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 March 31, 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)
Common Stock, $0.01 par value.
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING PRECEDING
FIVE YEARS
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as latest practicable date: 5,514,121 at May 13, 1996
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
MARCH 31, 1996
C O N T E N T S
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PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets March 31, 1996 (unaudited)
and December 31, 1995 2
Consolidated Statements of Income (unaudited) for the
three months ended March 31, 1996 and 1995 3
Consolidated Statement of Cash Flows (unaudited) for the
three months ended March 31, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED BALANCE SHEETS
<S> <C> <C> <C> <C>
31-Mar-96 31-Dec-95
ASSETS (unaudited) (audited)
- ------------------------------------------------------------------------------
Cash $ 2,951,909 $ 1,335,800
Restricted Cash 628,233 617,111
Notes Receivable:
Principal amount 105,785,889 116,573,463
Joint venture participations (385,107) (448,966)
Purchase discount (22,401,467) (28,708,043)
Allowance for loan losses (22,842,188) (20,420,311)
------------ ------------
60,157,126 66,996,143
Accrued Interest Receivable 1,129,170 1,150,869
Other real estate owned 5,318,201 3,785,651
Inventory, automobiles 279,036 267,428
Litigation Proceeds Receivable 514,986 502,486
Refundable income tax 74,240 74,240
Other Assets 978,708 938,001
Building, Furniture & Fixtures, net 651,829 698,418
Loan Commitment Fees and Other, net 1,467,005 1,564,920
------------ ------------
$ 74,150,443 $ 77,931,067
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 1,414,597 $ 701,142
Lines of credit 701,775 1,324,128
Notes payable 66,584,951 69,315,917
Subordinated debentures 1,201,250 1,260,000
Notes payable, affiliates 130,993 834,616
Deferred income tax credits 956,686 1,240,540
------------ ------------
Total liabilities 70,990,253 74,676,343
Commitments and Contingencies
Stockholder's Equity:
Common Stock, $.01 par value,
10,000,000 shares authorized,
5,503,896 and 5,503,896 shares
issued and outstanding in 1996
and 1995 respectively 55,040 55,040
Additional paid-in Capital 6,470,952 6,470,952
Accumulated deficit (3,365,802) (3,271,268)
------------ ------------
3,160,190 3,254,724
------------ ------------
$ 74,150,443 $ 77,931,067
============ ============
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Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
Period ended March 31, 1996 and 1995
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Three Months Ended
31-Mar-96 31-Mar-95
(unaudited) (unaudited)
- -------------------------------------------------------------------------------
Revenue:
Interest Income $1,808,679 $1,810,916
Purchase Discount Earned 1,303,367 846,425
Loss on liquidation of
partnership interests - (17,515)
Loss on sale of portfolios - (27,872)
Other 76,697 22,245
---------- ----------
3,188,743 2,634,199
---------- ----------
Operating expenses:
Collection, general and administrative 874,390 684,710
Provision for loan losses 206,726 417,210
Interest Expense 1,891,120 1,178,977
Service Fees 216,317 140,491
Amortization of debt issuance costs 98,928 143,061
Depreciation 15,796 7,769
---------- ----------
3,303,277 2,572,218
---------- ----------
Operating (loss) income (114,534) 61,981
Litigation proceeds 20,000 -
---------- ----------
(94,534) 61,981
---------- ----------
Provision for income taxes - 7,560
---------- ----------
(94,534) 54,421
Minority interest in net
income of consolidated partnerships - 44,962
---------- ----------
Net (loss) income $ (94,534) $ 9,459
========== ==========
Earnings per common share:
(Loss) income before minority interest
in net income of consolidated
partnerships $ (0.02) $ 0.01
Minority interest in net income
of consolidated partnerships $ - 0.01
---------- ----------
Net (loss) income $ (0.02) $ 0.02
---------- ----------
Weighted average number of shares outstanding 5,503,896 5,247,781
========== ==========
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3
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Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Three Months ended March 31, 1996 and 1995
<S><C><C><C><C><C> <C> <C>
(unaudited) (unaudited)
3/31/96 3/31/95
- -----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net (loss) income $ (94,534) $ 9,459
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation, depletion, amortization
and valuation provisions 114,724 150,830
Minority interests in net income
of affiliates - 44,962
Loss on sale of portfolios - 17,515
Purchase discount earned (1,303,367) (846,483)
Provision for loan losses 206,726 417,210
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable 21,699 (288,829)
Accounts receivable (1,165,624) 34,666
Inventory-repossessions (1,532,550) -
Other assets 40,707 (92,475)
Increase (decrease) in:
Accounts payable and accrued
expenses 713,455 53,298
Due to affiliates (74,500) (44,279)
Income tax payable - (47,979)
---------- ----------
Net cash used in operating
activities (3,073,264) (592,105)
Cash Flows From Investing Activities
Purchase of property and equipment 30,794 (600,276)
Principal collections on notes receivable 8,145,629 2,134,596
Joint venture participation (63,859) (16,255)
Acquisition fees paid - (20,000)
(Increase) in restricted cash (11,122) (34,717)
---------- ----------
Net cash used in investing
activities 8,101,442 1,463,348
