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, 1996
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 incorporation or organization) (I.R.S. Employer Identification No.)
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)
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
Indicate number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $0.01 par value 5,514,151
(Title of Class) Outstanding at November 14, 1996
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1996
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 1996 (unaudited)
and December 31, 1925 2
Consolidated Statements of Income (unaudited) for the
three month and nine month periods
ended September 30, 1996 and 1995 3
Consolidated Statement of Cash Flows (unaudited) for the
nine month periods ended September 30, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a vote of Security-Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Exhibit Index 17
1
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
30-Sept-96 31-Dec-95
ASSETS (unaudited) (audited)
- ------------------------------------------------------------------------------- -----------------
Cash $ 1,382,748 $ 1,335,800
Restricted Cash 759,705 617,111
Notes Receivable:
Principal amount 104,042,374 116,573,463
Joint venture participations (368,919) (448,966)
Purchase discount (22,446,714) (28,708,043)
Allowance for loan losses (21,394,942) (20,420,311)
----------- -----------
59,831,797 66,996,143
Accrued Interest Receivable 1,194,303 1,150,869
Other Real Estate Owned 6,239,973 3,785,651
Inventory, automobiles - 267,428
Litigation Proceeds Receivable 441,393 502,486
Refundable income tax 29,742 74,240
Other Assets 1,010,541 938,001
Building, Furniture & Fixtures, net 629,103 698,418
Loan Commitment Fees and Other, net 1,312,307 1,564,920
----------- -----------
$72,831,613 $77,931,067
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued
expenses $ 1,532,269 $ 701,142
Lines of credit 748,920 1,324,128
Notes payable 64,012,558 69,315,917
Subordinated debentures 1,083,750 1,260,000
Notes payable, affiliates 326,192 834,616
Deferred income tax credits 1,118,408 1,240,540
Contingency - Loan Sale 63,113 -
----------- -----------
Total liabilities 68,885,210 74,676,343
Stockholder's Equity:
Common Stock, $.01 par value,
10,000,000 shares authorized,
5,514,151 and 5,503,896 shares
issued and outstanding in 1996
and 1995, respectively 55,143 55,040
Additional paid-in Capital 6,490,421 6,470,952
Accumulated deficit (2,599,161) (3,271,268)
----------- -----------
3,946,402 3,254,724
----------- -----------
$72,831,613 $77,931,067
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Month
Periods ended September 30, 1996 and 1995
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
30-Sept-96 30-Sept-95 30-Sept-96 30-Sept-95
(unaudited) (unaudited) (unaudited) (unaudited)
- --------------------------------------------------------------------------------
Revenue:
Interest Income $1,475,203 $2,028,514 $4,652,253 $4,441,842
Purchase Discount Earned 1,696,808 948,353 4,822,957 2,922,782
Loss on liquidation of
partnership interests - (1,047) - (17,515)
Gain on sale of portfolios - - 977,519 -
Other 69,210 117,768 218,352 208,820
---------- ---------- ----------- ----------
3,241,221 3,224,588 10,671,081 8,555,929
---------- ---------- ----------- ----------
Operating expenses:
Collection, general
and administrative 1,000,300 908,168 2,815,656 2,480,700
Provision for loan losses 138,727 270,321 578,918 852,670
Interest Expense 1,943,095 1,547,461 5,730,346 4,057,049
Service Fees 96,439 280,616 292,953 614,139
Amortization of debt
issuance costs 108,902 204,843 445,541 515,121
Depreciation 16,035 12,652 49,429 37,955
---------- ---------- ----------- ----------
3,303,498 3,224,061 9,912,752 8,557,634
---------- ---------- ----------- ----------
Operating income (loss) (62,277) (130,473) 758,329 (1,705)
Litigation proceeds 55,500 - 75,500 -
---------- ---------- ----------- ----------
(6,777) (130,473) 833,829 (1,705)
Provision for income taxes 41,364 (21,352) 161,722 23,005
---------- ---------- ----------- ----------
(48,141) (109,121) 672,107 (24,710)
Minority interest in
net income of
consolidated partnerships - 16,483 - 36,576
---------- ---------- ----------- ----------
Net income $ (48,141) $ (92,638) $ 672,107 $ 11,866
========== ========== =========== ==========
Earnings per common share:
Income before minority interest
in net income of consolidated
partnerships $ (0.01) $ (0.02) $ 0.12 $ 0.00
Minority interest in net
income Of consolidated
partnerships - - - -
---------- ---------- --------- ---------
Net income $ (0.01) $ (0.02) $ 0.12 $ 0.00
---------- ---------- --------- ---------
Weighted average number of shares
outstanding 5,509,028 5,247,871 5,509,028 5,247,871
========== ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months ended September 30, 1996 and 1995
<S> <C> <C> <C> <C> <C>
30-Sept-96 30-Sept-95
(unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 672,107 $ 11,866
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation, depletion, amortization
and valuation provisions 494,970 553,076
Minority interests in net income of affiliates - (36,576)
Loss on sale of portfolios - (50,522)
