UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer Identification No.)
of 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)
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 August 14, 1996
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
C O N T E N T S
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1996
(unaudited) and December 31, 1995 2
Consolidated Statements of Income (unaudited) for the
three month and six month periods
ended June 30, 1996 and 1995 3
Consolidated Statement of Cash Flows (unaudited) for the
six month periods ended June 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 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a vote of Security-Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
1
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
30-Jun-96 31-Dec-95
ASSETS (unaudited) (audited)
- ------------------------------------------------------------------------------- -----------------
Cash $ 1,146,680 $ 1,335,800
Restricted Cash 683,169 617,111
Notes Receivable:
Principal amount 98,891,427 116,573,463
Joint venture participations (395,431) (448,966)
Purchase discount (20,397,607) (28,708,043)
Allowance for loan losses (22,071,138) (20,420,311)
----------- -----------
56,027,251 66,996,143
Accrued Interest Receivable 1,177,608 1,150,869
Other Real Estate Owned 5,723,019 3,785,651
Inventory, automobiles - 267,428
Litigation Proceeds Receivable 504,486 502,486
Refundable income tax 74,240 74,240
Other Assets 1,035,885 938,001
Building, Furniture & Fixtures, net 639,459 698,418
Loan Commitment Fees and Other, net 1,290,641 1,564,920
----------- -----------
$68,302,438 $77,931,067
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued
expenses $ 1,445,114 $ 701,142
Lines of credit 1,060,213 1,324,128
Notes payable 59,408,518 69,315,917
Subordinated debentures 1,142,500 1,260,000
Notes payable, affiliates 130,992 834,616
Deferred income tax credits 1,057,444 1,240,540
Contingency - Loan Sale 63,113 -
----------- -----------
Total liabilities 64,307,894 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 (2,551,020) (3,271,268)
----------- -----------
3,994,544 3,254,724
----------- -----------
$68,302,438 $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
Periods ended June 30, 1996 and 1995
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
30-Jun-96 30-Jun-95 30-Jun-96 30-Jun-95
(unaudited) (unaudited) (unaudited) (unaudited)
- --------------------------------------------------------------------------------
Revenue:
Interest Income $1,368,371 $1,602,412 $3,177,050 $3,413,328
Purchase Discount Earned 1,822,782 1,128,004 3,126,149 1,974,429
Loss on liquidation of
partnership interests - 1,047 - (16,468)
Gain on sale of portfolios 977,519 - 977,519 -
Other 72,445 55,981 149,142 78,226
---------- ---------- ----------- ----------
4,241,117 2,787,444 7,429,860 5,449,515
---------- ---------- ----------- ----------
Operating expenses:
Collection, general
and administrative 940,875 887,822 1,815,265 1,572,532
Provision for loan losses 233,465 124,441 440,191 569,523
Interest Expense 1,896,131 1,330,611 3,787,251 2,509,588
Service Fees (Reduction) (19,803) 193,032 196,514 333,523
Amortization of debt
issuance costs 237,711 175,967 336,639 318,013
Depreciation 17,598 8,784 33,394 17,568
---------- ---------- ----------- ----------
3,305,977 2,720,657 6,609,254 5,320,747
---------- ---------- ----------- ----------
Operating income 935,140 66,787 820,606 128,768
Litigation proceeds - - 20,000 -
---------- ---------- ----------- ----------
935,140 66,787 840,606 128,768
Provision for income taxes 120,358 36,797 120,358 44,357
---------- ---------- ----------- ----------
814,782 29,990 720,248 84,411
Minority interest in
net income of
consolidated partnerships - 65,055 - 20,093
---------- ---------- ----------- ----------
Net income $ 814,782 $ 95,045 $ 720,248 $ 104,504
========== ========== =========== ==========
Earnings per common share:
Income before minority interest
in net income of consolidated
partnerships $ 0.15 $ 0.01 $ 0.13 $ 0.02
Minority interest in net
income Of consolidated
partnerships - 0.01 - -
---------- ---------- --------- ---------
Net income $ 0.15 $ 0.02 $ 0.13 $ 0.02
---------- ---------- --------- ---------
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
Fiscal Six Months ended June 30, 1996 and 1995
<S> <C> <C> <C> <C> <C>
30-Jun-96 30-Jun-95
(unaudited) (unaudited)
- ------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net (loss) income $ 720,248 $ 104,504
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation, depletion, amortization
and valuation provisions 370,033 335,581
Minority interests in net income of affiliates - (20,093)
Loss on sale of portfolios - 16,468
