<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
Transitional Small Business Disclosure Format (check one):
Yes........No....X...
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 0-17771
-----------
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 75-2243266
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices, including zip code, and telephone
number, including area code)
Common Stock, $0.01 par value.
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING PRECEDING
FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as latest practicable date:
5,367,871 at August 10, 1995
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
JUNE 30, 1995
C O N T E N T S
---------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1995 (unaudited) and
December 31, 1994 2
Consolidated Statements of Operations (unaudited) for the
three months ended June 30, 1995 and 1994 3
and for the six months ended June 30, 1995 and 1994
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1995 and 1994 4
Consolidated Statements of Stockholders' Equity 5
Financial Footnotes 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
PART II. OTHER INFORMATION
SIGNATURES 14
</TABLE>
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
30-Jun-95 31-Dec-94
ASSETS (unaudited) (audited)
<S> <C> <C>
Cash $ 927,435 $ 681,234
Restricted Cash 477,111 382,394
Notes Receivable:
Principal amount 94,660,133 81,914,930
Joint venture participations (496,062) (492,086)
Purchase discount (22,279,011) (26,421,274)
Allowance for loan losses (19,464,847) (12,267,546)
------------ -----------
52,420,213 42,734,024
Accrued Interest Receivable 1,279,799 932,450
Inventory, homes 2,991,246 -
Inventory, automobiles 260,373 390,498
Litigation Proceeds Receivable 574,000 654,029
Due From Affiliate 1,776 -
Deferred Tax Asset 252,948 278,978
Other Assets 1,710,570 855,854
Building, Furniture & Fixtures, net 408,896 385,341
Loan Commitment Fees and Other, net 1,631,354 1,530,463
------------ -----------
$62,935,721 $48,825,265
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 1,512,201 $ 781,682
Notes payable 52,396,039 39,186,371
Convertible subordinated debentures 460,700 526,600
Subordinated debentures 725,000 575,000
Notes payable, affiliates - 469,417
Due to affiliates - 232,075
Income tax payable 24,689 163,336
Deferred income tax credits 1,254,075 1,337,590
Lines of credit 1,229,438 -
-------------- ------------
Total liabilities 57,602,142 43,272,071
Minority Interest in Consolidated
Partnerships 2,246,626 2,570,745
Redeemable Common Stock - 487,000
Commitments and Contingencies
Stockholder's Equity:
Common Stock, $.01 par value, 25,000,000
shares authorized, 5,247,871 shares issued and
outstanding in 1995 and 1994 respectively 52,479 52,479
Additional paid-in Capital 6,325,941 5,838,941
Retained Earnings (deficit) (3,291,467) (3,395,971)
------------ ------------
3,086,953 2,495,449
------------ ------------
$62,935,721 $48,825,265
============ ============
</TABLE>
2
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
PERIOD ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
30-Jun-95 30-Jun-94 30-Jun-95 30-Jun-94
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Interest Income $1,602,412 $ 858,538 $3,413,328 $1,545,687
Purchase Discount Earned 1,128,004 604,193 1,974,429 921,940
Oil & Gas 55,784 118,389 57,158 228,222
Gain (Loss) on liquidation of
partnership interests 1,047 -- (16,468) 45,302
Gain (Loss) on sale of portfolios 40,698 -- 12,826 --
Other Income 14,136 28,578 35,036 (18,309)
--------- ---------- ---------- ----------
2,842,081 1,609,698 5,476,309 2,722,842
---------- ---------- ---------- ----------
Operating expenses:
Oil & Gas 13,939 60,731 13,968 130,154
Depreciation, depletion and
amortization 184,751 171,101 335,581 249,812
Collection, general and administrative 848,725 488,918 1,497,647 961,419
Provision for loan losses 165,139 111,956 582,349 164,918
Interest Expense 1,330,611 449,386 2,509,588 785,453
Service Fees 193,032 -- 333,523 --
Merger expenses 39,097 -- 74,885 --
---------- ---------- ---------- ----------
2,775,294 1,282,092 5,347,541 2,291,756
---------- ---------- ---------- ----------
Operating income (loss) 66,787 327,606 128,768 431,086
Litigation proceeds -- -- -- --
---------- ---------- ---------- ----------
66,787 327,606 128,768 431,086
---------- ---------- ---------- ----------
Provision for income taxes 36,797 167,776 44,357 214,342
---------- ---------- ---------- ----------
29,989 159,830 84,410 216,744
Minority interest in net income of
consolidated partnerships 65,055 33,022 20,093 45,232
---------- ---------- ---------- ----------
Net income $ 95,045 $ 192,852 $ 104,504 $ 261,976
========== ========== ========== ==========
Earnings per common share:
Income before Minority interest
in net income of consoldiated
partnerships $ 0.01 $ 0.03 $ 0.02 $ 0.04
Minority interest in net income