Purchase discount earned (4,822,957) (2,922,782)
Provision for loan losses 578,918 852,670
Deferred tax provision (benefit) 161,722 34,498
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable 16,572 (786,861)
Accounts receivable 29,632 173,867
Repossessions - real estate
and automobiles (1,420,094) (2,469,835)
Other assets 45,869 (1,138,497)
Increase (decrease) in:
Accounts payable and
accrued expenses 832,517 212,598
Due to affiliates 851 (167,796)
------------ -----------
Net cash used in operating activities (3,409,892) (5,734,294)
Cash Flows From Investing Activities
Purchase of property and equipment 19,886 (49,075)
Purchase of notes receivable (10,362,046) (19,040,914)
Principal collections on notes receivable 21,219,046 12,256,132
Joint venture participation (116,945) (42,203)
Acquisition fees paid (191,091) (513,760)
(Increase) in restricted cash (142,595) (184,717)
------------ -----------
Net cash used in investing activities 10,426,092 (7,574,537)
Cash Flows From Financing Activities
Distributions to minority interests - (317,536)
Payments on debenture notes payable (176,250) (65,900)
Capital Contributions - 1,834
Proceeds from debenture notes - 625,000
Proceeds from lines of credit 474,711 -
Payments on lines of credit (1,049,920) -
Proceeds from long-term debt 10,336,175 21,206,382
Principal payments of long-term debt (16,553,967) (7,550,066)
------------ -----------
Net cash provided by
financing activities (6,969,251) 13,740,515
------------ -----------
Net increase in cash 46,949 431,684
Cash:
Beginning 1,335,800 681,234
------------ -----------
Ending $ 1,382,748 $ 1,112,918
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Common Stock Additional Retained
------------------ Paid-In Earnings
Shares Amount Capital (Deficit)
- -------------------------------------------------------------------------------
Balance, December 31, 1994 5,247,871 $ 52,479 $5,838,941 $(3,395,971)
Conversion of subordinated
debentures 254,457 2,545 484,455
Conversion of warrants 1,568 16 2,977
Contributed capital 144,579
Net income 124,703
---------------------------------------------------
Balance, December 31, 1995 5,503,896 55,040 6,470,952 (3,271,268)
Net income 672,107
Conversion of warrants 10,255 103 19,469
---------------------------------------------------
Balance, September 30, 1996 5,514,151 $ 55,143 $6,490,421 $(2,599,161)
===================================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Polices
Nature of business: Franklin Credit Management Corporation, (the "Registrant"
or "Company"), a Delaware corporation, acquires from mortgage and finance
companies as well as from the Federal Deposit Insurance Corporation (the "FDIC")
non-performing, non-conforming and sub-performing loans and promissory notes
which it restructures, brings to performing status and holds through repayment
or sale.
A summary of Registrant's significant accounting polices follows:
Basis of financial statement presentation: The financial statements have been
prepared in accordance with generally accepted accounting principles and general
practices similar to those of a consumer finance company. In preparing the
financial statements, management is required to make estimates and assumptions
that affect amounts of assets and liabilities as of the date of the balance
sheet and revenue and expenses for the period. Actual results could differ
from those estimates.
Basis of consolidation: The consolidated financial statements include the
accounts of Company, its wholly-owned subsidiaries, and all limited partnerships
controlled by the Company during the respective periods. By terms outlined in
the various limited partnership agreements in effect during 1995, the Company
was specifically afforded full power and authority on behalf of the limited
partnerships to manage, control, administer and operate the business and affairs
of the limited partnerships. During 1995, the Company purchased the interests
of the limited partners and all limited partnerships were liquidated. The loss
realized upon liquidation of the limited partnerships for the fiscal year ended
December 31, 1995 was $247,105. Limited partnership interests purchased from
limited partners who also had an ownership interest in the Company were treated
as additional paid-in capital, if the transaction resulted in a gain. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash: For purposes of reporting cash flows, the Company 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 and real estate mortgage loans purchased from mortgage and finance
companies as well as from the FDIC, usually at a substantial discount.
Loans are stated at the amount of unpaid principal, reduced by purchase discount
and an allowance for loan loss. The Company has the ability and intends to hold
its loans until maturity, liquidation of collateral or sale. In general,
interest on the loans is calculated by using the simple-interest method on daily
balances of the collectible principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes, after
considering economic, business conditions and collections efforts, that the
borrowers' financial condition is such that collection of interest is doubtful.