Purchase discount earned (3,126,149) (1,974,429)
Provision for loan losses 440,191 582,349
Deferred tax provision (benefit) 52,171 (57,485)
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (6,716) (353,548)
Accounts receivable (17,923) (2,767,220)
Repossessions - real estate
and automobiles (1,825,334) -
Other assets (97,085) (883,814)
Increase (decrease) in:
Accounts payable and
accrued expenses 691,977 433,534
Due to affiliates 126,993 (308,655)
Income tax payable 19,600 -
------------ -----------
Net cash used in operating activities (2,651,994) (4,892,808)
Cash Flows From Investing Activities
Purchase of property and equipment 25,565 (40,637)
Purchase of notes receivable (2,869,874) (16,510,014)
Principal collections on notes receivable 16,590,634 8,245,666
Joint venture participation (55,728) (28,938)
Acquisition fees paid (61,091) (423,781)
(Increase) in restricted cash (66,058) (94,717)
------------ -----------
Net cash used in investing activities 13,563,448 (8,852,421)
Cash Flows From Financing Activities
Distributions to minority interests - (317,536)
Payments on debenture notes payable (117,500) -
Capital Contributions 428,516 835
Proceeds from debenture notes - 150,000
Proceeds from lines of credit 652,441 -
Payments on lines of credit (916,357) -
Proceeds from long-term debt 2,850,902 18,522,218
Principal payments of long-term debt (13,998,576) (4,364,087)
------------ -----------
Net cash provided by
financing activities (11,100,574) 13,991,430
------------ -----------
Net increase in cash (189,120) 246,201
Cash:
Beginning 1,335,800 681,234
------------ -----------
Ending $ 1,146,680 $ 927,435
============ ===========
</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 720,248
Conversion of warrants 10,255 103 19,469
---------------------------------------------------
Balance, June 30, 1996 5,514,151 $ 55,143 $6,490,421 $(2,551,020)
===================================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Nature 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 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. 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 for 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 and 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 projected
cash flows 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 the purchase loan discount based on management's assessment of
the portion of purchase discount 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 absorb 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
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 collectively evaluated for
impairment. The larger balance real estate loans are individually evaluated for
impairment. The effect of adopting Statement 114 was not significant to the
operations of the Company based on the composition of the loan portfolio and
because the method utilized by Registrant to measure loan impairment prior to
the adoption of Statement 114, was essentially to the method prescribed by
Statement 114.
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: Prior to the 1994 sale of its interests in certain oil
and gas properties, the Company 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. Upon the sale of its interests in its oil and gas
properties, the Company realized a gain of approximately $57,000.
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-down 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
included in operations upon disposal.
7
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Nature of Business and Significant Accounting Polices (Continued)
Deferred income taxes: Deferred taxes are recorded based upon an 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.
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, 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 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. The carrying
amounts of the notes receivable approximate fair value.
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 analysis 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 of. The Company does not anticipate that the adoption of this standard
will have a significant impact on the financial statements
8
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Total revenue for the three months ended June 30, 1996 increased by
$1,453,673 or 52%, to $4,241,117 from $2,787,444 during the three months ended
June 30, 1995. Total revenue consists primarily of interest income, purchase
discount earned and gain upon sale of portfolios. Interest income on Notes
Receivable for the three months ended June 30, 1996, decreased by $234,041 or
15%, to $1,368,371 from $1,602,412 during the three months ended June 30, 1995.