of consolidated partnerships 0.01 0.01 0.00 0.01
---------- ---------- ---------- ----------
Net income $ 0.02 $ 0.03 $ 0.02 $ 0.05
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding 5,247,871 5,805,784 5,247,871 5,805,784
========== ========== ========== ==========
</TABLE>
3
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
(unaudited) (unaudited)
6/30/95 6/30/94
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 104,504 $ 261,976
Adjustments to reconcile net income to net
cash used in operating activities:
Gain on restructuring of debt - -
(Gain) loss on sale of oil and gas interests - -
Depreciation, depletion, amortization and valuation
provisions 335,581 249,812
Minority interests in net income of affiliates (20,093) (45,232)
(Gain) loss on sale of portfolios 16,468 (45,302)
Purchase discount earned (1,974,429) (921,940)
Provision for loan losses 582,349 164,918
Deferred tax provision (benefit) (57,485) -
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (353,648) (290,264)
Accounts receivable (2,767,220) 138,268
Other assets (883,814) (81,660)
Increase (decrease) in:
Accounts payable and accrued expenses 433,634 124,431
Due to affiliates (308,655) 142,434
Income tax payable - -
----------- -----------
Net cash used in operating activities (4,892,808) (302,559)
Cash Flows From Investing Activities
Purchase of property and equipments (40,637) (1,871)
Proceeds from sale of properties - -
Purchase of notes receivable (16,510,014) (8,830,000)
Principal collections on notes receivable 8,245,666 3,786,676
Joint venture participation (28,938) (54,854)
Acquisition fees paid (423,781) (1,463,077)
Increase in restricted cash (94,717) (148,688)
----------- -----------
Net cash used in investing activities (8,852,421) (6,711,814)
Cash Flows from Financing Activities
Distributions to minority interests (317,536) (879,106)
Contributions from minority interests - 1,239,500
Capital coantributions 835 -
Proceeds from debenture notes 150,000 -
Proceeds from long-term debt 18,522,218 10,230,829
Principal payments of long-term debt (4,364,087) (3,527,903)
Principal payments on prepitition debt authorized by
bankruptcy court - -
----------- -----------
Net cash provided by financing activities 13,991,430 7,063,320
----------- -----------
Net increase (decrease) in cash 246,201 48,947
Cash:
Beginning 681,234 675,477
----------- -----------
Ending $ 927,435 $ 724,424
=========== ===========
</TABLE>
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained
----------------------- Paid-In Earnings
Shares Amount Capital (Deficit)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 5,247,871 52,479 5,838,941 (3,395,971)
Conversion of subordinated
debentures 487,000
Net income 104,504
--------------------------------------------------------
Balance, June 30, 1995 5,247,871 $52,479 $6,325,941 $(3,291,467)
========================================================
</TABLE>
5
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: On December 30, 1994, all shares of Franklin Credit
-------------------
Management Corporation ("Franklin") were exchanged for shares of Miramar
Resources, Inc ("Miramar"). The newly formed entity was renamed Franklin Credit
Management Corporation ("Registrant"). Registrant, incorporated under the laws
of the State of Delaware, acquires loans and promissory notes from mortgage and
finance companies as well as from the Resolution Trust Corporation (RTC) and/or
Federal Deposit Insurance Corporation (FDIC). Registrant purchases these loans
directly and through certain affiliated limited partnerships and wholly owned
subsidiaries. In addition, certain stockholders of the Company have limited
partnership interests in these partnerships. Recurring operating income and
identifiable assets attributable to these operations each constitutes more than
90% of the related combined totals for all of Registrant's operations.
Registrant follows accounting principles similar to those of a consumer finance
company.
During 1994, Miramar held interests in certain gas and oil wells located in
Colorado, Kansas and Oklahoma. These interests were sold in December 1994 at
the time of the merger. The proceeds of the sale were utilized in the ongoing
business of the Registrant.
A summary of Registrant's significant accounting policies follows:
Basis of consolidation: The consolidated financial statements include the
-----------------------
accounts of Registrant, its wholly-owned subsidiaries, Rockwell Drilling Co.,
Harrison Financial Corporation, Harrison First Corporation and all limited
partnerships controlled by Franklin as General Partner. By terms outlined in
the various partnership agreements, Franklin is specifically afforded full power
and authority on behalf of the partnerships to manage, control, administer and
operate the business and affairs of the partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.