Purchase discount is amortized to income using the interest method over the
period to maturity. The interest method recognizes income based on the timing of
projected principal collections of the loans using a 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. The projection of cash flows for purposes of amortizing purchase
discount is a material estimate which could change significantly in the near
term. Changes in the projected payments are accounted for as a change in
estimate and the periodic amortization is prospectively adjusted over the
remaining life of the loans. 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, a material estimate
which could change significantly in the near term, is initially established by
an allocation of a portion of the difference between the Company's acquisition
price and face value of the purchase loan discount based on management's
assessment of the portion of such difference that represents uncollectible
principal. Subsequently, increases to the allowance are made through a provision
for loan losses charged to expense and is maintained at a level that management
considers adequate to provide for potential losses in the loan portfolio. While
management uses available information to recognize losses on loans, future
additions to the allowance or write-downs may be necessary based on changes in
economic conditions.
6
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Polices (Continued)
Management's judgment in determining the adequacy of the allowance is based on
the evaluation of individual loans within the portfolio, the risk
characteristics and size of the loan portfolio, the assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience and other relevant factors.
Loans are charged against the allowance for loan losses when management believes
that the collectibilty of principal is unlikely. Any subsequent recoveries are
credits to the allowance for loan losses when received. In connection with the
determination of allowance for loan losses, management obtains independent
appraisals for significant properties, when considered necessary.
The Registrant's loans are generally collateralized by real estate located
throughout the United States. Accordingly, the collateral value of a substantial
portion of the Registrant's real estate loans and real estate acquired through
foreclosure is susceptible to market conditions.
On January 1, 1995, Registrant adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan ("Statement
114"). Statement 114 has been amended by Statement No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures. As
required by Statement 114, as amended, the impairment of loans is measured based
upon the present value of expected future cash flows or, alternatively, the
lower of the market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the underlying collateral) and
for which management has determined that foreclosure is probable, the measure of
impairment is based solely upon the fair value of the collateral. A loan is
deemed impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Approximately 10% of the Company's loan portfolio consists
of smaller balance, homogenous loans which are evaluated collectively for
impairment. The larger balance real estate loans are evaluated individually for
impairment.
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.
Other real estate owned: Other real estate owned ("OREO") represents properties
acquired through foreclosure, accepted by deed in lieu of foreclosure or through
other proceedings. OREO is recorded at the lower of the carrying amounts of the
related loans or the fair market value of the properties less estimated costs to
sell. Any write-down to fair value, less costs to sell, at the time of transfer
to OREO, is charged to the allowance for loan losses. Subsequent write-downs are
charged to operations based upon management's continuing assessment of the fair
value of the underlying collateral. Property is evaluated regularly to ensure
that the recorded amount is supported by its current fair market value. Costs
relating to the development and improvement of the property are capitalized,
subject to the limit of fair value of the collateral, while costs relating to
holding the property are expensed in the period incurred. Gains or losses are
recognized, through the amortization of purchase discount, upon disposal.
Deferred income taxes: Deferred taxes are recorded based upon the asset and
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 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Polices (Continued)
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. Unconverted
debentures of the Company, which may be converted to Common Stock, employee
incentive options and directors non-qualified options, are deemed not to be
common stock equivalents. Earnings per common share has been restated for the
effects of the merger of the Company and Old Franklin.
Fair value of financial instruments: Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial Instruments ("Statement
107"), 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. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate applied and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instruments. Statement 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash, restricted cash, accrued interest receivable, other receivables and
accrued interest payable: The carrying value reported in the balance sheet
approximates their fair values.
Notes receivable: Fair value of the net loan portfolio is estimated by
discounting the future cash flows using the interest method. In the opinion of
management the carrying amounts of the notes receivable approximate the fair
value of such notes receivable.
Short-term borrowings: The carrying amounts of the line of credit and other
short-term borrowings approximate their fair value.
Long-term debt: Fair value of the Company's long-term debt (including notes
payable ("Senior Debt"), subordinated debentures and notes payable, affiliate)
is estimated using discounted cash flow method based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. The
carrying amounts reported on the balance sheet approximate their fair value.
Accounting for the impairment of long-lived assets: The Financial Accounting
Standards Board has issued Statement No. 121, Accounting for the Impairment of
Long-Lived Assets or Assets to be Disposed Of ("Statement 121"), which becomes
effective for the Company's fiscal year ending December 31, 1996. Statement 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, goodwill related to those assets to be held
and used, and for long-lived assets and certain identifiable intangibles to be
disposed. The Company does not anticipate that the adoption of this standard
will have a significant impact on its financial statements.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Total revenue for the three months ended September 30, 1996 increased by
$147,633 or 5%, to $3,241,221 from $3,093,588 during the three months ended
September 30, 1995. Total revenue generally consists primarily of interest
income, purchase discount earned and gain upon sale of portfolios. Interest
income on Notes Receivable for the three months ended September 30, 1996,
decreased by $553,311 or 27%, to $1,475,203 from $2,028,514 during the three
months ended September 30, 1995. The Company recognizes interest income on Notes
Receivable based upon three factors; (i) interest from performing notes, (ii)
interest received with payments from non-performing notes and (iii) the balance
of loan settlements in excess of principal balances. The decline in interest
income resulted primarily from the increased average age of loans in the
Company's portfolio, which, since such loans typically provide for level
amortization, resulted in a greater portion of payments received being applied
towards their respective principal balances as opposed to interest income, and
from the impact of a decrease in the prime rate on the majority of the loans in
the Company's portfolio, which accrue interest at an adjustable rate.
