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 September 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:
5,503,897 at November 13, 1995
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
SEPTEMBER 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 September 30, 1995 (unaudited) and
December 31, 1994 2
Consolidated Statements of Operations (unaudited) for the three months
ended September 30, 1995 and 1994 and for the nine months ended
September 30, 1995 and 1994 3
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 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-Sep-95 31-Dec-94
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash $ 1,112,918 $ 681,234
Restricted Cash 567,111 382,394
Notes Receivable:
Principal amount 94,979,863 81,914,930
Joint venture participations (493,707) (492,086)
Purchase discount (23,590,648) (26,421,274)
Allowance for loan losses (19,257,611) (12,267,546)
-------------- -----------
51,637,896 42,734,024
Accrued Interest Receivable 1,713,115 932,450
Inventory, homes 2,517,881 -
Inventory, automobiles 342,452 390,498
Litigation Proceeds Receivable 484,516 654,029
Due From Affiliate - -
Deferred Tax Asset 240,227 278,978
Other Assets 2,007,167 855,854
Building, Furniture & Fixtures, net 396,461 385,341
Loan Commitment Fees and Other, net 1,522,333 1,530,463
------------- -----------
$ 62,542,076 $ 48,825,265
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 1,419,176 $ 781,682
Notes payable 51,320,800 39,186,371
Convertible subordinated debentures 460,700 526,600
Subordinated debentures 1,200,000 575,000
Notes payable, affiliates 359,279 469,417
Due to affiliates - 232,075
Income tax payable - 163,336
Deferred income tax credits 1,324,759 1,337,590
Lines of credit 1,377,683 -
----------- -----------
Total liabilities 57,462,397 43,272,071
Minority Interest in Consolidated Partnerships 2,082,369 2,570,745
Redeemable Common Stock - 487,000
Commitments and Contingencies
Stockholder's Equity:
Common Stock, $.01 par value, 25,000,000
shares authorized, 5,503,897 and 5,247,871
shares issued and outstanding in 1995
and 1994 respectively 55,039 52,479
Additional paid-in Capital 6,326,376 5,838,941
Retained Earnings (deficit) (3,384,105) (3,395,971)
----------- -----------
2,997,309 2,495,449
----------- -----------
$ 62,542,076 $ 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 September 30, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
30-Sep-95 30-Sep-94 30-Sep-95 30-Sep-94
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Interest Income $2,028,514 $ 728,895 $5,441,842 $2,274,582
Purchase Discount Earned 948,353 387,175 2,922,782 1,309,115
Oil & Gas 736 131,998 57,894 360,220
Gain (loss) on liquidation
of partnership interests (1,047) 314 (17,515) 45,616
Gain (loss) on sale of
portfolios 55,211 - 68,037 -
Other Income 62,937 (32,322) 97,973 (50,631)
--------- --------- --------- ---------
3,094,704 1,216,060 8,571,013 3,938,902
--------- --------- --------- ---------
Operating expenses:
Oil & Gas 1,116 65,636 15,084 195,790
Depreciation, depletion
and amortization 217,495 156,098 553,076 405,910
Collection, general and
administrative 889,209 814,638 2,386,856 1,776,057
Provision for loan losses 270,321 79,971 852,670 244,889
Interest Expense 1,547,461 418,985 4,057,049 1,204,438
Service Fees 280,616 - 614,139 -
Merger expenses 18,959 - 93,844 -
--------- -------- --------- ---------
3,225,177 1,535,328 8,572,718 3,827,084
--------- --------- --------- ---------
Operating income (loss) (130,473) (319,268) (1,705) 111,818
Litigation proceeds - - - -
--------- --------- --------- ---------
(130,473) (319,268) (1,705) 111,818
--------- --------- --------- ---------
Provision for income taxes (21,352) (139,048) 23,005 75,294
--------- --------- --------- ---------
(109,121) (180,220) (24,710) 36,524
Minority interest in net
income of consolidated
partnerships (16,483) (10,239) (36,576) (55,471)
--------- ---------- --------- ---------
Net income $ (92,638) $ (169,981) $ 11,866 $ 91,995
========= ========= ========= =========
Earnings per common share:
Income before Minority
interest in net income
of consolidated partnerships $ (0.02) $ (0.04) $ - $ 0.01
Minority interest in net
income of consolidated
partnerships - - - (0.01)
------ ------ ------ ------
Net income (0.02) (0.04) 0.00 0.00
------ ------ ------ ------
Weighted average number
of shares outstanding 5,410,616 4,760,784 5,410,616 4,760,784
========= ========= ========= =========
</TABLE>
3
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
(unaudited) (unaudited)
9/30/95 9/30/94
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 11,866 $ 91,995
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation, depletion, amortization
and valuation provisions 553,076 405,910
Minority interests in net