Cash Flows From Financing Activities
Distributions to minority interests - (191,383)
Payments on debenture notes payable (58,750) -
Proceeds from debenture notes - 125,000
Proceeds from lines of credit 235,733 -
Payments on lines of credit (858,086) -
Proceeds from long-term debt - 844,568
Principal payments of long-term debt (2,730,966) (1,631,230)
---------- ----------
Net cash provided by
financing activities (3,412,069) (853,045)
---------- ----------
Net increase in cash 1,616,109 18,198
Cash:
Beginning 1,335,800 677,192
---------- ----------
Ending $2,951,909 $ 695,390
========== ==========
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Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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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 (loss) (94,534)
-----------------------------------------------
Balance, March 31, 1996 5,503,896 $55,040 $6,470,952 $(3,365,802)
===============================================
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5
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FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Nature of Business and Significant Accounting Polices
Nature of business: Franklin Credit Management Corporation, formerly Miramar
Resources, Inc. (the "Registrant" or "Company"), incorporated under the laws of
the State of Delaware, acquires loans and promissory notes from mortgage and
finance companies as well as from the Federal Deposit Insurance Corporation
(FDIC).
On December 30, 1994, the Company merged with Franklin Credit Management
Corporation ("Old Franklin"), an affiliate of the Company. In the merger, all
outstanding shares of common stock of Old Franklin, par value $.01 per share,
were converted into 4,667,086 shares of the Company's Common Stock, at a
conversion rate of 1.045 shares of Company Common Stock per share of Old
Franklin Common Stock. The acquisition by the Company of Old Franklin has been
accounted for as a combination of companies under common control in a manner
similar to a pooling of interests and, accordingly, the assets acquired and the
liabilities assumed were recorded at the carrying values. Following the merger,
the Company assumed the name Franklin Credit Management Corporation. Prior to
the merger, the Company held interests in certain gas and oil wells located in
Colorado, Kansas and Oklahoma. These interests were sold in December 1994.
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. 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 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 purchased 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 or liquidation of collateral. 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.
6
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FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Nature of Business and Significant Accounting Polices (Continued)
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.
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 real estate loans are 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
("Statement 118"). As required by Statement 114, as amended, the impairment of
loans, that have been separately identified for evaluation, is measured based
upon the present value of expected future cash flows or, alternatively, the
observable 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 foreclosure is probable, the measure of
impairment is based on 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 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.
7
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FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Nature of Business and Significant Accounting Polices (Continued)
Other real estate owned (Continued): 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 re-expensed. Gains or
losses are included in operations upon disposal.
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. Unexercised options
under the conversion feature of the debenture are deemed not to be common stock
equivalents. Earnings per common share has been restated for the effects of the
merger.
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, 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.
8
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FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(Formerly Miramar Resources, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Nature of Business and Significant Accounting Polices (Continued)
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
9
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PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995
During the three months ended March 31, 1996, total revenue, comprised
primarily of interest income and purchase discount earned, increased $554,544 or
21% to $3,188,743 from $2,634,199 during the three months ended March 31, 1995.
During the three months ended March 31, 1996, revenues from interest income on
Notes Receivable decreased $2,237, to $1,808,679 from $1,810,916 in the three
months ended March 31, 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 Notes Receivable in
the Company's portfolio typically provide for level amortization. As a result,
the interest income on the portfolio may be expected to decline as the portfolio
ages. The Company did not experience a significant decline in interest income
from the quarter ended March 31, 1995 to that ended March 31, 1996 primarily
because of the purchase of additional Notes Receivable during the intervening
period.
