SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the registrant Filed by a party other than the registrant Check
the appropriate box:
Preliminary proxy statement Confidential, for Use of the Commission Only
Definitive proxy statement (as permitted by Rule 14a-6(e)(2)) Definitive
additional materials Soliciting material pursuant to Rule 14a-11(c) or
Rule 14a-12
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)Payment
of filing fee (Check the appropriate box): $125 per Exchange Act Rule
0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
$500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3). Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
Six Harrison Street
New York, New York 10013
June 5, 1996
To Our Stockholders:
You are cordially invited to attend the 1996 Annual Meeting of
Stockholders of Franklin Credit Management Corporation (the "Company"), which
will be held at the corporate offices of the Company, located at Six Harrison
Street, Sixth Floor, New York, New York, on Wednesday June 26, 1996, at 10:00
A.M., New York time.
The Notice of Annual Meeting and Proxy Statement covering the formal
business to be conducted at the Annual Meeting follow this letter and are
accompanied by the Company's Annual Report for the fiscal year ended December
31, 1995.
We hope you will attend the Annual Meeting in person. Whether or not you
plan to attend, please complete, sign, date and return the enclosed proxy
promptly in the accompanying reply envelope to assure that your shares are
represented at the meeting.
Sincerely yours,
THOMAS J. AXON
President
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
Six Harrison Street
New York, New York 10013
(212) 925-8745
NOTICE OF 1996 ANNUAL MEETING OF STOCKHOLDERS
June 26, 1996
Notice is hereby given that the Annual Meeting of Stockholders of Franklin
Credit Management Corporation (the "Company") will be held at the corporate
offices of the Company, located at Six Harrison Street, Sixth Floor, New York,
New York, at 10:00 A.M., New York time, on Wednesday, June 26, 1996 for the
following purposes:
1. to elect three Directors to Class 2 of the Company's Board of
Directors;
2. to approve the Company's 1996 Stock Incentive Plan;
3. to ratify the appointment of McGladrey & Pullen as the Company's
independent public auditors for the fiscal year ending
December 31, 1996; and
4. to transact such other business as may be properly brought before the
meeting and any adjournment or postponement thereof.
The Board of Directors unanimously recommends that you vote FOR the
election of all three nominees as Directors, FOR the adoption of the Company's
1996 Stock Incentive Plan, and FOR the approval of the appointment of the
independent public auditors.
Stockholders of record at the close of business on June 5, 1996 are
entitled to notice of, and to vote at, the Annual Meeting and any adjournment or
postponement thereof.
Whether or not you plan to attend the Annual Meeting in person, please
complete, sign, date and return the enclosed proxy in the reply envelope
provided which requires no postage if mailed in the United States. Stockholders
attending the Annual Meeting may vote in person even if they have returned a
proxy. By promptly returning your proxy, you will greatly assist us in preparing
for the Annual Meeting.
By Order of the Board of Directors,
THOMAS J. AXON
President
New York, New York
June 5, 1996
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
Six Harrison Street
New York, New York 10013
(212) 925-8745
PROXY STATEMENT FOR
1996 ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 26, 1996
General Information
This Proxy Statement and the enclosed form of proxy are being furnished,
commencing on or about June 5, 1996, in connection with the solicitation of
proxies in the enclosed form by the Board of Directors of Franklin Credit
Management Corporation, a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders ("Stockholders") of the Company (the "Annual
Meeting"). The Annual Meeting will be held at the corporate offices of the
Company, located at Six Harrison Street, Sixth Floor, New York, New York, at
10:00 A.M., New York time, on June 26, 1996, and at any adjournment or
postponement thereof, for the purposes set forth in the foregoing Notice of 1996
Annual Meeting of Stockholders.
The annual report of the Company, containing financial statements of the
Company as of December 31, 1995, and for the year then ended (the "Annual
Report"), has been delivered or is included with this proxy statement.
A list of the Stockholders entitled to vote at the Annual Meeting will be
available for examination by Stockholders during ordinary business hours for a
period of ten days prior to the Annual Meeting at the corporate offices of the
Company. A Stockholder list will also be available for examination at the Annual
Meeting.
If you are unable to attend the Annual Meeting, you may vote by proxy on
any matter to come before that meeting. The enclosed proxy is being solicited by
the Board of Directors. Any proxy given pursuant to such solicitation and
received in time for the Annual Meeting will be voted as specified in such
proxy. If no instructions are given, proxies will be voted 1. FOR the election
as Directors of the nominees named below under the caption "Election of
Directors" to Class 2 of the Board of Directors, 2. FOR the approval of the
Franklin Credit Management Corporation 1996 Stock Incentive Plan (the "Plan
Adoption Proposal"), 3. FOR the ratification of the appointment of McGladrey &
Pullen ("M&P") as independent public auditors for the Company's fiscal year
ending December 31, 1996, and 4. in the discretion of the proxies named on the
proxy card with respect to any other matters properly brought before the Annual
Meeting. Attendance in person at the Annual Meeting will not of itself revoke a
proxy; however, any Stockholder who does attend the Annual Meeting may revoke a
proxy orally and vote in person. Proxies may be revoked at any time before they
are voted by timely submitting a properly executed proxy with a later date or by
sending a written notice of revocation to the Secretary of the Company at the
Company's principal executive offices.
This Proxy Statement and the accompanying form of proxy are being mailed
to Stockholders of the Company on or about June 5, 1996.
Following the original mailing of proxy solicitation material, executive
and other employees of the Company and professional proxy solicitors may solicit
proxies by mail, telephone, telegraph and personal interview. Arrangements may
also be made with brokerage houses and other custodians, nominees and
fiduciaries who are record holders of the Company's Common Stock to forward
proxy solicitation material to the beneficial owners of such stock, and the
Company may reimburse such record holders for their reasonable expenses incurred
in such forwarding. The cost of soliciting proxies in the enclosed form
will be borne by the Company.
<PAGE>
The Company's Board of Directors has unanimously voted to recommend that
you vote for the nominees for election to the Board of Directors listed below,
for the Plan Adoption Proposal and for the appointment of M&P as the independent
public auditors of the Company for the fiscal year ended December 31, 1996.
Voting of Shares
The holders of one-third of the outstanding shares entitled to vote,
present in person or represented by proxy, will constitute a quorum for the
transaction of business. Shares represented by proxies that are marked "abstain"
will be counted as shares present for purposes of determining the presence of a
quorum on all matters. Brokers holding shares for beneficial owners in "street
name" must vote those shares according to specific instructions they receive
from the owners of such shares. If instructions are not received, brokers may
vote the shares, in their discretion, depending on the type of proposals
involved. "Broker non-votes" result when brokers are precluded from exercising
their discretion on certain types of proposals. However, brokers have
discretionary authority to vote on all the proposals being submitted hereby to
the Stockholders other than the Plan Adoption Proposal. Shares that are voted by
brokers on some but not all of the matters will be treated as shares present for
purposes of determining the presence of a quorum on all matters, but will not be
treated as shares entitled to vote at the Annual Meeting on those matters as to
which authority to vote is withheld by the broker.
The election of each nominee for Director requires a plurality of votes
cast. Accordingly, abstentions and Broker non-votes will not affect the outcome
of the election; votes that are withheld will be excluded entirely from the vote
and will have no effect. The affirmative vote of the holders of a majority of
the shares present in person or represented by proxy at the meeting and entitled
to vote is required for 5. the approval of the Plan Adoption Proposal and 6. the
appointment of the independent public auditors. On these matters the abstentions
will have the same effect as a negative vote. Because Broker non-votes will not
be treated as shares that are present and entitled to vote with respect to a
specific proposal, a Broker non-vote will have no effect on the outcome.
The Company will appoint an inspector to act at the Annual Meeting who
will: (1) ascertain the number of shares outstanding and the voting powers of
each; (2) determine the shares represented at the Annual Meeting and the
validity of the proxies and ballots; (3) count all votes and ballots; (4)
determine and retain for a reasonable period of time a record of the disposition
of any challenges made to any determinations by such inspector; and (5) certify
his determination of the number of shares represented at the Annual Meeting and
his count of all votes and ballots.