Purchase discount earned for the three months ended September 30, 1996
increased by $748,455 or 79%, to $1,696,808 from $948,353 during the three
months ended September 30, 1995. The increase in purchase discount earned was
primarily attributable to the improved performance of the Notes Receivable
acquired in December 1995 and a net increase of approximately $9,000,000 or 9%,
in the size of the Company's portfolio at September 30, 1996, over that at
September 30, 1995. Notes Receivable purchased in December 1995, accounted
for $296,116 or 17% of the purchase discount earned, with the remainder
resulting from the remaining Notes Receivable.
Total operating expenses for the three months ended September 30, 1996
increased by $79,437 or 2%, to $3,303,498 from $3,224,061 during the three
months ended September 30, 1995.
Collection, general and administrative expenses for the three months
ended September 30, 1996 increased by $92,132 or 10%, to $1,000,300 from
$908,168 during the three months ended September 30, 1995. Personnel expenses
decreased by $78,095 or 22%, to $272,853 from $350,948 during the three months
ended September 30, 1995 due primarily to staff reductions during the
intervening period. All other collection expenses increased by $170,227 or 31%,
to $727,447 from $557,220 during the three months ended September 30, 1995. This
increase resulted primarily from litigation and OREO expenses directly relating
to the $2,454,322 increase in OREO and the 9% increase in size of the Company's
portfolio, which was only partially offset by economies of scale. Management
believes that OREO will continue to increase by virtue of the portfolios we
acquire. OREO can have a material effect due to the variables associated in the
real estate market. While management currently estimates that OREO will not
have a material effect, future estimates of materiality will be a function of
the nationwide real estate market. The Registrant's general policy is to manage
OREO as rental properties until such time as it can arrange economically
beneficial sales of such properties.
Provisions for loan losses for the three months ended September 30, 1996
decreased by $131,594 or 49%, to $138,727 from $270,321 in the three months
ended September 30, 1995. This decrease reflects a change in accounting method
from expensing of the provision for loan losses in 1995, when the Company's
portfolio of Notes Receivable was unseasoned, and management expected its
estimates of loan losses to require frequent adjustment, to reflecting the
provision as a reserve to be amortized over the life of the portfolio in 1996,
when the portfolio was more seasoned and management believed it could better
estimate the necessary reserves. Bad debt expense expressed as a percentage of
gross notes receivable decreased to .001% for the quarter ended September 30,
1996 from .003% for the quarter ended September 30, 1995.
Interest expense for the three months ended September 30, 1996 increased
by $395,634 or 26%, to $1,943,095 from $1,547,461 in the three months ended
September 30, 1995. Senior Debt increased by $12,867,598 or 25%, to $64,188,398
as of September 30, 1996, from $51,320,800 as of September 30, 1995. This
higher level of debt relates to funding the purchase of $23,000,000 of Notes
Receivable. The notes payable of the Company accrue interest at variable rates
based upon the prime rate. The decrease in the weighted prime rate to 8.25%
during the quarter ended September 30, 1996 from 8.85% during the quarter ended
September 30, 1995, had a positive effect in reducing the cost of borrowed funds
used to acquire Notes Receivable. Had the prime rate remained constant at
8.85%, interest expense would have been approximately $68,000 higher for the
quarter ended September 30, 1996.
9
<PAGE>
In June, 1996 the Company concluded negotiations with its Senior Debt
lenders to modify the existing terms of its Senior Debt obligations. These
modifications reduced the rates at which Senior Debt accrues service fees.
Service fees for the three months ended September 30, 1996 decreased by $184,177
or 66%, to $96,439 from $280,616 in the three months ended September 30, 1995.
Without this modification, service fees would have been $192,878 for three
months ended September 30, 1996. The modifications accounted for $96,439 or 52%
of the total reduction for the three months ended September 30, 1996.
Operating losses for the three months ended September 30, 1996 decreased
by $68,196 or 52%, to $62,277 from $130,473 during the three months ended
September 30, 1995. This decrease was primarily attributable to increased
purchase discount earned reflecting the acquisition by the Company of
approximately $23,000,000 of Notes Receivable in December 1995. Following the
purchase of new Notes Receivable the Company immediately begins to recognize the
expenses, including interest expense, collection, general and administrative
expenses, and service fees associated with carrying and servicing such Notes
Receivable. The corresponding interest income and purchase discount earned, on
the other hand is recognized after the Notes Receivable provide predictable cash
flows and/or reach performing status. During the three months ended September
30, 1996, a majority of the loans purchased at December 1995 were performing and
contributed to increase in operating income.