These consolidated financial statements include the following entities:
Rockwell Drilling Co.
Franklin Credit Management Corporation (FCMC)
Franklin Credit Recovery Fund, L.P. (Fund I)
Franklin Credit Recovery Fund II, L.P. (Fund II)
Franklin Credit Recovery Fund III, L.P. (Fund III)
Franklin Credit Recovery Fund IV, L.P. (Fund IV)
Franklin Credit Recovery Fund V, L.P. (Fund V)
Franklin Credit Recovery Fund VI, L.P. (Fund VI)
Franklin Credit Recovery Fund VII, L.P. (Fund VII)
Franklin Credit Recovery Fund VIII, L.P. (Fund VIII)
Franklin Credit Recovery Fund IX, L.P. (Fund IX)
Franklin Credit Recovery Fund X, L.P. (Fund X)
Franklin Credit Recovery Fund XI, L.P. (Fund XI)
Franklin Credit Recovery Fund XII, L.P. (Fund XII)
Franklin Credit Recovery Fund XIII, L.P. (Fund XIII)
Franklin Credit Recovery Fund XIV, L.P. (Fund XIV)
Franklin Credit Recovery Fund XVI, L.P. (Fund XVI)
Franklin Credit Recovery Fund XVII, L.P. (Fund XVII)
Franklin Credit Recovery Fund XVIII, L.P. (Fund XVIII)
Franklin Credit Recovery Fund XIX, L.P. (Fund XIX)
Franklin Credit Recovery Fund XX, L.P. (Fund XX)
Franklin Credit Recovery Fund XXI, L.P. (Fund XXI)
Franklin Credit Recovery Fund XXII, L.P. (Fund XXII)
Franklin Credit Recovery Fund XXIII, L.P. (Fund XXIII)
Harrison Financial Corporation (Harrison Financial)
Harrison First Corporation (Harrison 1st)
6
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Cash: For purposes of reporting cash flows, Registrant includes all cash
-----
accounts (excluding restricted cash) and money market accounts held at financial
institutions.
Loans and income recognition: The loan portfolio consists primarily of secured
consumer oriented loans purchased from the RTC and FDIC as well as from finance
and mortgage companies which are usually purchased at a substantial discount.
Loans are stated at the amount of unpaid principal, reduced by purchase discount
and an allowance for loan loss. In general, interest on the loans is calculated
by using the simple-interest method on daily balances of what is deemed the
collectible principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes, after
considering current and possible future collection efforts, as well as the
borrowers' financial condition that collection of interest is doubtful.
Purchase discount is amortized to income using the interest method. The
interest method recognizes income based on the projected cash flows from loans
using a constant effective yield on the net investment in the loans. Discounts
are amortized if the projected payments are probable of collection and the
timing of such collections is reasonably estimable. Changes in the projected
payments are accounted for as a change in estimate and prospectively adjust the
periodic amortization of remaining discount over the remaining life of the
loans. Should projected payments not exceed the carrying value of the loan, the
periodic amortization is suspended and either the loan is written down or an
allowance for uncollectibility is recognized.
Allowance for loan losses: The allowance for loan losses is initially
--------------------------
established by an allocation of the acquisition discount. Subsequently,
increases to the allowance are made through a provision for loan losses charged
to expense. Loans are charged against the allowance when management believes
that the principal is uncollectible. Franklin's charge-off policy is based upon
a loan-by-loan review for all portfolios.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibilty of the loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay.
Building, property and equipment: Building, property and equipment are recorded
---------------------------------
at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets.
Loan commitment fees: Loan commitment fees represent loan origination fees
---------------------
incurred by the Company in connection with obtaining financing and are amortized
based on the principal reduction of the related loans.
Oil and gas properties: Miramar followed the full cost method of accounting as
-----------------------
defined by the Securities and Exchange Commission, whereby all costs incurred in
connection with the acquisition, exploration and development of oil and gas
properties were capitalized. These costs were amortized using the unit-of-
production method. Miramar's depreciation, depletion, amortization and
valuation provision rate per barrel of oil produced during 1994 was $2.93.
During 1994, the Company sold its interest in all wells and realized a gain of
approximately $57,000 on the transaction.