Only Stockholders of record at the close of business on June 5, 1996 are
entitled to notice of, and to vote at, the Annual Meeting and any adjournment or
postponement thereof. As of the close of business on June 5, 1996, there were
outstanding 5,514,121 shares of the Company's Common Stock, par value $.01 per
share (the "Common Stock"). Each share of Common Stock entitles the record
holder thereof to one vote on all matters properly brought before the Annual
Meeting and any adjournment or postponement thereof, with no cumulative voting.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 5, 1996, the number of shares
of Common Stock (and the percentage of the Company's Common Stock) beneficially
owned by (i) each person known (based solely on Schedules 13D or 13G filed with
the Securities and Exchange Commission (the "Commission") to the Company to be
the beneficial owner of more than 5% of the Common Stock, (ii) each Director and
nominee for Director of the Company, (iii) the Named Executives (as defined in
"Executive Compensation" below), and (iv) all Directors and executive Officers
of the Company as a group (based upon information furnished by such persons).
Under the rules of the Commission, a person is deemed to be a beneficial owner
of a security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose of or to direct the disposition
of such security. In general, a person is also deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership within 60 days. Accordingly, more than one person may be deemed to be
a beneficial owner of the same securities.
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Number of Shares Percentage (%)
Beneficially Owned of Common Stock
Thomas J. Axon(1)(2) 2,778,739 50.4%
Frank B. Evans, Jr.(1)(3) 927,257 16.8%
Joseph Caiazzo(1) 0 *
Vincent A. Merola 295,938 5.4%
25 Wildwood Court
Montvale, NJ 07645
James B. Murphy(1) 207,549 3.8%
Joseph Bartfield(1) 0 *
Robert Chiste(1) 45,058 *
Steven W. Lefkowitz(1) 0 *
Allan R. Lyons(1) 0 *
William F. Sullivan(1) 3,700 *
Eugene T. Wilkinson(1) 15,514 *
All Directors and Officers as a
group (8 per-sons) 4,273,755 77.5%
<FN>
* Indicates beneficial ownership of less than one (1%) percent.
(1) Mailing address: c/o Franklin Credit Management Corporation, Six Harrison
Street, New York, New York 10013.
(2) Includes 11,611 beneficially owned by Mr.Axon's mother, Ann Axon, with
respect to which shares Mr. Axon disclaims beneficial ownership and 1,034
shares owned of record by him as custodian for a minor child.
(3) Includes 5,225 shares beneficially owned by Mr.Evans' father, Frank Evans,
with respect to which shares Mr. Evans disclaims beneficial ownership.
3
</FN>
</TABLE>
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors and executive Officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Commission initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Reporting persons
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely on review of the copies of such reports furnished to the
Company, the Company believes that during the fiscal year ended December 31,
1995 ("Fiscal 1995") all Section 16(a) filing requirements applicable to its
Officers, Directors and greater than ten percent stockholders were complied
with; except that one report covering a single transaction was filed late by
Thomas J. Axon and one report covering a single transaction was filed late by
Eugene T. Wilkinson.
PROPOSALS
The Company's Board of Directors has unanimously voted to recommend the
nominees for election to the Board of Directors listed below, for the Plan
Adoption Proposal and for the appointment of M&P as the independent public
auditors of the Company for the fiscal year ending December 31, 1996.
PROPOSAL 1 - ELECTION OF DIRECTORS
Nominees for Election
The Board of Directors is divided into three classes. Each class is
elected in a different year for a term of three years, except to the extent that
shorter terms may be required to effect an appropriate balance among the classes
in the event of an increase in the number of Directors. It is proposed to elect
three Directors to Class 2 of the Company's Board of Directors, each for a term
of three years. All of the nominees, set forth in the table below, are currently
members of the Board of Directors. Unless instructed otherwise, the enclosed
proxy will be voted FOR the election of the nominees named below. Voting is not
cumulative. While management has no reason to believe that the nominees will not
be available as candidates, should such a situation arise, proxies may be voted
for the election of such other persons as a Director as the holders of the
proxies may, in their discretion, determine.
The following sets forth certain information with respect to each of the
three nominees to Class 2 of the Board of Directors as well as to the remaining
Directors and executive Officers of the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year First
Name Age Elected Director Office
Nominees to the Board
Allan R. Lyons 56 1994 Director
William F. Sullivan 46 ---- ----
Eugene T. Wilkinson 46 1994 Director
4
<PAGE>
Year First
Name Age Elected Director Office
Other Directors and
Executive Officers
Thomas J. Axon 44 1988 President, Chief
Executive Officer and
Director
Frank B. Evans, Jr. 44 1994 Vice President, Chief
Financial Officer,
Treasurer and Director
Joseph Bartfield 40 1994 Director
Joseph Caiazzo 38 1994 Vice President, Chief
Operating Officer and
Director
Robert Chiste 48 1994 Director
Steven W. Lefkowitz 40 1996 Director
</TABLE>
NOMINEES TO CLASS 2 DIRECTOR
FOR TERM ENDING 1999
Allan R. Lyons has served as a Director of the Company since December 30,
1994. Mr. Lyons is a Certified Public Accountant who has been a principal in
Piaker & Lyons, P.C. and its predecessors since 1968. He is engaged primarily in
estate, tax and financial planning services including investment structuring.
Mr. Lyons has been a Director of Starlog Franchise Corporation since August
1993, and a Director of The Score Board, Inc., a corporation primarily engaged
in the sale of sports and entertainment memorabilia since June 1990.
William F. Sullivan has been a Partner at Marnik & Sullivan, a general
practice law firm since 1985. He is admitted to both the New York State and
Massachusetts Bar Associations. He graduated from Suffolk University School of
Law and holds a Bachelor of Arts degree in political science from the University
of Massachusetts.
Eugene T. Wilkinson has served as a Director of the Company since December
30, 1994. Mr. Wilkinson has served as President and CEO of Management Facilities
Corporation ("MFC"), a Warren, New Jersey reinsurance facilities manager,
underwriter and consultant primarily in the health care field since 1987.
CLASS 3 DIRECTORS WITH TERMS EXPIRING 1997
Frank B. Evans, Jr. has served as Vice President, Treasurer, Chief
Financial Officer, and a Director of the Company since December 30, 1994. Mr.
Evans also served as the Secretary, Treasurer, a Vice President and a Director
of Franklin Credit Management Corporation ("Franklin"), which merged on December
30, 1994 with the Company (the "Merger"), which until the Merger had operated
under the name Miramar Resources, Inc. ("Miramar"), from its inception in 1990
until the Merger. Mr. Evans is CEO of Convault Mid Atlantic, Inc., an
environmental products company located in McLean, Virginia. Since 1986, Mr.
Evans has served as the President of First Chesapeake Capital Corporation, a
financial services firm providing investment banking and portfolio consulting
services, and as the President of First Chesapeake Futures Corporation, a
general partner of two managed futures funds with approximately $4,500,000 in
total assets. Mr. Evans is a Certified Public Accountant and received a Bachelor
of Science degree from the University of Maryland and a Masters degree in
business administration from the University of Southern California.
5
<PAGE>
Thomas J. Axon has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since December 30, 1994. Mr.
Axon has also served as Director of Franklin since May 1988 and the President
of Franklin since October 8, 1991. Prior to the Merger, Mr. Axon served as
President and Director of Franklin from its inception in 1990. Since 1984, Mr.
Axon has also served as the President of Axon Associates, Inc., a company
engaged in consumer financing. Since 1985, Mr. Axon has been the president of
RMTS Associates, Inc. ("RMTS"), an insurance consulting and underwriting
business with emphasis in professional sports, medical stop loss insurance and
large risk management. Mr.Axon received a Bachelor of Arts in economics from
Franklin and Marshall College and attended the New York University Graduate
School of Business.