The Company 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 loan settlements in
excess of principal repayments. The decline in interest income resulted
primarily from the increased average age of loans in the Company's portfolio,
which, since such loans tend to provide for level amortization, resulted in a
greater portion of cash flows received being applied towards their respective
principal balances as opposed to interest income and the impact of a decrease in
the prime rate on the majority of the loan portfolios, which accrue interest at
an adjustable rate. The increased age of loans included in the portfolio at June
30, 1995 was partially offset by the purchase of additional Notes Receivable
during the intervening period.
Purchase discount earned for the three months ended June 30, 1996
increased by $694,778 or 62%, to $1,822,782 from $1,128,004 during the three
months ended June 30, 1995. The increase in purchase discount earned was
primarily attributable to an increase of approximately $18,000,000 in the size
of the Company's portfolio at June 30, 1996, over that at June 30, 1995. The
additional Notes Receivable generated $621,139 or 89% of the increase in
purchase discount earned, with the remainder resulting from improved performance
of the remaining Notes Receivable.
During the three months ended June 30, 1996 the Company sold $6,311,404 or
6%, of its loan portfolio at 90.75% of the aggregate of the remaining principal
balances. The total proceeds from the sale were $5,727,599, generating a gain on
sale of $977,519. The Company incurred associated costs of the sale of $84,992
which resulted in a net gain of $892,527. There were no similar sales during the
three months ended June 30, 1995. The Company believes that selective sales of
Notes Receivable which it has brought to performing status for which it incurred
high interest upon 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 recently made available to the Company in
connection with its Senior Debt lender.
Total operating expenses for the three months ended June 30, 1996
increased by $585,320 or 22%, to $3,305,977 from $2,720,657 during the three
months ended June 30, 1995.
Collection, general and administrative expenses for the three months ended
June 30, 1996 increased by $53,053 or 6%, to $940,875 from $887,822 during the
three months ended June 30, 1995. Personnel expenses decreased by $82,609 or
23%, to $274,832 from $357,441 during the three months ended June 30, 1995 due
primarily to staff alterations during the intervening period. All other
collection expenses increased by $135,662 or 26%, to $666,043 from $530,381
during the three months ended June 30, 1995. The increases in overall
collection, general and administrative expenses resulted from the 13%
increase in size of the Company's portfolio and were only partially offset by
economies of scale and a decrease in personnel expense.
Provisions for loan losses for the three months ended June 30, 1996
increased by $109,024 or 88%, to $233,465 from $124,441 in the three months
ended June 30, 1995. The increase reflected primarily the write off of the
Company's automobile inventory as a gift to charity. Automobiles having a
carrying value of $155,396 were written off in an effort to reduce costs
associated with repairs, reconditioning and selling expenses associated with
carrying the inventory. Bad debt expense expressed as a percentage of gross
notes receivable for the quarters ended June 30, 1996 and 1995 equaled
approximately 0.002% and .17%, respectively. This decrease reflects both an
increase volume and improved performance of certain Notes Receivable.
9
<PAGE>
Interest expense for the three months ended June 30, 1996 increased by
$565,520 or 43%, to $1,896,131 from $1,330,611 in the three months ended June
30, 1995. The increase was principally due to increased indebtedness. Senior
Debt as of June 30, 1995 was $52,396,039, which included $15,270,000 incurred
only during thee last month of the three months ended June 30, 1995. Senior Debt
as of June 30, 1996 was $59,408,518, which was net of repayment of $5,741,102 on
June 30, 1996, in connection with the bulk sale of loan portfolio and regularly
scheduled repayment of principal. The notes payable of the Company accrue
interest at variable rates based upon the prime rate. The decrease in the prime
rate to 8.25% during the quarter ended June 30, 1996 from 8.75% during the
quarter ended June 30, 1995, had little effect on the cost of borrowed funds
used to acquire Notes Receivable.
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 June 30, 1996 decreased by $212,835 or
110%, to credit of $19,803 from a charge of $193,032 in the three months ended
June 30, 1995. The decrease reflected primarily the modifications of the terms
of the Company's existing Senior Debt obligations. In June 1996, a retroactive
adjustment to the beginning of the year was recorded to reduce service fees. The
total service fee without the modification would have been $153,026 for three
months ended June 30, 1996. The modification resulted in a reduction of service
fees of $172,829, from a credit of $19,803 to charge of $153,026 for the three
months ended June 30, 1996.