Deferred income taxes: Deferred taxes are provided using the liability method
----------------------
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax purposes and financial reporting purposes. Deferred tax assets are reduced
by a valuation allowance when management determines that it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
7
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Earnings per common share: Earnings per share are computed based on the
--------------------------
weighted average number of common shares outstanding during the period and
includes the effect of redeemable common stock and outstanding warrants.
Unexercised options under the conversion feature of the debenture are deemed not
to be common stock equivalents. Earnings per common share has been restated for
the effects of the merger.
Emerging accounting standards: The Financial Accounting Standards Board (FASB)
-----------------------------
has issued SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
-----------------------------------------------------
which requires disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to
estimate that value. SFAS No. 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. This statement
is effective for the Registrant's year ending December 31, 1995, to which the
Registrant anticipates no material effect.
The FASB has issued Statement No. 114, Accounting by Creditors for Impairment of
-----------------------------------------
a Loan. SFAS No. 114 requires that impaired loans that are within the scope of
------
the Statement be measured based on the present value of expected future cash
flows discounted at the loans' effective interest rate or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral. A loan is impaired when it is probable the creditor will be unable
to collect all contractual principal and interest payment due in accordance with
the terms of the loan agreement. This Statement is effective for Registrant's
year ending December 31, 1995. Registrant has not addressed the potential
future impact of the application of the Statement.
The FASB issued SFAS No. 118, Accounting by Creditors for Impairment of a Loan-
------------------------------------------------
Income Recognition and Disclosure which amends SFAS No. 114, to allow a creditor
---------------------------------
to use existing methods for recognizing interest income on an impaired loan by
eliminating the provisions in SFAS 114 that described how a creditor should
report income on an impaired loan. It also amends the disclosure requirements
in SFAS No. 114 to require information about the recorded investment in certain
impaired loans and how a creditor recognizes interest income related to those
loans. This Statement is effective concurrent with the effective date of SFAS
No. 114.
Accounting Change and Income Tax Matters: Prior to the Merger, Franklin, with
----------------------------------------
the consent of their stockholders, elected to be taxed under sections of the
federal and Virginia income tax laws (S Corporation status), which provide that,
in lieu of corporation income taxes, the stockholders separately account for
their pro rata shares of Franklin's items of income, deductions, losses and
credits. On July 1, 1994 Franklin terminated its election to be treated as an S
Corporation.
As a result of the July 1, 1994 termination, Franklin recorded a net deferred
tax liability of approximately $736,000, for the period of inception through
July 1, 1994, by a charge to income tax expense for temporary differences
between the financial reporting and the income tax basis of discounts,
allowances, receivables, and other assets.
Effective January 1, 1993 Franklin adopted FASB Statement No. 109, Accounting
----------
for income Taxes. The adoption of Statement No. 109 changed Franklin's method
----------------
of accounting for accounting for income taxes from the deferred method to the
liability method. Under the deferred method, Franklin deferred the past tax
effects of timing differences between financial reporting and taxable income.
The liability method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the reported amounts of assets and liabilities and their tax basis.
8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE MONTHS ENDED JUNE 30, 1995 COMPARED TO THREE MONTHS ENDED JUNE 30, 1994
The Registrant is in the business of acquiring performing and non-
performing consumer loan portfolios from various financial institutions. In
late 1994, the Registrant acquired two consumer loan portfolios with an
aggregate principal balance of approximately $43,000,000. In May 1995 the
Registrant acquired two additional consumer loan portfolios totaling
approximately $25,000,000. These portfolios were acquired through term debt
facilities from financial institutions (the "Senior Debt") of approximately
$24,000,000 and $16,509,000, respectively.
The Registrant believes these acquisitions will result in substantial
increases in interest income and purchase discount income for future periods.
Historically however, during the initial period following acquisitions, the
Registrant incurs significant costs as these portfolios are incorporated into
the Company's proprietary loan tracking system and contact with the borrowers
begins to produce monthly cash flows that will be utilized to service the Senior
Debt. Accordingly, during the three months ended June 30, 1995, Registrant
recognized net income of $95,045, a decline of 51% when compared to net income
of $192,852 for the same period in 1994. This decrease can be greatly
attributed to an $881,225 or 196% increase in interest expense from $449,386 at
June 30, 1994 to $1,330,611 at June 30, 1995 reflective of the additional Senior
Debt associated with these portfolios.
On May 9, 1995 Franklin completed the purchase of a non-performing consumer
loan portfolio acquired on April 13, 1995 with a principal balance of $2,438,416
for an acquisition cost of $1,238,500. The portfolio was secured by
condominiums and co-op apartments in the New York Metropolitan Area.