Steven W. Lefkowitz is the founder and President of Wade Capital
Corporation, a privately held investment firm organized in 1990. From 1988 to
1990, Mr.Lefkowitz served as a Vice President of Corporate Finance for Drexel
Burnham Lambert, Incorporated, where he had been employed since 1985. Mr.
Lefkowitz serves on the Board of Directors of American Film Technologies, Inc.
and several private companies. Mr.Lefkowitz holds a Bachelor of Arts degree in
history from Dartmouth College and a Masters degree in business administration
from Columbia University.
CLASS 1 DIRECTORS WITH TERMS EXPIRING 1998
Joseph Bartfield has served as a Director of the Company since December
30, 1994. Mr. Bartfield has practiced law in New York State since 1980. Since
1988 he has been self-employed, specializing in commercial and real estate law
with particular emphasis on commercial litigation and commercial arbitration. He
graduated from New York Law School and holds a masters degree in political
science from Long Island University.
Joseph Caiazzo has served as a Director of the Company since December 30,
1994 and as a Vice President and Chief Operating Officer since March 25, 1996.
From 1989 to March 1996, Mr. Caiazzo served as corporate controller of R.C.
Dolner, Inc., a general contractor. He holds a Bachelor of Science from St.
Francis College and a Master of Business Administration in Finance from Long
Island University.
Robert Chiste has served as a Director of the Company since December 30,
1994. Since November 1994 Mr. Chiste has served as Chief Executive Officer and
a Director of Allwaste, Inc. From February 1986 to November 1994, Mr. Chiste
served as Chief Executive Officer and President of American National Power,
Inc., successor to Transco Energy Ventures Company. Mr. Chiste holds a Bachelor
of Science with honors in mathematics from Trenton State College, a J.D. cum
laude from Rutgers University School of Law and a Master of Business
Administration cum laude from Rutgers University School of Management.
All Directors hold office until the expiration of the three year term of
the class of Directors to which they were elected and until their successors
have been duly elected and qualified, or until their earlier death, resignation
or removal. The Company's Officers are elected by, and serve at the pleasure of,
the Board of Directors, subject to the terms of any employment agreements.
Currently none of the Company's Officers have employment agreements with the
Company. Pursuant to the By-laws of the Company, the Board of Directors has set
the number of Directors at nine with three classes of three Directors each. Nine
Directors are currently serving. No familial relationships exist between any
Directors or executive Officers of the Company.
Committees of the Board of Directors
The Company's Board of Directors has an Audit Committee and, if the Plan
Adoption Proposal is approved by the Stockholders, may form a Compensation
Committee to administer such plan. Messrs. Bartfield, Lyons and Wilkinson serve
on the Audit Committee. The Audit Committee meets with the Company's auditors
and principal financial personnel to review the results of the annual audit. The
Audit Committee also reviews the scope of the annual audit and other services
before they are undertaken by the Company's auditors, and reviews the adequacy
and effectiveness of the Company's internal accounting controls.
Meetings of the Board of Directors and its Committees
During Fiscal 1995, there were 5 meetings of the Board of Directors of the
Company, and 1 meeting of the Audit Committee. No Director attended fewer than
75% of the aggregate of the number of meetings of the Board of Directors and of
any committee on which he served.
6
<PAGE>
Compensation of Directors
The Directors received no compensation for their service as Directors of
the Company.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation earned by or paid to Thomas J.
Axon, the Chief Executive Officer of the Company, and Harvey R. Hirschfeld, the
only other executive Officer of the Company who earned over $100,000 (together,
the "Named Executives") in Fiscal 1995. Mr. Hirschfeld served as Senior Vice
President, Assistant Treasurer, Chief Operating Officer and a Director of the
Company until his resignation to pursue other interests in February, 1996. The
Company awarded or paid such compensation to such persons for services rendered
in all capacities during the applicable fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C>
Annual Compensation
---------------------------------------
Name and Other Annual
Principal Position Fiscal Year Salary($) Bonus($) Compensation ($)
- - ------------------------------------------------------------------------------
Thomas J. Axon-Chief 1995 $ 0 - $7,000(1)
Executive Officer 1994 $ 0 - $7,000(1)
1993 $108,000 - -
Harvey R. Hirschfeld 1995 $130,962 - -
Senior Vice President 1994 $100,000 $5,000 -
Assistant Treasurer 1993 $75,000 $30,000 -
and Chief Operating
Officer (2)
<FN>
(1) Represents health insurance benefits received by Mr. Axon.
(2) Resigned effective February 29, 1996.
</FN>
</TABLE>
Certain Relationships and Related Transaction.
During Fiscal 1995, the Company held an undivided 60% interest in an
office condominium unit located on the Sixth Floor of Six Harrison Street, New
York, New York, which housed the Company's principal executive offices. The
entire condominium unit serves as collateral for a loan (the "Loan") from an
unaffiliated lending institution to RMTS, of which Thomas J. Axon owns 80% of
the outstanding stock. During fiscal 1994 and fiscal 1995, Franklin and the
Company, respectively, paid RMTS on a monthly basis an amount equal to 60% of
the principal and interest due on the obligation secured by the condominium, as
well as certain pro-rated operating costs associated with use of the office. On
December 31, 1995, the Company purchased the remaining undivided interests in
the condominium unit from RMTS and Axon Associates, Inc. ("Axon"), for the
assumption by the Company of the obligation to pay all principal and interest
under the Loan and a purchase price of $150,000, half of which is due to each
of RMTS and Axon. In payment of such amounts the Company issued to RMTS and to
Axon 7% Demand Notes which are reflected on the financial statements of the
Company as Notes Payable to Affiliates at December 31, 1995. Thomas J. Axon owns
100% of the outstanding stock of Axon.
7
<PAGE>
Pursuant to the purchase agreement, the Company has guaranteed the obligations
secured by the condominium unit. The Company has guaranteed a line of credit
with a maximum borrowing amount of $250,000, maintained by RMTS at a bank. The
line of credit is collateralized by the condominium and is payable on demand,
with interest at a rate of prime plus one-half percent, payable monthly. An
amount of $125,000 was drawn in December 1992, and the proceeds were used for
improvements to the office condominium unit located at Six Harrison Street, New
York, New York. As of February 1996, the line had been repaid in full.
On May 3, 1995, the Company entered into a letter agreement with Wade Capital
Corporation ("WCC"), of which Steven W. Lefkowitz, a member of the Company's
Board of Directors, serves as President, pursuant to which WCC was retained
through April 30, 1996 to provide financial advisory services to the Company. In
consideration for the services, the Company agreed to pay WCC a monthly retainer
of $2,500 and a success fee based upon performance parameters, and to issue WCC
a five year warrant to purchase 5% of the amount of the Company's securities
issued in any transaction. The Company has paid WCC the $30,000 of retainer fees
owed to date.
Vote Required for Approval of the Election of Directors
The election of each nominee for Director requires a plurality of votes
cast. Accordingly, abstentions and Broker non-votes will not affect the outcome
of the Election. Proxies solicited by the Board of Directors will be voted for
each of the nominees listed above, unless Stockholders specify otherwise.
The Board of Directors unanimously recommends a vote FOR the election
of each of the nominees listed above.
PROPOSAL 2 - APPROVAL OF THE FRANKLIN CAPITAL MANAGEMENT 1996 STOCK
INCENTIVE PLAN
There will be presented to the meeting a proposal to approve the adoption
of the Company's 1996 Stock Incentive Plan (the "Plan"). The Board of Directors
believes that the Plan will provide certain Officers, Directors and other
employees of the Company, and consultants to the Company, an incentive to enter
into and remain in the service of the Company, to enhance the long-term
performance of the Company and to acquire a proprietary interest in the success
of the Company.
The Plan was adopted by the Board of Directors on May 23, 1996, subject to
the approval of Stockholders; all awards made under the Plan are subject in
their entirety to such Stockholder approval.