During the three months ended September 30, 1996, operating loss as a
percentage of net notes receivable was .1% as compared to .3% for the three
months ended September 30, 1995. As noted previously, the timing differences
between realization of interest income and purchase discount earned on the one
hand, and interest expense, service fees, collections expenses and amortization
of loan commitment fees for the newly acquired portfolios on the other,
generally result in recognition of increased operating expenses prior to the
corresponding increase in related income upon the acquisition of new Notes
Receivable.
Loss before litigation proceeds, taxes and minority interest for the
three months ended September 30, 1996 decreased by $68,196 or 52%, to $62,277
from $130,473 in the three months ended September 30, 1995. Net loss decreased
by $44,497 or 48%, to $48,141 from a loss of $92,638 in the three months ended
September 30, 1995 reflecting principally the receipt by the Company of
litigation proceeds of $55,500 during the three months ending September 30,1996.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Total revenue for the nine months ended September 30, 1996 increased by
$2,115,152 or 25%, to $10,671,081 from $8,555,929 during the nine months ended
September 30, 1995. Interest income on Notes Receivable for the nine months
ended September 30, 1996, decreased by $789,589 or 15%, to $4,652,253 from
$5,441,842 during the nine months ended September 30, 1995. The decline in
interest income resulted primarily from the increased age of loans in the
Company's portfolio at September 30, 1996, the impact of a decrease in the
prime rate on the Company's adjustable rate Notes Receivable, which comprise a
majority of the Company's portfolio and the bulk sale in June 1996 of $6,311,404
in face amount of performing loans, which were only partially offset by the
purchase in December 1995 of additional Notes Receivable.
Purchase discount earned for the nine months ended September 30, 1996
increased by $1,900,175 or 65%, to $4,822,957 from $2,922,782 in the nine months
ended September 30, 1995. The increase in purchase discount earned was primarily
attributable to the acquisition of approximately $28,600,000 of Notes
Receivable, in December 1995 resulting in a 25% increase in the size of the
Company's portfolio at September 30, 1996, over that at December 31, 1995.
Notes Receivable purchased in December 1995, accounted for $952,767 or 20% of
the purchase discount earned during the nine months ended September 30, 1996,
with the remainder resulting from the remaining Notes Receivable.
During the nine months ended September 30, 1996 gains from the sale of
portfolios increased to $977,519 from $0 in the nine months ended September 30,
1995. In June 1996, the Company sold $6,311,404 or 6%, of its loan portfolio at
90.75% of aggregate of the remaining principal balances. The total proceeds
from the sale were $5,727,599, generating a gain of $977,519. The Company
incurred associated costs of sale of $84,992 which resulted in a net gain of
$892,527. The Company believes that selective sales of Notes Receivable which
it has brought to performing status, the purchase of which was funded with high
interest Senior Debt (as hereafter defined), and the use of proceeds of such
sales to pay down such debt, increases profitability. Additionally, new
purchases of Notes Receivable will be made with the benefit of a decreased prime
rate and the more advantageous terms currently available to the Company in
connection with Senior Debt lender.
Total operating expenses for the nine months ended September 30, 1996
increased by $1,355,118 or 13%, to $9,912,752 from $8,557,634 in the nine months
ended September 30, 1995.
10
<PAGE>
Collection, general and administrative expenses for the nine months
ended September 30, 1996 increased by $334,865 or 13%, to $2,815,565 from
$2,480,700 in the nine months ended September 30, 1995. Personnel expenses
decreased by $100,950 or 11%, to $837,302 from $938,252 in the nine months ended
September 30, 1995 due primarily to staff reductions during the intervening
period. All other collection expenses, increased by $435,815 or 28%, to
$1,978,263 from $1,542,448 in the nine months ended September 30, 1995. This
increase resulted primarily from litigation and OREO expenses directly related
to the $2,454,322, increase in OREO, and the increased size of the Company's
portfolio of Notes Receivable being serviced which was only partially offset
by economies of scale.
Provisions for loan losses for the nine months ended September 30, 1996
decreased by $273,752 or 32%, to $578,918 from $852,670 in the nine months ended
September 30, 1995. The decrease reflected primarily the filing for bankruptcy
in 1995 of a borrower who owed the Company approximately $235,000, the Company's
efforts in 1996 to reduce costs associated with managing its automobile
inventory by writing off $155,396 worth of automobiles and the improved
performance of certain Notes Receivable. Bad debt expense expressed as a
percentage of gross notes receivable for the nine months ended September 30,
1996 and the nine months ended September 30, 1995 equaled approximately 1%.
The decrease in provision for loan losses reflects both the write-offs
previously mentioned and improved performance of certain Notes Receivable.