During the three months ended March 31, 1996, purchase discount earned
increased $456,942 or 54%, to $1,303,367 from $846,425 in the three months ended
March 31, 1995. The increase in purchase discount earned was attributable
principally to an increase of $29,206,022 or 38% in the size of the Company's
portfolio of Notes Receivable to $105,785,889 at March 31, 1996, from
$76,579,867 at March 31, 1995, primarily as the result of a single purchase of
approximately $26,000,000 of Notes Receivable in December 1995.
During the three months ended March 31, 1996 total operating expenses
increased $731,059 or 28%, to $3,303,277 from $2,572,218 in the three months
ended March 31, 1995. This increase was largely due to the increase of both
Notes Receivable and associated Senior Debt during fiscal 1995.
During the three months ended March 31, 1996 collection, general and
administrative expenses increased $189,680 or 28% to $874,390 from $684,710 in
the three months ended March 31, 1995. Personnel expenses increased $59,754 or
26% to $289,617 from $229,863 in the three months ended March 31, 1995. All
other collection expenses, increased $129,926 or 39% to $584,773 from $454,847
in the three months ended March 31, 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.
During the three months ended March 31, 1996, interest expense increased
$712,143 or 60%, to $1,891,120 from $1,178,977 in the three months ended March
31, 1995. The increase was principally due to an increase in Senior Debt,
debentures and lines of credit of $28,646,591 or 72% from $39,841,385 as of
March 31, 1995 to $68,487,976 as of March 31, 1996, which additional
indebtedness was incurred to fund the purchase of additional Notes Receivable.
The notes payable accrue interest at variable rates based upon the prime rate.
The change in the prime rate during the respective quarters had little effect on
the cost of borrowed funds used to acquire Loan Portfolios. Prime rate decreased
from 8.43% during the first quarter ended March 31, 1995 to 8.33% during the
first quarter ended March 31, 1996. The Company is currently negotiating with
its Senior Debt lenders to modify the existing terms of its Senior Debt
obligations. Management believes that such modifications will reduce its
borrowing costs during fiscal 1996, assuming general market rates remain at
present levels.
During the three months ended March 31, 1996, provisions for loan losses
decreased $210,484 or 50% to $206,726 from $417,210 in the three months ended
March 31, 1995. The decrease reflected primarily the filing for bankruptcy of
one specific borrower in 1995. Bad debt expense expressed as a percentage of
gross notes receivable for the quarters ended March 31, 1996 and 1995 equaled
approximately 0.2% and 1%, respectively. This decrease reflects both an increase
volume and improved performance of certain Notes Receivable.
During the three months ended March 31, 1996 operating income decreased
285% to a $114,534 loss from income of $61,981 during the three months ended
March 31, 1995. This decline was attributable, in part, to the purchase 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
10
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performing status. During the three months ended March 31, 1996, operating
income (loss) as a percentage of net notes receivable was (.2)% as compared to
.2% in the three months ended March 31, 1995. As noted previously, the timing
differences of the interest income and purchase discount earned vs. interest
expense combined with service fees, collections expenses and amortization of
loan commitment fees for the newly acquired portfolios increase operating
expenses disproportionately until these portfolios reach performing status.
During the three months ended March 31, 1996 income before litigation
proceeds, taxes and minority interest decreased 253% to a loss of $94,534 from
income of $61,982 in the three months ended March 31, 1995. Net income decreased
to loss of $94,534 from income of $9,459 in the three months ended March 31,
1995, for the reasons described above.
Liquidity and Capital Resources
At March 31, 1996, the Company had cash of $2,951,909, a net increase of
$1,616,109 from December 31, 1995. During the first quarter of 1996, the Company
used cash in the amount of $3,073,264 in its operating activities and gained
$8,101,442 from its investing activities, primarily due to the collections of
the Notes Receivable. The amount of cash provided in operating and investing
activities was reduced by $3,412,069 due primarily to principal repayment of its
Senior Debt.
In the normal course of its business,the Company accelerates and
foreclosures upon non-performing consumer loans included in its portfolio which
are secured by first and second mortgages. At March 31, 1996, as a result of
such foreclosures, the Company held OREO having a net realizable value of
$5,318,201. Management believes that OREO will be sold in the ordinary course of
business and that the increase in OREO held as inventory at March 31, 1996 is
not material to the operations of the Company.