Operating income for the three months ended June 30, 1996 increased by
$868,353 or 1300%, to $935,140 from $66,787 during the three months ended June
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
$26,000,000 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 sufficient cash flows and/or reach
performing status. During the three months ended June 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 June 30, 1996, operating income as a
percentage of net notes receivable was 1.5% as compared to .001% for the three
months ended June 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
three months ended June 30, 1996 increased by $868,353 or 1300%, to $935,140
from $66,787 in the three months ended June 30, 1995. Net income increased to
$814,782 from $95,045 in the three months ended June 30, 1995, for the reasons
described above.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Total revenue for the six months ended June 30, 1996 increased by
$1,980,345 or 36%, to $7,429,860 from $5,449,515 during the six months ended
June 30, 1995. Interest income on Notes Receivable for the six months ended June
30, 1996, decreased by $236,278 or 7%, to $3,177,050 from $3,413,328 during the
six months ended June 30, 1995. The decline in interest income resulted
primarily from the increased age of loans in the Company's portfolio and 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. The increased
age of the loans included in the portfolio at June 30, 1996 was partially offset
by the purchase of additional Notes Receivable during the intervening period.
Purchase discount earned for the six months ended June 30, 1996 increased
by $1,151,720 or 58%, to $3,126,149 from $1,974,429 in the six months ended June
30, 1995. The increase in purchase discount earned was attributable principally
to acquisition of the additional Notes Receivable after June 30, 1995.
During the six months ended June 30, 1996 the Company had a gain from the
sale of portfolios of $977,519. There were no similar sales during the six
months ended June 30, 1995.
10
<PAGE>
Total operating expenses for the six months ended June 30, 1996 increased
by $1,288,507 or 24%, to $6,609,254 from $5,320,747 in the six months ended June
30, 1995.
Collection, general and administrative expenses for the six months ended
June 30, 1996 increased by $242,733 or 15%, to $1,815,265 from $1,572,532 in the
six months ended June 30, 1995. Personnel expenses decreased $22,855 or 4% to
$564,449 from $587,304 in the six months ended June 30, 1995. All other
collection expenses, increased $265,588 or 27% to $1,250,816 from $985,228 in
the six months ended June 30, 1995. The increases in overall collection, general
and administrative expenses were due to the increased size of the Company's
portfolio of Notes Receivable being serviced and were only partially offset by
economies of scale.
Provisions for loan losses for the six months ended June 30, 1996
decreased by $129,332 or 23%, to $440,191 from $569,523 in the six months ended
June 30, 1995. The decrease reflected primarily the filing for bankruptcy in
1995, of one specific borrower, who owed the Company approximately $235,000. In
addition, the Company in an effort to reduce costs associated with managing the
automobile inventory wrote off $155,396 worth of automobiles as a gift to
charity. Bad debt expense expressed as a percentage of gross notes receivable
for the quarters ended June 30, 1996 and 1995 equaled approximately 0.004% and
1%, respectively. This decrease reflects both an increase volume and improved
performance of certain Notes Receivable.
Interest expense for the six months ended June 30, 1996 increased by
$1,277,663 or 51%, to $3,787,251 from $2,509,588 in the six months ended June
30, 1995. The increase was principally due to increased indebtedness. Senior
Debt as of June 30, 1995 was $52,396,039 , which included $15,270,000 incurred
only during the last month of the six months ended June 30, 1995. Senior Debt as
of June 30, 1996 was $59,408,518, which was net of repayment of $5,741,102 as of
June 30, 1996 in connection with the bulk sale of loan portfolio and regularly
scheduled repayment of principal. The decrease in the prime rate to 8.25% during
the six months ended June 30, 1996 from 8.75% during the six months ended June
30, 1995 had little effect on the cost of borrowed funds used to acquire Notes
Receivable.