On May 10 and May 11, 1995 Franklin was the successful bidder on 355
predominately performing consumer loans with an aggregate principal balance of
$22,769,747 for the acquisition cost of $15,270,000 at the RTC's National Loan
Auction VII. These loans are primary secured by first mortgages, located on a
nationwide basis. The closing occurred on May 25, 1995.
In addition, during the second quarter of 1995, Registrant is attempting to
return, pursuant to its purchase agreement with the RTC, $4,213,480 of notes
receivable previously acquired from the RTC during 1994. Registrant has
recorded, in other assets, approximately $1,518,222 which represents the
purchase price of these acquired loans. If successful, the purchase price of
these loans will be reimbursed to Registrant by the RTC without earning any
interest, while Registrant incurs interest expense with respect to the Senior
Debt used to acquire these loans. Management believes that the failure of the
RTC to reimburse the registrant will not have a material effect upon the
operations of the Company, due to the fact that the impact would be reflected as
a reduction in the overall purchase discount to be earned over the life of the
portfolios.
Registrant recognizes interest income on Notes Receivable based upon three
factors; (i) interest upon performing notes, (ii) interest received with
payments upon non-performing notes and (iii) the balance of settlements in
excess of principal repayments. Revenues from interest income on Notes
Receivable increased $743,874, or 87%, from $858,538 in the three months ended
June 30, 1994 to $1,602,412 for the same period in 1995. The increase in
interest income was principally due to a 139% increase in net Notes Receivable
from $21,888,015 at June 30, 1994 to $52,420,213 at June 30, 1995.
Purchase discount income increased $523,811 or 87%, from $604,193 in the
three months ended June 30, 1994 to $1,128,004 for the same period in 1995. The
increase in Purchase Discount income reflects both an increased volume of Notes
Receivable and improved collection performance of certain Notes Receivable in
existing portfolios.
Revenues related to oil and gas sales declined $62,605 or 53% from $118,389
in three months ended June 30, 1994 to $55,784 for the same period in 1995. The
sale on December 30, 1994, of the oil and gas interests accounts for the wide
variances related to all oil and gas related income and expenses. The revenue
reflected in the second quarter of 1995, relates to a joint venture interest,
which was not sold on December 30, 1994. Oil and gas operating expenses
decreased $46,792 or 77% from $60,731 in the three months ended June 30, 1994 to
$13,939 for the same period in 1995.
The Registrant had a $49,249,694 or 108% increase in gross Notes Receivable
from $45,410,439 at June 30, 1994 to $94,660,133 at June 30, 1995. In view of
this significant increase in Notes Receivable, the collection, general and
administrative expenses increased $359,807 or 74% from $488,918 for the three
months ending June 30, 1994 to $848,725 for the same period in 1995. The
majority of this increase, $177,841 or 49%, can be attributed to additional
personnel required to service the Notes Receivable.
9
<PAGE>
Personnel expenses increased $177,841 or 99% from $179,600 for the three months
ended June 30, 1994 to $357,441 for the same period in 1995. All other
collection expenses increased $181,966, reflecting the costs associated with the
significant increase in Notes Receivable.
It is managements belief that additional staffing requirements and
productivity gains incurred in the later part of 1994 have resulted in excess
servicing capacity for future acquisitions. The Registrant had acquired two
additional loan portfolios totaling approximately $25 million in May 1995, with
no additional personnel increases. It is Managements opinion that an additional
$50 million in portfolio acquisitions can be accomplished without further
staffing adjustments.
Bad debt expense increased $53,183 or 48% from $111,956 for the three
months ended June 30, 1994 to $165,139 for the same period in 1995. The
increase in bad debt expense was primarily due to charge offs for several loans
who's borrowers filed for bankruptcy.
Interest expense increased $881,225 or 196%, from $449,386 in the three
months ended June 30, 1994 to $1,330,611 for the same period in 1995. The
increase was principally due to an increase in notes payable of $33,763,148 or
181%, from $18,632,892 at June 30, 1994 to $52,396,040 at June 30, 1995,
reflecting additional funds borrowed to acquire Loan Portfolios and an increase
in the interest rate charged on borrowed funds. The notes payable accrue
interest at variable rates based upon the prime rate.
Service fees increased $193,032 or 100% due to no corresponding expense in
1994. Registrant incurred the service fees under agreements with a Senior Debt
Lender with respect to two of the Limited Partnerships formed in the later part
of 1994.