Interest expense for the nine months ended September 30, 1996 increased
by $1,673,297 or 41%, to $5,730,346 from $4,057,049 in the nine months ended
September 30, 1995. Senior Debt increased $12,867,598 or 25% from $51,320,800,
as of September 30, 1995 to $64,188,398 as of September 30, 1996, which
increase was only partially offset by the repayment in June 1996 of $5,741,102
of the Company's highest interest Senior Debt in connection with the bulk sale
of loan portfolio. The decrease in the weighted prime rate to 8.28% during the
six months ended June 30, 1996 from 8.86% during the nine months ended September
30, 1995 had a positive effect in reducing the cost of borrowed funds used to
acquire Notes Receivable. Had the prime rate remained constant at 8.86%,
interest expense would have been approximately $216,000 higher for the nine
months ended September 30, 1996.
In June 1996, the Company concluded negotiations with its Senior Debt
lenders to modify the existing terms of its Senior Debt obligations. These
modifications reduced the rates at which Senior Debt accrues service fees.
Service fees for the nine months ended September 30, 1996 decreased by $321,186
or 52%, to $292,953 from $614,139 in the nine months ended September 30, 1995.
In June 1996, a retroactive adjustment to the beginning of the year was recorded
to reduce service fees. Absent the modification service fees would have been
$562,221 for nine months ended September 30, 1996. The modifications accounted
for $269,268 or 83% of the total reduction. The remaining 17% of the reduction
resulted from no service fees being incurred from the debt repaid in June 1996
in connection with the bulk sale.
Operating income for the nine months ended September 30, 1996 increased
by $760,034, to $758,329 from a loss of $1,705 during the nine months ended
September 30, 1995. This increase was primarily attributable to, the gain on
the bulk sale of the loan portfolios net of its associated costs of and
increased purchase discount earned reflecting the acquisition by the Company of
approximately $40,000,000 of Notes Receivable since September 1995. During the
nine months ended September 30, 1996, a majority of the loans purchased since
September 1995 achieved performing status and contributed to increase in
operating income.
During the nine months ended September 30, 1996, operating income as a
percentage of net notes receivable was 2% as compared to .003% for the nine
months ended September 30, 1995. As noted previously, the timing differences
between realization of interest income and purchase discount earned on the one
hand, and interest expense, service fees, collections expenses and amortization
of loan commitment fees for the newly acquired portfolios on the other,
generally result in increased operating expenses prior to the corresponding
increase in income related as the loan in the portfolio reach performing status.
Income before litigation proceeds, taxes and minority interest for the
nine months ended September 30, 1996, increased by $760,034 to $758,329 from a
loss of $1,705 in the nine months ended September 30, 1995. Net income
increased to $672,107 for the nine months ended September 30, 1996 from $11,866
in the nine months ended September 30, 1995, for the reasons described above.
11
<PAGE>
Liquidity and Capital Resources
At September 30, 1996, the Company had cash of $1,382,748, reflecting a
net increase of $46,949 from December 31, 1995. During the first nine months of
1996, the Company used cash in the amount of $3,409,892 in its operating
activities, primarily for overhead, litigation and for the foreclosure and
improvement of OREO. The Company generated $10,426,092 from its investing
activities, primarily due to the collections on and sale of Notes Receivable.
The net amount of cash used in financing activities was $6,969,251, reflecting
a net decrease in Senior Debt and lines of credit.
In the normal course of its business,the Company accelerates and
forecloses upon non-performing consumer loans included in its portfolio which
are secured by first and second mortgages. As a result of such foreclosures,
the Company held OREO having a net realizable value of $6,239,973 at September
30, 1996. Management believes that OREO will be held as rental property or sold
in the ordinary course of business and that the increase in OREO held as
inventory at September 30, 1996 is not material to the operations of the
Company.
The Company held as inventory automobiles having a fair market value of
$267,428 as of December 31, 1995, which it obtained through repossessions and
recorded at the lower of cost or fair market value. In an effort to reduce
costs associated with managing the automobile inventory, the Company wrote off
$155,396 worth of automobiles in June 1996.
At September 30, 1996, the Company held no automobile inventory.
Management believes that any additional automobile inventory acquired in the
ordinary course of business from the Company's remaining automobile loans, will
be sold. The Company has ceased to purchase Notes Receivable secured by
automobiles. Approximately $318,000 or .3% of the Company's gross loan
portfolio at September 30, 1996 was secured by automobiles.
Certain of the Company's loan agreements require payment of "service
fees" based on gross cash collections of principal and interest as well as
accelerated principal reductions from early payoff collections. The use of this
cash flow for the repayment of bank debt may create cash shortages in the
Company's ability to fund operations, pay taxes and retire its subordinated
debt. Management believes that the Company's existing cash balances, credit
lines and anticipated cash flow from operations will provide sufficient capital
resources for its anticipated operating needs. The Company has negotiated with
its Senior Debt lender a modifications of the terms of its funding of cash flows
for operations, which may improve cash flows. See "Cash Flow from Financing
Activities".