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 six months ended June 30, 1996 decreased by $137,009 or
41%, to $196,514 from $333,523 in the six months ended June 30, 1995. The
decrease reflected primarily the modifications of the terms of the Company's
existing Senior Debt obligations. In June 1996, a retroactive adjustment to the
beginning of the year was recorded to reduce service fees. The total service fee
without the modification would have been $369,343 for six months ended June 30,
1996. The modification resulted in a reduction of service fees of $172,829, from
$196,514 to $369,343 for the six months ended June 30, 1996.
Operating income for the six months ended June 30, 1996 increased by
$691,838 or 537%, to $820,606 from $128,768 during the six months ended June 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
$34,000,000 of Notes Receivable since June 1995. During the six months ended
June 30, 1996, a majority of the loans purchased since June 1995 were performing
and contributed to increase in operating income. During the six months ended
June 30, 1996, operating income as a percentage of net notes receivable was 2%
as compared to .2% for the six months ended June 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 six
months ended June 30, 1996, increased by 506% to $820,606 from $128,768 in the
six months ended June 30, 1995. Net income increased to $720,248 from $104,504
in the six months ended June 30, 1995, for the reasons described above.
Liquidity and Capital Resources
At June 30, 1996, the Company had cash of $1,146,680, a net decrease of
$189,120 from December 31, 1995. During the first six months of 1996, the
Company used cash in the amount of $2,651,994 in its operating activities and
gained $13,563,448 from its investing activities, primarily due to the
collections of the Notes Receivable. The net amount of cash used in operating
and investing activities was reduced by $11,100,574, reflecting primarily the
repayment of its Senior Debt.
11
<PAGE>
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 $5,723,019 at June 30, 1996.
Management believes that OREO will be held as rental property or be sold in
the ordinary course of business and that the increase in OREO held as inventory
at June 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, in June 1996 the Company
wrote off $155,396 worth of automobiles as a gift to charity. At June 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.
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 lenders 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
The Company has negotiated with its Senior Debt lenders 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 operations that would cause the Company to incur additional capital
expenditures in the future.
Senior Debt. As of June 30, 1996, the Company and its wholly owned
subsidiaries owed an aggregate amount of $59,408,518, under fifteen 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 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 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.
12
<PAGE>
Certain of the Senior Debt credit agreements required the established of
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 $683,169 at June 30, 1996.
Lines of Credit. Advances made available to the Company by its Senior Debt
lender were used to repay loans senior to those acquired by the Company on a
given property 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 June 30, 1996 and
December 31, 1995, were $1,060,213 and $1,324,128, respectively. The agreement
with the Senior Debt lender provides the Company the ability 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 June 30, 1996 and December 31, 1995, $587,500 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 principal 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
June 30, 1996 and December 31, 1995, there were $555,000 and $575,000 of theses
debentures were 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. 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.
Management plans to continue to use bank financing, credit lines and
private sources of equity to fund future Loan Portfolio acquisitions. Management
believes that Registrant can acquire debt from financial institutions on more
favorable terms than can be obtained from individuals investing in limited
partnerships.
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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Litigation. On January 24, 1996, the Shultz, William B. Sr, Family Living
Q-Tip Trust commenced an action against the Company in the US District Court,
Hartley County, Texas seeking a determination on the security interest in a
certain real property assigned to the Company to receive approximately $400,000
owing to the Company pursuant to a settlement of certain previous litigation,
was unenforceable.
On July 15, 1996, the Court granted the Company's motion for summary
judgement and awarded the Company actual damages of $413,819, pre and post
judgment interest, attorney fees in the amount of $15,000 and a declaration that
the Deed of Trust constitutes a valid and enforceable lien against the property
to secure payment of all obligations under the settlement agreement and for an
order foreclosing the Deed of Trust lien by order for sales.
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.
Financial Advisory Services. The Company has entered into an agreement
with Sandler O'Neill Corporate Strategies, a division of Sandler O'Neill &
Partners, L.P., to act as financial advisors in connection with the Company's
strategic and capital planning to assess alternative plans to enhance the value
of the Company and its shareholder value. The agreement is for a term of five
months commencing as of August 1, 1996 and ending December 31, 1996.