General
The Plan is designed to provide additional incentives for Officers, other
key employees and non-employee Directors of the Company to promote the success
of the business and to enhance the Company's ability to attract and retain the
services of qualified persons.
The Plan will provide for the issuance of a total of up to 600,000
authorized and unissued shares of Common Stock, treasury shares and/or shares
acquired by the Company for purposes of the Plan. Generally, shares subject to
an award that remain unissued upon expiration or cancellation of the award are
available for other awards under the Plan.
Awards under the Plan may be made in the form of (i) incentive stock
options or (ii) non-qualified stock options (incentive and non-qualified stock
options are collectively referred to as "options"). Awards may be made to such
Officers, Directors and other employees of the Company and its subsidiaries
(including employees who are Directors), and to such consultants to the Company
as the Committee shall in its discretion select (collectively, "key persons").
Administration
8
<PAGE>
The Administrator of the Plan (the "Administrator") will be either the
Board of Directors, or, at the discretion of the Board of Directors, a
committee, composed of not fewer than two Directors. To the extent required for
compensation realized from awards under the Plan to be deductible by the Company
pursuant to Section 162(m) of the Code, Committee members shall be "outside
Directors" within the meaning of Section 162(m). The Administrator will be
authorized to construe, interpret and implement the provisions of the Plan, to
select the key persons to whom awards will be granted, to determine the terms
and provisions of such awards, and to amend outstanding awards. The
determinations of the Administrator will be made in its sole discretion and are
conclusive.
Unless sooner terminated by the Board of Directors, the provisions of the
Plan respecting the grant of incentive stock options shall terminate on the
tenth anniversary of the adoption of the Plan by the Board of Directors. All
awards made under the Plan prior to its termination shall remain in effect until
they are satisfied or terminated. The Board of Directors may, without
Stockholder approval, suspend, discontinue, revise or amend the Plan at any time
or from time to time, subject to certain limitations. In the event of a stock
dividend, stock split, recapitalization or the like, the Administrator will
equitably adjust the aggregate number of shares subject to the Plan, the number
of shares subject to each outstanding award, and the exercise price of each
outstanding option.
Grants Under the Plan
Options granted under the Plan may be either incentive stock options or
non-qualified stock options. Incentive stock options are intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
The exercise price of any incentive stock options granted under the Plan may not
be less than the fair market value of the Common Stock at the time the option is
granted, provided that, with respect to an incentive stock option granted to an
optionee who is or will be the beneficial owner of more than 10% of the combined
voting power of all classes of the Company's stock, the exercise price may not
be less than 110% of the fair market value of the Common Stock on the date of
grant. The exercise price of any non-qualified stock options granted under the
Plan may be less than the fair market value of the Common Stock but not less
than $.01 per share, the par value thereof.
Incentive stock options and non-qualified stock options may be granted
with terms of no more than ten years from the date of grant, provided that in
the case of an incentive stock option granted to an optionee who is or, after
such grant, will be the beneficial owner of more than 10% of the combined voting
power of all classes of the Company's stock, the term of such option may not
exceed five years. Options will survive for a limited time after the optionee's
death, disability or normal retirement from the Company. Any shares as to which
an option expires, lapses unexercised, or is terminated or cancelled may be
subject to a new option.
Unless otherwise determined by the Administrator, in his sole discretion,
options are to become exercisable cumulatively over a four-year period, with 25%
of the options becoming exercisable on each of the first four anniversaries of
the date of grant. The purchase price per share payable upon the exercise of an
option (the "option exercise price") will be established by the Administrator,
provided that in the case of an incentive stock option the option exercise price
shall be no less than 100% of the closing price of Common Stock on the date of
grant and, in the case of a non-qualified stock option, the option exercise
price shall be no less than par value. The option exercise price is payable in
cash, or, with the consent of the Administrator, by surrender of shares of
Common Stock having a fair market value on the date of the exercise equal to
part or all of the option exercise price, or by such other payment method as the
Administrator may prescribe.
Termination of Employment or Service
Unless the Administrator otherwise specifies: (i) all options not yet
exercised shall terminate upon termination of the grantee's employment or
service by reason of discharge for cause; (ii) if a grantee's employment or
service terminates for reasons other than cause or death or disability, the
grantee's options generally will be exercisable for 90 days (extendable to one
year by the Administrator) after termination to the extent that they were
exercisable at termination, but not after the expiration date of the award; and
(iii) if a grantee dies while in the Company's employ or service or during the
aforementioned post-employment exercise period, the grantee's options will, to
the extent exercisable immediately prior to death, generally remain exercisable
for one year after the date of death, but not after the expiration date of the
award.
9
<PAGE>
Federal Income Tax Consequences of Plan Awards
The following brief description of the tax consequences of awards under
the Plan is based on present Federal tax laws, and does not purport to be a
complete description of the Federal tax consequences of the Plan.
There are generally no Federal tax consequences either to the optionee or
to the Company upon the grant of an option. Upon exercise of an incentive stock
option, the optionee will not recognize any income, and the Company will not be
entitled to a deduction for tax purposes, although such exercise may give rise
to liability for the optionee under the alternative minimum tax provisions of
the Code. Generally, if the optionee disposes of shares acquired upon exercise
of an incentive stock option within two years of the date of grant or one year
of the date of exercise, the optionee will recognize compensation income, and
the Company will be entitled to a deduction for tax purposes, in the amount of
the excess of the fair market value of the shares of Common Stock on the date of
exercise over the option exercise price (or the gain on sale, if less); the
remainder of any gain to the optionee will be treated as capital gain.
Otherwise, the Company will not be entitled to any deduction for tax purposes
upon disposition of such shares, and the entire gain for the optionee will be
treated as a capital gain. Upon exercise of a non-qualified stock option, the
amount by which the fair market value of the Common Stock on the date of
exercise exceeds the option exercise price will generally be taxable to the
optionee as compensation income, and will generally be deductible for tax
purposes by the Company. The disposition of shares of Common Stock acquired upon
exercise of a non-qualified stock option will generally result in a capital gain
or loss for the optionee, but will have no tax consequences for the Company.
Limitations on the Company's Compensation Deduction. Section 162(m) of the
Code will limit the deduction which the Company may take for otherwise
deductible compensation payable to certain executive Officers to the extent that
compensation paid to such Officers for a year exceeds $1 million, unless such
compensation is performance-based, is approved by the Company's Stockholders and
meets certain other criteria. Although the Company believes that compensation
realized from stock options and stock appreciation rights granted under the Plan
generally will satisfy the requirements to be considered performance-based for
purposes of Section 162(m) of the Code, there is no assurance that such awards
will satisfy such requirements, and, accordingly, the Company may be limited by
Section 162(m) in the amount of deductions it would otherwise be entitled to
take with respect to such awards under the Plan.
Tax Withholding. The Committee may require payments from participants in
the Plan, or withhold from payments due to be made thereunder, in order to
satisfy applicable withholding tax requirements.
Vote Required for Approval of the Plan Adoption Proposal
Approval of the Plan Adoption Proposal requires the affirmative vote of a
majority of the outstanding shares of Common Stock of the Company entitled to
vote thereon at the Annual Meeting. Proxies solicited by the Board of Directors
will be voted for the Plan Adoption Proposal, unless Stockholders specify
otherwise.
The Board of Directors unanimously recommends a vote FOR the authorization
of the Plan Adoption Proposal.
PROPOSAL 3 - APPOINTMENT OF INDEPENDENT PUBLIC AUDITORS
The firm of McGladrey & Pullen, independent certified public auditors, has
audited the Company's financial statements for Fiscal 1995 and for one year
prior thereto. The Board of Directors has appointed M&P as the Company's
independent public auditors for the fiscal year ending December 31, 1996, and
the Stockholders will be asked to ratify such appointment. It is expected that a
representative of M&P will be present at the Annual Meeting with the opportunity
to make a statement if he desires to do so, and will be available to respond to
appropriate questions.