Cash Flow From Operating and Investing Activities
Substantially all of the assets of the Company are invested in its
portfolio of Notes Receivable. The Company's primary source of cash flow from
operating and investing activities is collections on Notes Receivable and the
sale of loan portfolios. An increase in acquisitions and in collection efforts
have supported the Company's operations. See -"Results of Operations".
Cash Flow From Financing Activities
In June 1996, the Company negotiated with its Senior Debt lender a
modification to the Senior Debt obligations which eases the cash flow
restrictions placed upon the Company. Management believes that this
modification may reduce the irregular periods of cash flows shortages.
Management believes that the Company 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 the Company's secured obligations and that sufficient additional cash
flows will exist, through collections of Notes Receivable, the sale of Loan
Portfolios, continued modifications to the secured debt credit agreements or
additional borrowings, to repay current liabilities arising from operations and
to repay the long term indebtedness of the Company. The Company has no
commitments for capital expenditures. Other than management's intent to acquire
additional Loan Portfolios, the Company is aware of no trends or changes in
operations that would cause the Company to incur significant additional capital
expenditures in the future.
Senior Debt. As of September 30, 1996, the Company and its wholly owned
subsidiaries owed an aggregate amount of $64,188,398, under eighteen loans,
(the "Senior Debt") from two financial institutions.
The Senior Debt is collateralized by first liens on the respective Loan
Portfolios for the purchase of which the debt was incurred and is guaranteed by
the Company. The monthly payments on the Senior Debt have been, and the Company
intends for such payments to continue to be, met by the collections from the
respective Loan Portfolios. The loan agreements for the Senior
12
<PAGE>
Debt call for minimum interest and principal payments each month and
accelerated payments based upon the collection of the Notes Receivable securing
the debt during the preceding month. The Senior Debt accrues interest at
variable rates ranging from 1.5% to 3% over the prime rate. 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; the second requires
a further amount to be applied toward additional principal reduction from
available cash after scheduled principal and interest payments have been made.
As a result of the accelerated payment provisions, the Company is repaying the
amounts due on the Senior Debt at a rate faster than the minimum scheduled
payments. However, while the Senior Debt remains outstanding, these accelerated
payment provisions may limit the cash flow available to the Company. The
Company has negotiated with one of its Senior Debt lenders a modification of the
existing terms of its funding of cash allowances for operations to improve cash
flows, whereby the Company receives additional availability based upon
collections after contractual principal, interest and escrow payments are met.
Management feels this may reduce the periods of irregular cash flows, however,
there can be no assurance that the Company will not encounter periods of cash
flow shortages.
Certain of the Senior Debt credit agreements required the establishment
of restricted cash accounts, funded by an initial deposit at the loan closing
and additional deposits based upon monthly collections up to a specified dollar
limit. The restricted cash is maintained in a interest bearing account, at a
bank which is one of the lenders of the Senior Debt. Restricted cash may be
accessed by the Bank 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 $617,111 at December 31, 1995 and $759,705 at September 30,
1996.
Lines of Credit. Advances are available to the Company by one of its two
Senior Debt lenders to repay loans with security interests in the underlying
collateral senior to those acquired by the Company 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 collectible value of the original secured notes receivable because the
Company typically purchases loans having an outstanding balance well below the
assumed value of the underlying collateral. Management has an agreement with
its Senior Debt lender to increase the line to cover the carrying costs of
properties obtained through foreclosures which the Company may be required to
hold as rental property to maximize its return. The total amounts outstanding
under the lines of credit as of September 30, 1996 and December 31, 1995, were
$748,920 and $1,324,128, respectively. The agreement with the Senior Debt
lender allows the Company to borrow a maximum of $1,500,000 at a rate equal to
the bank's prime rate plus two percent per annum. Principal repayment of the
lines are due six months from the date of each cash advance and interest is
payable monthly.
12% Debentures. In connection with the acquisition of a loan portfolio
during 1994 the Company offered to investors $750,000 in subordinated debentures
(the "12% Debentures"). As of September 30, 1996 and December 31, 1995,
$528,750 and $705,000 respectively, of these debentures were outstanding. The
12% Debentures bear interest at the rate of 12% per annum payable in quarterly
installments. The principle is to be repaid over 4 years in 16 equal quarterly
installments of $44,062 commencing March 31, 1996. The 12% Debentures are
secured by a lien on the Company's interest in certain notes receivable and are
subordinated to the Senior Debt encumbering the loan portfolio.
Harrison First Corporation 12% Debentures. In connection with the
acquisition of a loan portfolio during 1995, the Company offered to investors
$800,000 in subordinated debentures (the "Harrison 1st 12% Debentures"). As of
September 30, 1996 and December 31, 1995, there were $555,000 and $575,000 of
theses debentures outstanding, respectively. The Harrison 1st 12% Debentures
bear interest at the rate of 12% per annum payable in quarterly installments.