Merger related expenses increased $39,097 or 100% due to no corresponding
expense in 1994. The Merger was consummated on December 30, 1994 and had no
related expenses incurred during the three months ended June 30, 1994. The fees
incurred during 1995 related to expenses incurred in connection with the
issuance of new stock certificates for Registrants Common Stock in connection
with the Merger.
Income before taxes and minority interest decreased 80% from $327,606 in
the three months ended June 30, 1994 to $66,787 for the same period in 1995.
Net income decreased 51% from a $192,852 for the three months ended June 30,
1994 to $95,045 for the same period in 1995.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
As reflected in the three month analysis, Registrant had acquired four loan
portfolios with an aggregate principal balance of approximately $68,000,000 in
late 1994 and May 1995. These acquisitions were funded through Senior Debt
provided to the Registrant in the aggregate amount of approximately $40,509,000.
The Registrant incurs significant costs while these portfolios are incorporated
into the Company's proprietary loan tracking system. Interest expense,
primarily as a result of the Senior Debt associated with these new portfolios
increased $1,724,135 or 220% from $785,453 for the six months ended June 30,
1994 to $2,509,588 for the same period in 1995. Accordingly, Registrant
recognized a decline in net income of 60% from a $261,976 net income for the six
months ending June 30, 1994 to a net income of $104,504 for the same period in
1995. Management believes however that the recently acquired loan portfolios
will significantly increase income and purchase discount income in future
periods.
Revenues from interest income on Notes Receivable increased $1,867,641 or
121%, from $1,545,687 in the six months ended June 30, 1994 to $3,413,328 for
the same period in 1995. The increase in interest income was principally due to
the increase in Notes Receivable as noted above.
Purchase discount income increased $1,052,489 or 114%, from $921,940 in the
six months ended June 30, 1994 to $1,974,429 for the same period in 1995. The
increase in Purchase Discount income reflects both an increased volume of Notes
Receivable and improved collection performance of certain Notes Receivable in
existing portfolios.
10
<PAGE>
Revenues related to oil and gas sales declined $171,064 or 75% from
$228,222 in six months ended June 30, 1994 to $57,158 for the same period in
1995. The revenue reflected in the second quarter of 1995, relates to a joint
venture interest, which was not sold on December 30, 1994. Oil and gas operating
expenses decreased $116,186 or 89% from $130,154 in the six months ended June
30, 1994 to $13,968 for the same period in 1995.
Depreciation, depletion and amortization expenses increased $85,769 or 34%
from $249,812 in the six months ended June 30, 1994 to $335,581 for the same
period in 1995.
The Registrant had a $49,249,694 or 108% increase in gross Notes Receivable
from $45,410,439 at June 30, 1994 to $94,660,133 at June 30, 1995. In view of
this significant increase in Notes Receivable, the collection, general and
administrative expenses increased $536,228 or 56% from $961,419 for the six
months ending June 30, 1994 to $1,497,647 for the same period in 1995. The
majority of this increase, $233,441 or 44%, can be attributed to additional
personnel required to service the Notes Receivable. Personnel expenses
increased $233,441, from $353,863 for the six months ended June 30, 1994 to
$587,304 for the same period in 1995. All other collection expenses increased
$302,787, reflecting the costs associated with the significant increase in Notes
Receivable. However, when analyzing the general and administrative expenses as
a percentage of the total revenue they result in an actual decrease of 8% from
35% of total revenue for the six months ended June 30, 1994 to 27% for the same
period in 1995.
It is managements belief as stated earlier that the additional staffing
requirements and productivity gains incurred in the later part of 1994 have
resulted in excess servicing capacity for future acquisitions. The Registrant
had acquired two additional loan portfolios totaling approximately $25 million
in May 1995, with no additional personnel increases. It is Managements opinion
that an additional $50 million in portfolio acquisitions can be accomplished
without further staffing adjustments.
Bad debt expense increased $417,431 or 253% from $164,918 for the six
months ended June 30, 1994 to $582,349 for the same period in 1995. The
increase in bad debt expense was primarily due to a charge off of $235,000 for
several loans to one borrower who filed for bankruptcy.
Interest expense increased $1,724,135 or 220%, from $785,453 in the six
months ended June 30, 1994 to $2,509,588 for the same period in 1995. The
increase was principally due to an increase in notes payable as noted above.
Service fees increased $333,523 or 100% due to no corresponding expense in
1994. Registrant incurred the service fees under agreements with a Senior Debt
Lender with respect to two of the Limited Partnerships formed in the later part
of 1994.