10
<PAGE>
Most Recent Fiscal Years
In each of the last two completed fiscal years, the Company has received
unqualified accountants' opinions from the accounting firm of McGladrey & Pullen
with respect to the Company's financial statements.
Changes in Certifying Accountant.
On January 24, 1994, prior to its merger with Franklin Credit Management
Corporation and its change of name, Miramar dismissed the accounting firm of
Hoffman, Dykes & Fitzgerald, P.C. as the independent accountants for Miramar and
its wholly-owned subsidiary, Rockwell Drilling Company ("Rockwell"). Hoffman,
Dykes & Fitzgerald, P.C. had served as accountants engaged to audit the
financial statements of Miramar and Rockwell for the two years ended December
31, 1992.
The Independent Auditors' Report issued by Hoffman, Dykes & Fitzgerald,
P.C. with respect to the consolidated balance sheets of Miramar and Rockwell as
of December 31, 1991 and December 31, 1992 and the related consolidated
statements of operations, Stockholders' deficit and cash flows for the years
then ended was qualified to indicate that Miramar was operating as a
debtor-in-possession under Chapter 11 of the federal bankruptcy laws and
substantial doubt existed as to Miramar's ability to continue as a going
concern.
The change in accountants was approved by Miramar's Board of Directors.
During Miramar's two fiscal years and the subsequent interim period immediately
preceding the dismissal, there was no disagreement with the former accountants
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which disagreement, if not resolved to
the satisfaction of the former accountants would have caused it to make a
reference to the subject matter of the disagreement in connection with its
report.
By a letter dated January 20, 1994, Miramar's former accountant Hoffman,
Dykes & Fitzgerald, P.C. enclosed a management letter dated November 19, 1993 to
Miramar. The accountant's report to the management letter, also dated November
19, 1993, stated that the former accountant noted certain matters involving the
internal control structure and its operations that the former accountant
considered to be reportable conditions and material weaknesses under standards
established by the American Institute of Certified Public Accountants. Neither
the accountant's report nor the management letter specified which matters the
former accountant considered to be reportable conditions, material weaknesses or
merely management suggestions. The management letter stated, with respect to the
former accountant's audit of Miramar's financial statements for the two years
ended December 31, 1992, that "the accounting system of Miramar was inadequate
to support the volume of transactions and accounting information of Miramar to
produce accurate financial statements without significant adjustments."
The Officers of Miramar were replaced in October 1991 and the new
management of Miramar did not obtain possession of Miramar's books and records
until the second half of 1992, after Miramar obtained a final judgment dated May
15, 1992 from the Bankruptcy Court requiring that such books and records be
turned over. When obtained by Miramar, the books and records were in a state of
disarray and, as a result, current management of Miramar began the
implementation of a new accounting system. From August 1991 to November 1992,
revenue from Miramar's oil and gas interest was held in suspense by third
parties pending resolution of the then pending fraudulent conveyance actions.
Miramar did not begin to receive revenue again until November 1992.
The former accountant's management letter took note that during 1992 and
1991 Miramar was in transition pending resolution of extensive litigation and
administrative requirements of Miramar's Chapter 11 bankruptcy proceeding. The
former accountant acknowledged that in 1992 Miramar hired a full time controller
who immediately began consolidating the accounting systems and responsibilities
and began establishing uniform controls for processing accounting information.
The former accountant also acknowledged that in certain cases controls were
established in 1993.
11
<PAGE>
Discussions between Board of Directors and Former Accountant.
Miramar's Board of Directors did not discuss the management letter or the
accountant's report thereto with the former accountant. At the time of the
dismissal of Hoffman, Dykes & Fitzgerald, P.C., Miramar did not have an audit
committee. Further there were no disagreements with the former accountant on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountant, would have caused it to make reference to
the subject matter of the disagreement in connection with its report, either
during the past two years or in the subsequent interim period prior to the
accountant's discharge.
Discussions with Successor Accountant.
Miramar placed no restrictions on the former accountant in responding to
inquiries of the successor accountant concerning the management letter or any
other matter.
Vote Required for Ratification of M&P
Ratification of the appointment of M&P requires the affirmative vote of a
majority of the shares of Common Stock present at the Annual Meeting and
entitled to vote thereon.
The Board of Directors recommends a vote FOR ratification of the appointment of
M&P.
OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors is not
aware of any other matter that is to be presented to Stockholders for formal
action at the Annual Meeting. If, however, any other matter or matters are
properly brought before the Annual Meeting or any adjournment or postponement
thereof, it is the intention of the persons named in the enclosed form of proxy
to vote such proxy in accordance with their judgment on such matters.
STOCKHOLDER PROPOSALS
Any Stockholder proposal intended to be presented at the next annual
meeting of Stockholders must be received by the Company at its principal
executive offices, Six Harrison Street, New York, New York 10013, no later than
February 5, 1997, in order to be eligible for inclusion in the Company's proxy
statement and form of proxy to be used in connection with that meeting.
INCORPORATION BY REFERENCE
This Proxy Statement shall be deemed to incorporate by reference the
Company's annual report on Form 10-KSB, which is being mailed to the
Stockholders together with this Proxy Statement.
12
<PAGE>
OTHER INFORMATION
Although it has entered into no formal agreements to do so, the Company
will reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding proxy-soliciting
materials to their principals. The cost of soliciting proxies on behalf of the
Board of Directors will be borne by the Company. Such proxies will be solicited
principally through the mail but, if deemed desirable, may also be solicited
personally or by telephone, telegraph, facsimile transmission or special letter
by Directors, Officers and regular employees of the Company without additional
compensation.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE ANNUAL MEETING
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING. THE BOARD URGES YOU TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID
REPLY ENVELOPE. YOUR COOPERATION AS A STOCKHOLDER, REGARDLESS OF THE NUMBER OF
SHARES OF STOCK YOU OWN, WILL REDUCE THE EXPENSES INCIDENT TO A FOLLOW-UP
SOLICITATION OF PROXIES.
IF YOU HAVE ANY QUESTIONS ABOUT VOTING YOUR SHARES, PLEASE TELEPHONE THE
COMPANY AT (212) 925-8745.
Sincerely yours,
THOMAS J. AXON
President
New York, New York
June 5, 1996
<PAGE>
EXHIBIT A
FRANKLIN CREDIT MANAGEMENT CORPORATION
Annual Meeting of Stockholders
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas J. Axon and Joseph Caiazzo, or if
only one is present, then that individual, with full power of substitution, to
vote all shares of Franklin Credit Management Corporation (the "Company"), which
the undersigned is entitled to vote at the Company's Annual Meeting to be held
at the corporate offices of the Company, on the 26th day of June, 1996, at 10:00
a.m., New York time, and at any adjournment or postponement thereof, hereby
ratifying all that said proxies or their substitutes may do by virtue hereof,
and the undersigned authorizes and instructs said proxies to vote as follows:
1. ELECTION OF DIRECTORS: To elect the nominees for Class 2 Director below for
a term of three years;
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Allan R. Lyons
William F. Sullivan
Eugene T. Wilkinson
2.ADOPTION OF THE COMPANY'S 1996 STOCK INCENTIVE PLAN: To approve the Company's
1996 Stock Incentive Plan;
FOR AGAINST ABSTAIN
3.APPROVAL OF AUDITORS: To ratify and approve the appointment of McGladrey &
Pullen as independent public auditors of the Company for the fiscal year
ending December 31, 1996;
FOR AGAINST ABSTAIN
and in their discretion, upon any other matters that may properly come before
the meeting or any adjournments or postponements thereof.
(Continued and to be dated and signed on the other side.)
<PAGE>
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDERS. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
Receipt of the Notice of Annual Meeting and of the Proxy Statement and
Annual Report of the Company accompanying the same is hereby acknowledged.