income of affiliates (36,576) (55,471)
Liquidation of partnership interests 17,515 -
(Gain) loss on sale of portfolios (68,037) (45,616)
Purchase discount earned (2,922,782) (1,309,115)
Provision for loan losses 852,670 244,889
Deferred tax provision (benefit) 34,498 -
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (786,861) (282,476)
Accounts receivable 173,867 128,098
Inventory-repossessions (2,469,835) -
Other assets (1,138,497) (258,187)
Increase (decrease) in:
Accounts payable and accrued
expenses 212,598 (61,937)
Due to affiliates (167,796) 164,430
--------- ----------
Net cash used in operating
activities (5,734,294) (977,480)
Cash Flows From Investing Activities
Purchase of property and equipment (49,075) (1,871)
Proceeds from sale of properties - 350,981
Purchase of notes receivable (19,040,914) (8,830,000)
Principal collections on notes receivable 12,256,132 5,371,079
Joint venture participation (42,203) (59,033)
Additional paid in capital 1,834 -
Acquisition fees paid (513,760) (1,463,077)
Increase in restricted cash (184,717) (87,768)
---------- ---------
Net cash used in
investing activities (7,572,703) (4,719,689)
Cash Flows From Financing Activities
Distributions to minority interests (476,735) (904,469)
Contributions from minority interests - 1,239,500
Capital contributions - -
Payments on debenture notes payable (65,900) -
Proceeds from debenture notes 625,000 -
Proceeds from long-term debt 21,206,382 10,230,829
Principal payments of long-term debt (7,550,066) (5,090,045)
---------- ----------
Net cash provided by
financing activities 13,738,681 5,475,815
---------- ----------
Net increase (decrease) in cash 431,684 (221,354)
Cash:
Beginning 681,234 675,477
--------- ----------
Ending $ 1,112,918 $ 454,123
========= ==========
</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)
Exercised subordinated
debentures 254,458 2,545 484,455
Exercised Warrants 1,568 16 2,979
Net income 11,866
------------------------------------------------
Balance, September 30, 1995 5,503,897 $55,039 $6,326,376 $(3,384,105)
================================================
</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, 6 Harrison
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 Harrison Corporation (6 Harrison)
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 September 30, 1995 Compared to Three Months Ended September
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 $40,000,000. In May and September
of 1995 the Registrant acquired three additional consumer loan portfolios
totaling approximately $30,800,000. These portfolios were acquired through term
debt facilities from financial institutions (the "Senior Debt") of approximately
$24,000,000 and $19,044,000, 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 administrative carrying 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 September 30, 1995, Registrant recognized a net loss of $92,638
comparable to a net loss of $169,981 for the same period in 1994. The loss can
be greatly attributed to a $1,128,476 or 269% increase in interest expense from
$418,985 at September 30, 1994 to $1,547,461 at September 30, 1995 reflective of
the additional Senior Debt borrowed to acquire these new portfolios.
On May 9, 1995 Franklin purchased a non-performing consumer loan portfolio
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.
On August 17, 1995 Franklin was the successful bidder on 83 predominately
non-performing consumer loans with an aggregate principal balance of $5,622,881
for the acquisition cost of $2,535,919 at the FDIC Loan Auction. These loans are
primary secured by second mortgages, located in the New York Metropolitan Area.
The closing occurred on September 13, 1995.
In addition, during the third quarter of 1995, Registrant returned,
pursuant to its purchase agreement with the RTC, $3,851,106 of notes receivable
previously acquired from the RTC during 1994. These notes had legal or document
deficiencies at the time of purchase by FCMC. Registrant has recorded, in other
assets, approximately $1,498,482 which represents the purchase price of these
acquired loans. Upon review and approval 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 would 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 $1,299,619, or 178%, from $728,895 in the three months
ended September 30, 1994 to $2,028,514 for the same period in 1995. The increase
in interest income was principally due to a 154% increase in net performing
Notes Receivable from $20,344,886 at September 30, 1994 to $51,647,033 at
September 30, 1995.
Purchase discount income increased $561,178 or 145%, from $387,175 in the
three months ended September 30, 1994 to $948,353 for the same period in 1995.
The increase in Purchase Discount income recognized reflects the increased
volume of Notes Receivable.