Merger related expenses increased $74,885 or 100% due to no corresponding
expense in 1994. The Merger was consummated on December 30, 1994 and there were
no related expenses incurred during the six months ended June 30, 1994.
Income before taxes and minority interest decreased 70% from $431,086 in
the six months ended June 30, 1994 to $128,768 for the same period in 1995. Net
income decreased 60% from a $261,976 for the six months ended June 30, 1994 to
$104,504 for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company had cash of $927,435, a net increase of
$246,201 from December 31, 1994. During 1994, Registrant used cash in the
amount of $4,892,808 in its operating activities and $8,852,421 in its investing
activities. The amount of cash used in operating and investing activities was
funded by $13,991,430 of net cash provided by financing activities.
In the later part of 1994, Franklin had completed the acquisition of three
non-performing consumer loan portfolios with an aggregate principal balance of
approximately $63.2 million, that were secured by first and second mortgages.
In the normal course of business, Franklin had begun foreclosure actions on a
number of the loans from these portfolios in late 1994. Accordingly, Franklin
held no homes as inventory as of December 31, 1994. At June 30, 1995, however,
Registrant held as inventory, homes having a net realizable value of $2,991,246,
which it had obtained through said foreclosures. Management believes these
homes will be sold in the ordinary course of business and that the increase in
homes held as inventory at June 30, 1995 is not material to the operations of
the Company. Registrant has recorded these homes at the lower of cost or market
values.
11
<PAGE>
At June 30, 1995, Registrant held as inventory automobiles having a net
realizable value of $260,373 which it obtained through repossessions in the
normal course of business. Franklin held as inventory automobiles having a fair
market value of $390,498 as of December 31, 1994. The decrease in automobiles
held as inventory at June 30, 1995 is a result of reduced repossession, and
improved collection efforts. Registrant has recorded these autos at the lower
of cost or market values.
Management believes that Registrant's existing cash balances, credit lines,
and anticipated cash flow from operations will provide sufficient capital
resources for its currently anticipated operating needs.
CASH FLOW FROM OPERATING AND INVESTING ACTIVITIES
Substantially all of the assets of Registrant are invested in Notes
Receivable owned by the Limited Partnerships and its wholly owned subsidiaries.
The Company's primary source of cash flow from operations is distributions
related to its ownership interests in the Limited Partnerships and subsidiaries
and fees earned for servicing the Loan Portfolios owned by these entities.
Due to the restrictions placed on Registrant's use of collections from
Notes Receivable imposed by the Senior Debt lenders, which restrictions are
described below in Cash Flow From Financing Activities, Registrant experiences
periods of irregular cash flow shortages. Management believes that Registrant
has sufficient cash flow to pay current liabilities arising from operations.
Management also believes that sufficient cash flow from the collection of Notes
Receivable will be available to repay Registrant's secured obligations and that
sufficient additional cash flows will exist, through collections of Notes
Receivable, the sale of Loan Portfolios, modifications to the secured debt
credit agreements or additional borrowings, to repay the obligations of
Registrant. Registrant has no commitments for capital expenditures. Except for
management's intent to acquire additional Loan Portfolios, Registrant is not
aware of any trends or operations that would cause Registrant to incur
additional capital expenditures in the future.
CASH FLOW FROM FINANCING ACTIVITIES
SENIOR DEBT. As of June 30, 1995, the Limited Partnerships and affiliated
wholly owned subsidiaries had eleven loans payable to two financial
institutions, in the aggregate amount of $52,396,040. The eleven loans obtained
by the Limited Partnerships and the affiliated wholly owned subsidiaries are
collectively referred to as the Senior Debt.
The Senior Debt is collateralized by first liens on the respective Loan
Portfolios for which the debt was incurred and is guaranteed by the Company.
The monthly payments on the Senior Debt have been, and it is intended that the
payments will continue to be, met by the collections from the respective Loan
Portfolios. The loan agreements for the Senior Debt call for minimum interest
and principal payments due each month and accelerated payments based on the
collection of the Notes Receivable securing the debt. The accelerated payment
provisions are generally of two types: the first requires that all collections
from Notes Receivable, other than a fixed monthly allowance for servicing
operations, be applied to reduce the Senior Debt, and the second requires the
Company to maintain a fixed ratio of the aggregate amount of Notes Receivable
compared to the outstanding amount of the Senior Debt. As a result of the
accelerated payment provisions, the Company is repaying the amounts due on the
Senior Debt at a rate faster than the minimum scheduled payments. However,
while the Senior Debt remains outstanding, these accelerated payment provisions
limit the amount of cash flow which is available to the Limited Partnerships and
subsidiaries to distribute to their partners including the Company.