Repurchase of Common Stock. In July 1996 the Board of Directors of the
Company authorized management at its discretion to utilize up to $250,000 to
repurchase shares of the Company's common stock ("the Plan").
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K.
(a)
<S> <C>
EXHIBIT TABLE
Exhibit
No. Description
3(a) Restated Certificate of Incorporation of Franklin Credit Management
Corporation.
3(b) Bylaws of Registrant.
4(a) Convertible Subordinated Debentures and their associated Warrants
99(a) Letter Agreement, dated August 2, 1996, between the Company and
Sandler O'Neill Corporate Strategies.
(b) No reports on Form 8-K were filed during the second quarter of 1996.
</TABLE>
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
August 14, 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 Executi August 14, 1996
Thomas J. Axon and Director (Principal
executive officer)
FRANK B. EVANS, Jr. Vice President, Treasurer, August 14, 1996
Frank B. Evans, Jr. Chief Financial Officer and
Director Secretary (Principal
financial and accounting officer)
JOSEPH CAIAZZO Vice President Chief Operating August 14, 1996
Joseph Caiazzo Officer and Director
15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C>
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.)
3(b) Bylaws of Registrant (incorporated by reference
to Registrant's Registration Statement on
Form S-4, No. 33-81948)
4(a) Convertible Subordinated Debentures and their
associated Warrants (incorporated by reference
to Registrant's Registration Statement on Form
S-4, No. 33-81948)
99(a) Letter Agreement, dated August 2, 1996, between
the Company and Sandler O'Neill Corporatate
Strategies. (filed herewith) 17-19
</TABLE>
16
Exhibit 99(a)
August 2, 1996
Board of Directors
Franklin Credit Management Corporation
Six Harrison Street
New York, NY 10013
AttentMr. Thomas J. Axon
President and Chief Executive Officer
Ladies and Gentlemen:
Sandler O'Neill Corporate Strategies, a division of Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill"), is pleased to act as financial advisor to
Franklin Credit Management Corporation (the "Company") in connection with the
Company's strategic and capital planning analyses ("General Advisory Services").
This letter is to confirm the terms and conditions of our engagement.
GENERAL ADVISORY SERVICES
In connection with Sandler O'Neill's General Advisory Services, we would
expect to work with the Company's management, its counsel, accountants and other
advisors to assess the Company's strategic alternatives and help implement a
tactical plan to enhance the value of the Company. We anticipate that our
activities would include, as appropriate, the following:
1. Reviewing the current business and financial characteristics of the
Company, including a review of its financial performance, trends,
and future prospects;
2 Creating a base case financial model to project a range of possible
operating results given alternative operating strategies and market
environments;
3 Reviewing and comparing the potential present values created by pursuing
alternative strategies, assuming a range of operating results, terminal
franchise values and anticipated capital costs;
4. Analyzing the impact on the Company's franchise value of the
implementation of a capital raising transaction;
5. Analyzing the impact on the Company's franchise value of implementing
other restructuring activities which may involve the purchase or sale of
selected performing and nonperforming assets;
6. Analyzing other strategic alternatives which could provide long-term
benefits and enhanced value to the Company's shareholders;
7. Summarizing recent merger and acquisition trends in the financial services
industry, including tactics employed by others and typical terms and
values involved, and reviewing the implications of such trends and values
for the Company;
17
<PAGE>
8. Reviewing Sandler O'Neill's findings with the Board of Directors of the
Company, with periodic updates as may be requested; and
9. Ongoing general advice and counsel to management and the Board of
Directors of the Company with respect to strategic and tactical issues.
Prior to December 31, 1996, Sandler O'Neill will propose to the Company a
course of action to enhance the Company's shareholder value. If this course of
action is approved by the Company, then the Company agrees to enter into an
investment banking agreement with Sandler O'Neill with respect to the execution
of such course of action which will supersede this agreement. The terms of such
agreement will reflect the conditions of the general market place as with
regards to comparable investment banking transactions.
RETAINER FEE
In connection with its General Advisory Services hereunder, the Company
agrees to pay Sandler O'Neill a non-refundable retainer fee of $40,000 for the
five month period commencing as of August 1, 1996 and ending on December 31,
1996, payable in four equal installments of $10,000 on the first day of August,
September, October, and November.