The principal is to be repaid over five years in eleven equal quarterly
installments of $22,200 commencing September 30, 1997 with the remaining balloon
payment of $310,800 due on June 30, 2000. The Harrison 1st 12% Debentures are
secured by a lien on the Company's interest in certain notes receivable and are
subordinate to the Senior Debt encumbering the loan portfolio.
Limited Partnerships. The Company was the general partner of seventeen
limited partnerships which were active during 1995. The limited partnerships
had obtained capital to purchase Loan Portfolios primarily from one or a
combination of the following sources: (i) equity contributions or loans from
the Company and its principal stockholders, (ii) the sale of limited partnership
interests to third parties, and (iii) loans from banks or finance companies
including portfolios of the Senior Debt. During 1995 the Company purchased the
interests of all remaining limited partners and liquidated all limited
partnerships. The loss upon liquidation for 1995 was $247,105. Gains realized
from limited partnership interests purchased from limited partners who also had
an ownership interest in the Company were recorded as additional paid in capital
in the amount of $144,579.
13
<PAGE>
Management plans to continue to use bank financing, credit lines and
private sources of equity to fund future Loan Portfolio acquisitions.
Management believes the Registrant can acquire debt from financial
institutions on more favorable terms than can be obtained from individuals
investing in limited partnerships.
Management is evaluating the possibility of broadening the Company's
activities to include mortgage origination in the markets currently served by
the Company. Management currently expects that any such originations would be
funded through existing credit facilities.
Certain statements contained in this discussion may be deemed forward
looking statements that involve a number of risks and uncertainties. Among the
factors that could cause actual results to differ materially are the following:
unanticipated changes in the U.S. economy, business conditions and interest
rates and the level of growth in the finance and having markets, the
availability for purchase of additional loans, the status of relations between
the Company and its primary sources for loan purchases, and other risks detailed
from time to time in the Company's SEC reports, including but not limited to
the report on Form 10-K for the year ended December 31, 1995.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 18, 1996, the Company reached a settlement with Dinsmore &
Shohl, holder of a prepetition claim for $88,000 against the Company's
predecessor, Miramar Resources, Inc., ("Miramar"). Pursuant to the Plan of
Reorganization of Miramar, the Company had reserved the full amount of such
claim, and since the confirmation of the Plan of Reorganization, had accrued
interest of 6% per annum, or approximately $13,000, on such reserve. Under the
settlement, the Company will pay to Dinsmore & Shohl $40,000 in respect of such
claim, resulting in a gain from litigation of approximately $61,000.
On September 29, 1996, the Company reached a settlement with Grant
Thornton LLP, ("Grant") who had been Miramar's auditors for Miramar's fiscal
years 1989 and 1990, on certain claims and counterclaims between the Company and
Grant. Pursuant to the settlement, Grant will pay the Company $7,500, and the
Company and Grant will enter into mutual releases.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
None
Item 5. Other Information.
Effective November 1, 1996, the Company started a 401(k) Saving Plan for
its employees. The plan is solely funded by pre-tax employee earnings, however
the Company has no plans to make contributions.
Item 6. Exhibits and Reports on Form 8-K.
(a)
EXHIBIT TABLE
Exhibit
No. Description
3(a) Restated Certificate of Incorporation of Franklin
Credit Management Corporation.
(b) Bylaws of Registrant.
4(a) 15% Convertible Subordinated Debentures
(b) Warrants associated with principal repayments of
the 15% Convertible Subordinated Debentures
(b) No reports on Form 8-K were filed during the third quarter of 1996.
15
<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 14, 1996 FRANKLIN CREDIT MANAGEMENT CORPORATION
By: THOMAS J. AXON
Thomas J. Axon
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
THOMAS J. AXON President, Chief Executive November 14, 1996
Thomas J. Axon Officer and Director
(Principal executive officer)
FRANK B. EVANS, Jr. Vice President, Treasurer, November 14, 1996
Frank B. Evans, Jr. Chief Financial Officer and
Director (Principal financial
and accounting officer)
JOSEPH CAIAZZO Vice President, Chief Operating November 14, 1996
Joseph Caiazzo Officer and Director
16
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
3(a) Restated Certificate of Incorporation of Franklin Credit Management
Corporation (incorporated by Exhibit 2.1 to Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1994.)
(b) Bylaws of Registrant (incorporated by reference to Registrant's
Registration Statement on Form S-4, No. 33-81948)
4(a) 15% Convertible Subordinated Debentures (incorporated by reference to
Registrant's Registration Statement on Form S-4, No. 33-81948)
(b) Warrants associated with the principal repayments of the 15%
Convertible Subordinated Debentures (incorporated by reference to
Registrant's Registration Statement on Form S-4, No. 33-81948)
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAIL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1996, 10QSB AND IS QUAILIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.88
<CASH> 1,382,748
<SECURITIES> 0
<RECEIVABLES> 104,042,374
<ALLOWANCES> (21,394,942)
<INVENTORY> 6,239,973
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<PP&E> 629,103
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<CURRENT-LIABILITIES> 68,885,210
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0
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