Seven of the Senior Debt credit agreements require that a non-interest
bearing cash account be established as a "Bad Debt Reserve", funded by an
initial deposit at the loan closing and additional deposits based upon a
percentage of monthly collections up to a specified dollar limit. The Bad Debt
Reserves are maintained at a bank which is one of the lenders of the Senior
Debt. The use of the cash in the Bad Debt Reserves is restricted by the terms
of the credit agreements and is to be utilized only upon the Company's failure
to meet the minimum monthly payment due if collection from Notes Receivable
securing the loan is insufficient to satisfy the installment due. The aggregate
balance of restricted cash in such accounts was $477,111 at June 30, 1995 and
$382,394 at December 31, 1994.
12
<PAGE>
12% DEBENTURES. In October 1994, Franklin made a private offering of
$750,000 of 12% Debentures (the "12% Debentures"). The 12% Debentures bear
interest at the rate of 12% per annum which will be payable quarterly on the
last day of each calendar quarter commencing December 31, 1994. The principal
amount will then be repaid over four years in 16 equal quarterly payments
beginning with payment due March 31, 1996, with the entire balance due on
December 31, 1999. The 12% Debentures are secured by a lien subordinate to the
Senior Debt encumbering the Loan Portfolio acquired at the RTC National Auction
in September 1994. As of June 30, 1995, 12% Debentures having a face value of
$725,000, were subscribed to and accepted by Registrant. The proceeds of this
offering were used to pay costs associated with the acquisition of the Loan
Portfolio in September 1994, including repayment of amounts advanced by
stockholders, the cost of servicing existing Loan Portfolios and general working
capital. Approximately $400,000 of the proceeds of the 12% Debentures were used
for general working capital. The balance of the 12% Debentures totaling
$25,000, were not subscribed to and will not be accepted by the Registrant.
LINES OF CREDIT. Advances made available to the Company by its Senior Debt
lender were used to satisfy senior lien positions in connection with
foreclosures of certain real estate loans financed by the Company. Management
believes the ultimate sale of these properties will satisfy the outstanding
lines of credit and accrued interest, as well as surpass the value of the
original secured note receivable. Advances during the period ended June 30,
1995, total $1,229,438.
LIMITED PARTNERSHIPS. Franklin is the general partner of seventeen limited
partnerships which were active during 1995. The limited partnerships obtain
capital to purchase Loan Portfolios primarily from one, or a combination of the
following sources: (i) equity contributions or loans from Franklin and its
stockholders, (ii) the sale of limited partnership interests to third parties
and (iii) loans from banks or finance companies (which is referred to as the
Senior Debt).
Management plans to continue to use bank financing, credit lines and
private sources of equity to fund future Loan Portfolio acquisitions. However,
management intends to attempt to finance the acquisitions of Loan Portfolios
with debt from financial institutions, rather than from the sale of equity
interests to limited partners. Management believes that Registrant can acquire
debt from financial institutions on more favorable terms than can be obtained
from individuals investing in limited partnerships.
On May 5, 1995 Franklin was authorized by the U.S. Department of Education
and the New York State Higher Education Services Corporation to originate,
purchase, hold and transfer U.S. and New York State guaranteed Student Loans.
Franklin will utilize this designation for possible future student loan
portfolio acquisition.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
August 14, 1995 FRANKLIN CREDIT MANAGEMENT
CORPORATION
By: FRANK B. EVANS
------------------
Frank B. Evans
Vice President, Chief Financial Officer
and Director
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1995, 10QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,404,546
<SECURITIES> 0
<RECEIVABLES> 94,660,133
<ALLOWANCES> (19,464,847)
<INVENTORY> 3,251,619
<CURRENT-ASSETS> 0
<PP&E> 408,876
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,935,721
<CURRENT-LIABILITIES> 57,602,142
<BONDS> 0
<COMMON> 52,479
0
0
<OTHER-SE> 3,034,474
<TOTAL-LIABILITY-AND-EQUITY> 62,935,721
<SALES> 0
<TOTAL-REVENUES> 5,476,309
<CGS> 0
<TOTAL-COSTS> 2,837,953
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 582,349
<INTEREST-EXPENSE> 2,509,588
<INCOME-PRETAX> 128,768
<INCOME-TAX> 44,357
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,504
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.02
</TABLE>