Dated: _____________________________, 1996
------------------------------------------
(Signature of Stockholder)
------------------------------------------
(Signature of Stockholder)
Your signature should appear the same as your name
appears herein. If signing as attorney, executor,
administrator, trustee or guardian, please indicate
the capacity in which signing. When signing as joint
tenants, all parties to the joint tenancy must sign.
When the proxy is given by a corporation, it should
be signed by an authorized Officer.
<PAGE>
1995 ANNUAL REPORT
Description of Business.
On December 30, 1994, Miramar Resources, Inc. ("Miramar") consummated a
merger (the "Merger") with Franklin Credit Management Corporation ("Franklin")
and changed its name as the surviving corporation to "Franklin Credit Management
Corporation" ("Franklin" or "Registrant"). Prior to the Merger, the principal
business of Registrant was the production and marketing of oil and gas from
wells located in Colorado, Kansas and Oklahoma. On December 30, 1994, following
the effective time of the Merger, Registrant sold its most significant oil and
gas interests which were located in Colorado.
Registrant has continued the business of Franklin and, as a result,
Registrant is engaged in the financial services business. Registrant's business
currently involves the acquisition and collection of real estate secured loan
portfolios ("Loan Portfolios").
Business of Registrant. Registrant acquires consumer-oriented Loan
Portfolios from mortgage lending and financial institutions and the Federal
Deposit Insurance Corporation ("FDIC"). To date, Registrant has focused its
acquisitions primarily on real estate secured Loan Portfolios with aggregate
face amounts of between $2,000,000 and $10,000,000.
Prior to 1995, Registrant generally acquired interests in Loan Portfolios
through participation in Limited Partnerships rather than by direct ownership.
During 1994 the Company purchased the interests of certain limited partners and
liquidated the associated limited partnerships. During 1995 the Company
purchased the interests of all remaining limited partners and liquidated all
limited partnerships in an effort to simplify its capital structure and reduce
administrative costs. Income (loss) upon liquidation for 1995 and 1994 were
$(247,105) and $24,925 respectively. 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.
Since its inception the Company has purchased approximately 9,000 loans
with a principal balance of approximately $173,000,000 of which approximately
3,800 loans remain active. The Loan Portfolios bought by Registrant consist
primarily of loans secured with collateral such as first mortgages, home
equity/home improvement and second mortgages.
Registrant's management intends to continue to pursue the acquisition of
Loan Portfolios from the FDIC as well as various private financial institutions
such as banks, mortgage and finance companies. Registrant's management has filed
an application to become licensed to purchase FHA Title One loans. In addition,
Registrant was authorized by the U.S. Department of Education and the New York
State Higher Education Services Corporation on May 5, 1995, to originate,
purchase, hold and transfer U.S. and New York State guaranteed Student Loans.
While the FDIC has sold a significant number of loans at public and private
auction in the past, there can be no assurance that Loan Portfolios will
continue to be available from the FDIC or that Loan Portfolios will be available
from other sources.
While Registrant attempts to collect on all loans in each of the Loan
Portfolios, it is unlikely that Registrant will be successful in collecting the
full amount due under each loan in any of the Loan Portfolios. In addition,
significant administrative and litigation expenses are often incurred in
collection efforts.
<PAGE>
Historically, Registrant's income has been earned through its equity
participation as General Partner in the Limited Partnerships. The Limited
Partnerships' primary source of income was Registrant's collection, as general
partner, of principal and interest due under the loans comprising the Loan
Portfolios. The Company as of December 31, 1995, has purchased all of the
interests of these Limited Partnerships, thereby assuming sole ownership of the
respective assets.
Registrant employs standardized in-house servicing procedures in the
acquisition and collection of loans. The Registrants operations are divided into
three departments which are responsible for the servicing of the loans.
Acquisition and Start-up Department. The responsibilities of this
department include the following: (i) initial due-diligence of the portfolio;
(ii) acquisition and initialization of these loans into a proprietary
information system; (iii) the immediate issuing of introductory letters with
information regarding the change of ownership of the loan, information regarding
where to mail payments and a toll-free number which borrowers may call with
questions; (iv) the full internal audit of all the loans to identify and correct
any disputes or problems involved in the input of these loans; (v) mailing of an
audit letter advising the borrower of the outstanding balance, last payment date
and remaining terms; and (vi) collection activities to restructure
non-performing accounts, identify legal accounts and initially monitor
performing accounts.
Service Department. This department is responsible for the monitoring of
all day-to-day operations concerned with performing loans. The Service
Department is responsible for maintaining the monthly cash flows produced from
the performing accounts and is expected to maintain certain goals that are
assigned on a monthly basis by management. Registrant's management meets
regularly with staff members to review the status of collections as well as to
identify and solve collection problems.
Legal and Real Estate Department. The Acquisition and Start-up Department
identifies accounts which require legal action. An analysis is prepared to
develop a litigation strategy and appropriate counsel is assigned. Follow-ups
are conducted to insure implementation of litigation strategy. As a last resort
it may be necessary to acquire real estate collateral through foreclosure. An
evaluation is made to liquidate the asset through sale or to retain the asset on
a rental basis.
Bankruptcy and Related Events. Information regarding Registrant's prior
Bankruptcy and Related Events is incorporated herein by reference to
Registrant's 10-KSB for the fiscal year ended December 31, 1994, filed with the
SEC on March 31, 1995. (Item 1. Description of Business - Pg.3).
Formation of Franklin. Franklin, a Delaware corporation organized in 1990,
was formed by Thomas J. Axon and Frank B. Evans, Jr., currently executive
officers of Registrant, to acquire consumer loan portfolios from the RTC and the
FDIC. In connection with the formation of the Registrant, in March 1993,
Franklin completed the private placement of $2,000,000 in 15% Debentures and
warrants for the purchase of Franklin Common Stock (the "15% Debentures"), the
proceeds of which were used to acquire interests in loan portfolios and for
operations. In January 1995, Franklin completed the private placement of
$705,000 of 12% Debentures (the "12% Debentures"), the proceeds of which were
used to fund the acquisition of a loan portfolio, including amounts advanced by
stockholders, the cost of servicing existing debt obligations and for general
working capital. Additionally, in late 1995, Franklin completed the private
placement of $555,000 of 12% Debentures (the "Harrison 1st 12% Debentures"), the
proceeds of which were used in part to fund the acquisition of a loan portfolio.
<PAGE>
Competition. Registrant faces significant competition in the acquisition
of Loan Portfolios. In its acquisition of Loan Portfolios from the FDIC and
other financial institutions the Registrant experiences competition from
regional and local banks, as well as regional and national finance companies.
From 1990 to 1995, Registrant acquired the majority of the Loan Portfolios from
the RTC or the FDIC at private and public auction. The RTC ceased doing business
as of December 31, 1995. The Registrant believes that this will not materially
affect the supply of these loan portfolios and the Registrant believes
opportunities to acquire market paper remains strong. As a result of the federal
government closing the RTC, the Registrant's acquisition efforts have been
directed to private institutions and public auctions involving private financial
institutions. Nearly all of the Company's competitors possess significant
resources. The Registrant believes that an agreement in principal, from a bank,
to reduce the cost of acquisition funds, could increase the Registrant's
competitiveness.
Customers. Registrant's primary source of income is derived from
collection of Notes Receivable. In the past the Registrant has sold loan assets
and may, in the future, sell portions of the Loan Portfolios to third parties.
Registrant experiences competition from mortgage and finance companies in the
sale of Loan Portfolios. In addition, sales of bulk Loan Portfolios by the FDIC
and large private auctions have had a substantial impact on the market by
decreasing the number of companies buying portfolios. While Registrant has been
successful in marketing Loan Portfolios which it has elected to sell in the
past, there can be no assurance that Registrant will be able to successfully
market Loan Portfolios in the future.
