 Expenses 651,174 212,558 ------- ------- Loss from divested operations $ (54,444) $ (22,558) ======= =======
Such amounts have not been included in operating revenues or expenses in the accompanying consolidated statements of operations.
Under the terms of the agreement, the Company sold the net assets of IECM for a note in the amount of $1,312,500 thereby realizing a gain on divestiture of $284,876. The note bears interest at the prime rate plus 1%. Interest is payable in monthly installments. The note is secured by all assets of its parent company, Monarch Investment Properties, Inc. (Monarch) which was formerly known as Iron Holdings Corp. and which became a publicly-traded company in March 1997, by all of the issued and outstanding shares of IECM and by 30,000 post-split shares of common stock of Monarch.
Principal was originally payable in five equal annual installments commencing January 1998. During July 1998, the Company renegotiated the terms of the remaining $1,100,000 balance of the note in conjunction with a planned offering of Monarch equity. Monarch has received a commitment to purchase 1 million of its post-reverse split common shares at $0.25 per share. Monarch also plans a shelf registration to raise approximately $2 million. Under the revised terms of the note agreement, JJFN would receive 25% of the net proceeds from the private placement and public offering of Monarch equities. In addition, Monarch would be required to pay interest monthly and to make a quarterly principal payment of $25,000. JJFN would also receive 1.1 million warrants to acquire monarch common stock. Such warrants would be exercisable at $.001 for a seven-year period.
EXHIBIT 11.1
JJFN Services, Inc. and Subsidiaries Computation of Per Share Earnings
Exhibit 11
Year Year Ended Ended June 30 June 30 1998 1997 ------------ -----------
Primary
Income (loss) from Continuing operations $ (157,311) $ (272,974) Discontinued operations - 230,432 ------------ ----------- Net loss applicable to common stock $ (157,311) $ (42,542) ============ =========== Weighted average number of common 16,911,168 16,551,091 shares outstanding
Income(loss) per common share Continuing operations $ (0.01) $ (0.01) Discontinued operations - 0.01 ------------ --------- Net loss $ (0.01) $ 0.00 ============ =========
Primary loss per common share does not include the effect of common stock equivalents because the effect of such inclusion would be to reduce loss per common share.
EXHIBIT 12.1: For the annual report of Form 10K for the year ended June 30, 1998
Schedule identifying documents omitted.
1. Loan and Security Agreement dated March 26, 1998 between JJFN Services, Inc. as borrower and North East Financial Institution as lender.
2. Loan and Security Agreement dated March 31, 1998 between Model Funding I, LLC as borrower and New England Financial Institution as lender dated March 31, 1998 and JJFN services, Inc. as Guarantor.
3. Loan and Security Agreement dated December 31, 1997 between JJFN Services, Inc. as borrower and Midwestern Financial Institution as lender.
4. Loan and Security Agreement dated July 30, 1997 between JJFN Services, Inc. as borrower and Western Financial Institution as lender.
There are no material differences in the new Loan and Security Agreements.
EXHIBIT 21.1 List of Registrants' subsidiaries
List of Subsidiaries
Name State of Incorporation - ------------------- ---------------------- JJFN Holdings, Inc. Delaware Model Funding I, LLC Delaware