At March 31, 1996, the Company held as inventory automobiles having a net
realizable value of $279,036 which it obtained through repossessions. Franklin
held as inventory automobiles having a fair market value of $267,428 as of
December 31, 1995. Management believes that the automobile inventory will be
sold in the ordinary course of business and that the increase in inventory held
at March 31, 1996 is not material to the operations of the Company. Registrant
has recorded these autos at the lower of cost or market value.
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,
anticipated modifications to its Senior Debt obligations and anticipated cash
flow from operations will provide sufficient capital resources for its
anticipated operating needs. The Registrant is currently negotiating with its
Senior Debt lenders to modify the existing terms of its funding of cash flows
for operations, to improve cash flows.
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.
Due to the restrictions on the Company's use of collections from Notes
Receivable imposed by the Senior Debt lenders, which restrictions are described
below in Cash Flow From Financing Activities, the Company experiences irregular
periods of cash flow shortage. 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 the obligations of the
Company. The Company has no commitments for capital expenditures. Except for
management's intent to acquire additional Loan Portfolios, the Company is not
aware of any trends or operations that would cause the Company to incur
additional capital expenditures in the future.
11
<PAGE>
Cash Flow From Financing Activities
Senior Debt. As of March 31, 1996, the Company and it's wholly owned
subsidiaries had thirteen loans payable, (the "Senior Debt") to two financial
institutions, in the aggregate amount of $66,584,951.
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 three
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 the Company to maintain a fixed ratio of the
aggregate amount of Notes Receivable compared to the outstanding amount of the
Senior Debt; the third 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 limit the cash flow available to the
Company. The Registrant is currently negotiating with its Senior Debt lender to
modify the existing terms of its funding of cash allowances for operations to
improve cash flows.
Certain of the Senior Debt credit agreements require that non-interest
bearing cash account be established, funded by an initial deposit at the loan
closing and additional deposits based upon a percentage of monthly collections
up to a specified dollar limit. The restricted cash is maintained at a bank
which is one of the lenders of the Senior Debt. Restricted cash is to be
utilized only upon the Company's failure to meet the minimum monthly payment due
if collection from Notes Receivable securing the loan is insufficient to satisfy
the installment due. Historically, the Company has not had to call upon these
reserves. The aggregate balance of restricted cash in such accounts was $617,111
at December 31, 1995 and $628,233 at March 31, 1996.
Lines of Credit. Advances made available to the Company by its Senior Debt
lender were used to satisfy senior lien positions and fund property repair costs
in connection with foreclosures of certain real estate loans financed by the
Company. Management believes the ultimate sale of these properties will satisfy
the outstanding lines of credit and accrued interest, as well as surpass the
collectible value of the original secured notes receivable. Management has an
agreement in principal 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 March 31, 1996 and December
31, 1995, were $701,775 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 $750,000 in subordinated debentures (the "12%
Debentures"). As of March 31, 1996 and December 31, 1995, $646,250 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 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 $800,00 in
subordinated debentures (the "Harrison 1st 12% Debentures"). As of March 31,
1996 and December 31, 1995, $555,000 and $575,000 of theses debentures were
outstanding. 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
5 years in 11 equal quarterly installments of $22,200 commencing September 30,
1997 with the remaining balloon payment of $310,800 due on June 30, 2000. The
debenture 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.
12
<PAGE>
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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(b) No reports on Form 8-K were filed during the first quarter of 1996.
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.
May 15, 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 May 15, 1996
Thomas J. Axon and Director (Principal
executive officer)
FRANK B. EVANS, Jr. Vice President, Treasurer, May 15, 1996
Frank B. Evans, Jr. Chief Financial Officer
and Director Secretary
(Principal financial and
accounting officer)
JOSEPH CAIAZZO Vice President and Director May 15, 1996
Joseph Caiazzo
15
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAIL INFORMATION EXTRACTED FROM MARCH 31,
1996, 10QSB AND IS QUAILIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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<CASH> 2,951,909
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<RECEIVABLES> 105,785,889
<ALLOWANCES> (22,842,188)
<INVENTORY> 5,597,237
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<PP&E> 651,829
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<TOTAL-ASSETS> 74,150,443
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<COMMON> 55,040
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<TOTAL-REVENUES> 3,188,743
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<TOTAL-COSTS> 3,303,277
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<LOSS-PROVISION> 206,726
<INTEREST-EXPENSE> 1,891,120
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