Regulation. Registrant's activities in servicing the Loan Portfolios are
subject to regulation under various state and federal laws relating to the
collection of consumer obligations, including but not limited to the Fair Debt
Collection Act. These regulations specify the methods which Registrant can
employ in its collection efforts. If Registrant is deemed to have violated these
regulations, Registrant could be precluded from further collection efforts and
liable for monetary damages. Registrant does not expend material amounts of
financial resources complying with federal, state or local environmental laws.
Employees. Registrant had 25 employees as of December 31, 1995. None of
Registrant's employees is a member of a labor union. Registrant believes that
its employee relations are good.
Results of Operations
Fiscal Year 1995 Compared to 1994
Total revenue, comprised primarily of interest income and purchase
discount earned, increased $4,706,176 or 67% from $7,054,681 in fiscal 1994 to
$11,760,857 in fiscal 1995. Registrant recognizes interest income on Notes
Receivable based upon three factors; (i) interest upon performing notes, (ii)
interest received with payments upon non-performing notes and (iii) the balance
of settlements in excess of principal repayments. Revenues from interest income
on Notes Receivable increased $3,202,791, from $3,163,397 in fiscal 1994 to
$6,366,188 in fiscal 1995. Purchase discount income increased $1,935,907, from
$3,385,443 in fiscal 1994 to $5,321,350 in fiscal 1995. The increase in both
interest income and purchase discount earned reflects both an increased volume
and improved performance of certain Notes Receivable. Operating income as a
<PAGE>
percentage of net notes receivable was .5% in fiscal 1995 as compared to 1.8% in
fiscal 1994. This is largely due to the late acquisitions of approximately
$28,000,000 of Notes Receivable.
Operating income decreased 55% from $790,378 in fiscal 1994 to $356,395 in
fiscal 1995. Management believes that this decrease was caused primarily by the
late acquisition of approximately $28,000,000 of Notes Receivable. Other factors
include the liquidation of the Limited Partnerships and the expenses incurred in
acquiring the Loan Portfolios in December of 1995. The liquidation related
expenses are non-recurring charges related to 1995, while the benefit of the
ownership transfer of the related assets will be realized over their remaining
lives.
Total operating expenses increased $5,140,159 or 82%, from $6,264,303 in
fiscal 1994 to $11,404,462 in fiscal 1995. This was largely due to the increase
of both Notes Receivable and the associated Senior Debt during fiscal 1995.
The collection, general and administrative expenses increased $937,576 or
41% from $2,272,877 in fiscal 1994 to $3,210,453 in fiscal 1995. Personnel
expenses increased $296,017 or 41% from $718,489 for fiscal 1994 to $1,014,506
for fiscal 1995; and collection expenses, increased $641,559 or 41% from
$1,554,388 for fiscal 1994 to $2,195,947 for fiscal 1995. Increases in personnel
expenses were due to an increase number of employees required to service the
additional Notes Receivable. All other collection expenses increased due to the
increase in Notes Receivable.
Interest expense increased $3,617,793 or 191%, from $1,893,471 in fiscal
1994 to $5,511,264 in 1995. The increase was principally due to an increase in
Senior Debt, debentures and lines of credit totalling $31,612,074 or 78%. In
addition, the increase in the prime rate effected the cost of borrowed funds
used to acquire Loan Portfolios, which increased from $40,287,971 at December
31, 1994 to $71,900,045 at December 31, 1995. The notes payable accrue interest
at variable rates based upon the prime rate. The Registrant 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.
Bad debt expense increased $389,360 or 56% from $701,122 for fiscal 1994
to $1,090,482 for fiscal 1995. The majority of this increase related to one
specific borrower who filed for bankruptcy in 1995. Bad debt expense expressed
as a percentage of gross notes receivable for both 1994 and 1995 equates to
approximately 1%.
Income before taxes and minority interest decreased 77% from $1,551,297 in
fiscal 1994 to $356,395 in 1995. Net income decreased 49% from $242,303 in
fiscal 1994 to $124,703 in fiscal 1995, as a result of those items directly
effecting operating income.
Liquidity and Capital Resources
At December 31, 1995, the Company had cash of $1,335,800, a net increase
of $654,566 from December 31, 1994. During 1995, Registrant used cash in the
amount of $3,667,375 in its operating activities and $23,876,087 in its
investing activities, primarily for the purchase of Notes Receivable. The amount
of cash used in operating and investing activities was funded by $28,198,028 of
net cash provided by financing activities.
<PAGE>
During fiscal 1994 and fiscal 1995, Franklin completed the acceleration of
certain non-performing consumer loans secured by first and second mortgages. In
the normal course of business, Franklin began foreclosure actions on a number of
these loans in late 1994. Accordingly, Franklin held no Other real estate owned
("REO Properties") as of December 31, 1994. At December 31, 1995, however,
Registrant held REO Properties having a net realizable value of $3,785,651.
Management believes these REO Properties will be sold in the ordinary course of
business and that the increase in REO Properties held as inventory at December
31, 1995 is not material to the operations of the Company. Registrant has
recorded these REO Properties at the lower of cost or market value.
At December 31, 1995, the Company held as inventory automobiles having a
net realizable value of $267,428 which it obtained through repossessions.
Franklin held as inventory automobiles having a fair market value of $390,498 as
of December 31, 1994. The decrease in automobiles held as inventory at December
31, 1995 is a result of reduced repossessions and inventory sales. Registrant
has recorded these autos at the lower of cost or market value.
Certain loan agreements currently require "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 Registrants ability to
fund operations, pay taxes and retire its subordinated debt. Management believes
that the Company's existing cash balances, credit lines, modifications to its
Senior Debt obligations and anticipated cash flow from operations will provide
sufficient capital resources for its currently 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 Registrant are invested in Notes
Receivable. The Company's primary source of cash flow from operating and
investing activities is principally collections on Notes Receivable.
Due to the restrictions placed on Registrant's use of collections from
Notes Receivable imposed by the Senior Debt lenders, which restrictions are
described below in Cash Flow From Financing Activities, Registrant experiences
periods of irregular cash flow shortages. Management believes that Registrant
has sufficient cash flow to pay current liabilities arising from operations.
Management also believes that sufficient cash flow from the collection of Notes
Receivable will be available to repay Registrant's secured obligations and that
sufficient additional cash flows will exist, through collections of Notes
Receivable, the sale of Loan Portfolios, continued modifications to the secured
debt credit agreements or additional borrowings, to repay the obligations of
Registrant. Registrant has no commitments for capital expenditures. Except for
management's intent to acquire additional Loan Portfolios, Registrant is not
aware of any trends or operations that would cause Registrant to incur
additional capital expenditures in the future.
Cash Flow From Financing Activities
Senior Debt. As of December 31, 1995, the affiliated wholly owned
subsidiaries had thirteen loans payable to two financial institutions, in the
aggregate amount of $70,640,045. The fourteen loans obtained by the affiliated
wholly owned subsidiaries are collectively referred to as the Senior Debt.
<PAGE>
The Senior Debt is collateralized by first liens on the respective Loan
Portfolios for which the debt was incurred and is guaranteed by the Company. The
monthly payments on the Senior Debt have been, and it is intended that the
payments will continue to be, met by the collections from the respective Loan
Portfolios. The loan agreements for the Senior Debt call for minimum interest
and principal payments due each month and accelerated payments based on the
collection of the Notes Receivable securing the debt. The accelerated payment
provisions are generally of 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 percentage to be applied over 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 amount of cash flow
which is 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 a 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 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 $382,394
at December 31, 1994 and $617,111 at December 31, 1995.
12% Debentures. In October 1994, Franklin made a private offering of up to
$750,000 of 12% Debentures (the "12% Debentures"). The 12% Debentures bear
interest at the rate of 12% per annum and are payable quarterly on the last day
of each calendar quarter commencing December 31, 1994. The principal amount is
payable over four years in 16 equal quarterly payments beginning with a payment
due March 31, 1996, with the entire balance due on December 31, 1999. The 12%
Debentures are secured by a lien subordinate to the Senior Debt encumbering the
Loan Portfolio acquired at the RTC National Auction in September 1994. As of
December 31, 1995, 12% Debentures having a face value of $705,000, were
subscribed to and accepted by Registrant. The proceeds of this offering were
used to pay costs associated with the acquisition of the Loan Portfolio in
September 1994, including repayment of amounts advanced by stockholders, the
cost of servicing existing Loan Portfolios and general working capital.