9
<PAGE>
Revenues related to oil and gas sales declined $131,262 or 99% from
$131,998 in three months ended September 30, 1994 to $736 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 third quarter of 1995, relates to a joint venture
interest, which was not sold on December 30, 1994. Oil and gas operating
expenses decreased $64,520 or 98% from $65,636 in the three months ended
September 30, 1994 to $1,116 for the same period in 1995.
The Registrant had a $51,738,800 or 120% increase in gross Notes
Receivable from $43,241,063 at September 30, 1994 to $94,979,863 at September
30, 1995. In view of this significant increase in Notes Receivable, the
collection, general and administrative expenses increased $74,571 or 9% from
$814,638 for the three months ending September 30, 1994 to $889,209 for the same
period in 1995. The increase can be attributed to additional personnel required
to service the Notes Receivable.
Bad debt expense increased $190,350 or 238% from $79,971 for the three
months ended September 30, 1994 to $270,321 for the same period in 1995. The
increase in bad debt expense was primarily due to the charge off of several
loans in connection with borrower bankruptcies.
Interest expense increased $1,128,476 or 269%, from $418,985 in the three
months ended September 30, 1994 to $1,547,461 for the same period in 1995. The
increase was principally due to an increase in notes payable of $33,850,303 or
195%, from $17,329,776 at September 30, 1994 to $51,180,079 at September 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 $280,616 or 100% due to no corresponding expense in
1994. Registrant incurred the service fees under agreements with a Senior Debt
Lender with respect to five of the Limited Partnerships and its wholly owned
subsidiaries formed in the later part of 1994 and 1995.
Merger related expenses increased $18,959 or 100% due to no corresponding
expense in 1994. The Merger was consummated on December 30, 1994 and had no
related expenses during the three months ended September 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 and public filings.
Net losses before taxes and minority interest decreased 68% from $409,732
in the three months ended September 30, 1994 to $130,472 for the same period in
1995. Net losses decreased 46% from a $169,981 for the three months ended
September 30, 1994 to $92,638 for the same period in 1995.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended
September 30, 1994
As reflected in the three month analysis, Registrant acquired six loan
portfolios with an aggregate principal balance of approximately $75,000,000 in
late 1994 and 1995. These acquisitions were funded through Senior Debt provided
to the Registrant in the aggregate amount of approximately $43,310,000. The
Registrant incurs significant administrative carrying costs while these
portfolios are classified as to performance status and incorporated into the
Company's proprietary loan tracking system. Interest expense incurred during
this process,primarily as a result of the Senior Debt associated with these new
portfolios increased $2,852,611 or 237% from $1,204,438 for the nine months
ended September 30, 1994 to $4,057,049 for the same period in 1995. Accordingly,
Registrant recognized a decline in net income of 87% from a $91,995 net income
for the nine months ending September 30, 1994 to a net income of $11,866 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 $3,167,260 or
139%, from $2,274,582 in the nine months ended September 30, 1994 to $5,441,842
for the same period in 1995. The increase in interest income was principally due
to the increase in Notes Receivable as noted above.
10
<PAGE>
Purchase discount income increased $1,613,667 or 123%, from $1,309,115 in
the nine months ended September 30, 1994 to $2,922,782 for the same period in
1995. The increase in Purchase Discount income reflects the increased volume of
Notes Receivable as well as with the reclassification of certain non-performing
loans who have been brought to performing status.
Revenues related to oil and gas sales declined $302,326 or 84% from
$360,220 in nine months ended September 30, 1994 to $57,894 for the same period
in 1995. The revenue reflected in the third quarter of 1995, relates to a joint
venture interest, which was not sold on December 30, 1994. Oil and gas operating
expenses decreased $180,706 or 92% from $195,790 in the nine months ended
September 30, 1994 to $15,084 for the same period in 1995.
Depreciation, depletion and amortization expenses increased $147,166 or
36% from $405,910 in the nine months ended September 30, 1994 to $553,076 for
the same period in 1995 also reflective of the increased volume of Notes
Receivable.
The Registrant had a $51,738,800 or 120% increase in gross Notes
Receivable from $43,241,063 at September 30, 1994 to $94,979,863 at September
30, 1995. In view of this significant increase in Notes Receivable, the
collection, general and administrative expenses increased $610,799 or 34% from
$1,776,057 for the nine months ending September 30, 1994 to $2,386,856 for the
same period in 1995. The majority of this increase, $392,458 or 72%, can be
attributed to additional personnel required to service the Notes Receivable.
Personnel expenses increased $392,458, from $545,794 for the nine months ended
September 30, 1994 to $938,252 for the same period in 1995. All other collection
expenses increased $218,341, 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 17% from 45% of total revenue for the nine months ended
September 30, 1994 to 28% for the same period in 1995.