COSTS AND EXPENSES
In addition to any fees that may be payable to Sandler O'Neill hereunder,
the Company agrees to reimburse Sandler O'Neill, upon request made from time to
time, for its reasonable out-of-pocket expenses incurred in connection with its
engagement hereunder, including the reasonable fees and disbursements of its
legal counsel; provided, however, that the Company will have given its prior
approval of any expenses exceeding $10,000 in the aggregate for the term of this
engagement; and provided further that Sandler O'Neill shall document such
expenses to the reasonable satisfaction of the Company. The provisions of this
paragraph are not intended to apply to or in any way impair the indemnification
provisions of this letter.
CONFIDENTIALITY
The Company will furnish Sandler O'Neill with such information as Sandler
O'Neill reasonably believes appropriate to its assignment (all such information
so furnished being the "Information"). The Company recognizes and confirms that
Sandler O'Neill (a) will use and rely primarily on the Information and on
information available from generally recognized public sources in performing the
services contemplated by this letter without having independently verified the
same, (b) does not assume responsibility for the accuracy or completeness of the
Information and such other information and (c) will not make an appraisal of any
assets or collateral securing assets of the Company. Sandler O'Neill agrees to
use all reasonable efforts to keep confidential Information confidential.
18
<PAGE>
INDEMNIFICATION
The Company agrees to indemnify and hold Sandler O'Neill and its
affiliates and their respective partners, directors, officers, employees, agents
and controlling persons (Sandler O'Neill and each such person being an
"Indemnified Party") harmless from and against any and all losses, claims,
damages and liabilities, joint or several, to which such Indemnified Party may
become subject under applicable federal or state law, or otherwise, related to
or arising out of the engagement of Sandler O'Neill pursuant to, and the
performance by Sandler O'Neill of the services contemplated by, this letter, and
will reimburse any Indemnified Party for all expenses (including reasonable
counsel fees and expenses) as they are incurred, including expenses incurred in
connection with the investigation of, preparation for or defense of any pending
or threatened claim or any action or proceeding arising therefrom, whether or
not such Indemnified Party is a party. The Company will not be liable under the
foregoing indemnification provision to the extent that any loss, claim, damage,
liability or expense is found in a final judgment by a court of competent
jurisdiction to have resulted primarily from Sandler O'Neill's bad faith or
gross negligence.
The Company agrees to notify Sandler O'Neill promptly of the assertion
against it or any other person of any claim or the commencement of any action or
proceeding relating to any transaction contemplated by this agreement.
TERMINATION OF ENGAGEMENT
Sandler O'Neill's engagement hereunder may be terminated by the Company or
by Sandler O'Neill at any time upon 30 days written notice to that effect and,
unless sooner terminated by either party, will expire on December 31, 1996, it
being understood that the provisions relating to the payment of fees and
expenses and indemnification will survive any such termination or expiration.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner.
By:/s/ Catherine A. Lawton
Catherine A. Lawton
Vice President
Accepted and agreed to as of the date first written above:
Franklin Credit Management Corporation
By:/s/ Thomas J. Axon
Title: President
TWK/ab 19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAIL INFORMATION EXTRACTED FROM JUNE 30,
1996, 10QSB AND IS QUAILIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1.88
<CASH> 1,146,680
<SECURITIES> 0
<RECEIVABLES> 98,891,427
<ALLOWANCES> (22,071,138)
<INVENTORY> 6,900,627
<CURRENT-ASSETS> 0
<PP&E> 639,459
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,302,438
<CURRENT-LIABILITIES> 64,307,894
<BONDS> 0
<COMMON> 55,143
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 68,302,438
<SALES> 0
<TOTAL-REVENUES> 7,429,860
<CGS> 0
<TOTAL-COSTS> 6,609,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 440,191
<INTEREST-EXPENSE> 3,787,251
<INCOME-PRETAX> 840,606
<INCOME-TAX> 120,358
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 720,248
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