Bad debt expense increased $607,781 or 248% from $244,889 for the nine
months ended September 30, 1994 to $852,670 for the same period in 1995. The
increase in bad debt expense was primarily due to the charge off of several
loans in connection with borrower bankruptcies.
Interest expense increased $2,852,611 or 237%, from $1,204,438 in the nine
months ended September 30, 1994 to $4,057,049 for the same period in 1995. The
increase was principally due to an increase in notes payable as noted above.
Service fees increased $614,139 or 100% due to no corresponding expense in
1994. Registrant incurred the service fees under agreements with a Senior Debt
Lender with respect to five of the Limited Partnerships and its wholly owned
subsidiaries formed in the later part of 1994 and during 1995.
Merger related expenses increased $93,844 or 100% due to no corresponding
expense in 1994. The Merger was consummated on December 30, 1994 and there were
no related expenses during the nine months ended September 30, 1994.
Income before taxes and minority interest decreased 102% from $118,818 in
the nine months ended September 30, 1994 to $1,705 for the same period in 1995.
Net income decreased 87% from a $91,995 for the nine months ended September 30,
1994 to $11,866 for the same period in 1995.
Liquidity and Capital Resources
At September 30, 1995, the Company had cash of $1,112,918, a net increase
of $431,684 from December 31, 1994. During 1994, Registrant used cash in the
amount of $5,734,294 in its operating activities and $7,572,703 in its investing
activities. The amount of cash used in operating and investing activities was
funded by $13,738,681 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 secured by first and second mortgages. In the normal
course of business, Franklin began foreclosure actions on a number of these
loans in late 1994. Accordingly, Franklin held no homes as inventory as of
December 31, 1994. At September 30, 1995, however, Registrant held as inventory,
homes having a net realizable value of $2,517,881, which were obtained through
these foreclosures. Management believes these homes will be sold in the ordinary
course of business and that the increase in homes held as inventory at September
30, 1995 is not material to the operations of the Company. Registrant has
recorded these homes at the lower of cost or market value.
11
At September 30, 1995, Registrant held as inventory automobiles having a
net realizable value of $342,452 which it obtained through repossessions in the
normal course of business. Franklin held as inventory automobiles having a fair
market
<PAGE>
value of $390,498 as of December 31, 1994. The decrease in automobiles held as
inventory at September 30, 1995 is a result of reduced repossession and improved
collection efforts. Registrant has recorded these autos at the lower of cost or
market value.
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 September 30, 1995, the Limited Partnerships and
affiliated wholly owned subsidiaries had twelve loans payable to two financial
institutions, in the aggregate amount of $51,180,079. The twelve 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.
Eight 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. Historically,
the Company has not had to call upon these reserves. The aggregate balance of
restricted cash in such accounts was $588,676 at September 30, 1995 and $382,394
at December 31, 1994.
12
<PAGE>
12% Debentures. In October 1994, Franklin made a private offering of up to
$750,000 of 12% Debentures (the "12% Debentures"). The 12% Debentures bear
interest at the rate of 12% per annum and are payable quarterly on the last day
of each calendar quarter commencing December 31, 1994. The principal amount is
payable over four years in 16 equal quarterly payments beginning with a 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
September 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.
Lines of Credit. Advances made available to the Company by its Senior Debt
lender were used to satisfy senior lien positions and fund property repair costs
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
collectable value of the original secured note receivable. Advances during the
period ended September 30, 1995, total $1,377,683.
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 may 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.
November 15, 1995 FRANKLIN CREDIT MANAGEMENT
CORPORATION
By: FRANK B. EVANS
Frank B. Evans
Vice President,Chief Financial Officer
and Director
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SEPTEMBER 30, 1995, 10QSB AND IS QUALIFEID IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,112,918
<SECURITIES> 0
<RECEIVABLES> 94,979,863
<ALLOWANCES> (19,257,611)
<INVENTORY> 2,860,333
<CURRENT-ASSETS> 0
<PP&E> 396,461
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,542,076
<CURRENT-LIABILITIES> 57,462,397
<BONDS> 0
<COMMON> 55,039
0
0
<OTHER-SE> 2,942,271
<TOTAL-LIABILITY-AND-EQUITY> 62,542,076
<SALES> 0
<TOTAL-REVENUES> 8,571,013
<CGS> 0
<TOTAL-COSTS> 3,662,997
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 852,670
<INTEREST-EXPENSE> 4,057,049
<INCOME-PRETAX> (1,705)
<INCOME-TAX> 23,005
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,866
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