Approximately $400,000 of the proceeds of the 12% Debentures were used for
general working capital.
Harrison First Corporation 12% Debentures. In the second half of 1995,
Franklin made a private offering of up to $800,000 of 12% Debentures (the
"Harrison 1st 12% Debentures"). The Harrison 1st 12% Debentures bear interest at
the rate of 12% per annum and are payable quarterly on the last day of each
calendar quarter commencing September 30, 1995. The principal amount is payable
over five years in 11 equal quarterly payments beginning with a payment due
September 30, 1997, with the remaining balloon payment due on June 30, 2000. The
Harrison 1st 12% Debentures are secured by a lien subordinate to the Senior Debt
encumbering the Loan Portfolio acquired at the RTC National Auction in May 1995.
As of December 31, 1995, the Harrison 1st 12% Debentures having a face value of
$555,000, were subscribed to and accepted by Registrant. The proceeds of this
offering were used to pay costs associated with the acquisition of the Loan
Portfolio in May 1995.
<PAGE>
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 additional real estate foreclosures which the Registrant maybe
required to hold as rental property to maximize its return. The total amounts
outstanding under the lines of credit as of December 31, 1995 and 1994, were
$1,324,128 and $0, respectively. The agreement with a bank 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.
Limited Partnerships. Franklin 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
Franklin and its stockholders, (ii) the sale of limited partnership interests to
third parties and (iii) loans from banks or finance companies (which is referred
to as the Senior Debt). During 1994 the Company purchased the interests of
certain limited partners and liquidated the associated limited partnerships.
During 1995 the Company purchased the interests of all remaining limited
partners and liquidated all limited partnerships. Income (loss) upon liquidation
for 1995 and 1994 were $(247,105) and $24,925 respectively. 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. However,
management intends to attempt to finance the acquisitions of Loan Portfolios
with debt from financial institutions, rather than from the sale of equity
interests to limited partners. Management believes that Registrant can acquire
debt from financial institutions on more favorable terms than can be obtained
from individuals investing in limited partnerships.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
The firm of McGladrey & Pullen, LLP., has been the independent accountants
for the Registrant and its wholly owned subsidiaries. There has been no changes
or disagreements with the firm.
certain Relationships and Related Transaction.
During fiscal 1994 and fiscal 1995, Franklin held an undivided 60%
interest in an office condominium unit located on the Sixth Floor of Six
Harrison Street, New York, New York. Franklin's principal offices are located at
the Six Harrison Street Location. On December 31, 1995 Franklin purchased the
remaining undivided interests in the condominium unit from RMTS Associates Inc.,
("RMTS") and Axon Associates Inc. ("Axon"). RMTS and Axon are affiliates of
Franklin. Mr. Axon owns 80% of the outstanding stock of RMTS Associates, Inc.
and 81% of the outstanding stock of Axon Associates, Inc. The entire condominium
unit serves as collateral for a loan from an unaffiliated lending institution
with RMTS Associates Inc. as the borrower. Pursuant to the purchase agreement,
Franklin has guaranteed the obligation secured by the condominium unit and in
total as of December 31, 1995. Franklin purchased the respective remaining
interest from RMTS and Axon for $75,000 each. These amounts are reflected as
Notes Payable to Affiliates at December 31, 1995. Prior to this, on a monthly
<PAGE>
basis, during fiscal 1994 and fiscal 1995, Franklin had paid RMTS Associates,
Inc. an amount equal to 60% of the principal and interest due on the obligation
secured by the condominium, as well as certain pro-rated operating costs
associated with use of the office.
Franklin has guaranteed a line of credit with a maximum borrowing amount
of $250,000, maintained by RMTS Associates, Inc. at a bank. The line of credit
is collateralized by the condominium and is payable on demand, with interest at
a rate of prime plus one-half percent, payable monthly. An amount of $125,000
was drawn in December 1992, and the proceeds used for improvements to the office
condominium unit located at Six Harrison Street. As of February 1996 the entire
line had been repaid to the bank.
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
AND AFFILIATES
( FORMERLY MIRAMAR RESOURCES, INC.)
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1995
Page 14
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
- - ------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- - ------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets 2 - 3
Consolidated statements of income 4
Consolidated statements of stockholders' equity 5
Consolidated statements of cash flows 6 - 7
Notes to consolidated financial statements 8 - 22
- - ------------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Franklin Credit Management Corporation and Affiliates
New York, New York
We have audited the accompanying consolidated balance sheets of Franklin Credit
Management Corporation and Affiliates (formerly Miramar Resources, Inc.) as of
December 31, 1995 and 1994, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Franklin Credit
Management Corporation and Affiliates as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards Numbers 114 and 118 regarding the method of accounting for impaired
loans.
Jericho, New York
March 15, 1996
Page 1
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 1,335,800 $ 681,234
Restricted Cash (Note 6) 617,111 382,394
Notes Receivable (Notes 3 and 6)
Principal amount 116,573,463 81,914,930
Joint venture participations (448,966) (492,086)
Purchase discount (28,708,043) (26,421,274)
Allowance for loan losses (20,420,311) (12,267,546)
----------------------------------
66,996,143 42,734,024
----------------------------------
Accrued Interest Receivable 1,150,869 932,450
Other real estate owned 3,785,651 -
Inventory, automobiles 267,428 390,498
Other Receivables (Note 13) 502,486 654,029
Refundable income tax 74,240 -
Other Assets 938,001 855,854
Building, Furniture and Fixtures, net (Note 4) 698,418 385,341
Loan Commitment Fees and Other, net 1,564,920 1,530,463
---------------------------------
$ 77,931,067 $ 48,546,287
=================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Accounts payable and accrued expenses $ 701,142 $ 781,682
Line of Credit (Note 10) 1,324,128 -
Notes payable (Note 6) 69,315,917 39,186,371
Convertible subordinated debentures (Note 7) - 526,600
Subordinated debentures (Note 8) 1,260,000 575,000
Notes payable, affiliates (Note 9) 834,616 469,417
Due to affiliates (Note 12) - 232,075
Income taxes payable - 163,336
Deferred income taxes (Note 11) 1,240,540 1,058,612
---------------------------------
Total liabilities 74,676,343 42,993,093
---------------------------------
Minority Interest in Consolidated Partnerships - 2,570,745
---------------------------------
Redeemable Common Stock (Note 7) - 487,000
---------------------------------
Commitments and Contingencies (Note 13)
Stockholder's Equity:
Common stock,$.01 par value, 10,000,000 shares
authorized, 5,503,896 and 5,247,871 shares
issued and outstanding in 1995 and 1994
respectively (Note 7) 55,040 52,479
Additional paid-in capital (Note 5) 6,470,952 5,838,941
Accumulated deficit (3,271,268) (3,395,971)
---------------------------------
3,254,724 2,495,449
---------------------------------
$ 77,931,067 $ 48,546,287
=================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995 and 1994
1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Interest income $ 6,366,188 $ 3,163,397
Purchase discount earned 5,321,350 3,385,443
Oil and gas - 404,855
(Loss) gain on liquidation of partnership
interests (Note 5) (247,105) 24,925
Gain (loss) on sale of portfolios 109,067 (48,265)
Gain on sale of oil and gas interests - 57,433
Other 211,357 66,893
-------------------------------
11,760,857 7,054,681
-------------------------------
Operating expenses:
Collection, general and administrative 3,210,453 2,272,877
Provision for loan losses (Note 3) 1,090,482 701,122
Interest expense 5,511,264 1,893,471
Service fees 829,016 177,744
Amortization of debt issuance costs 710,663 557,407
Depreciation 52,584 133,856
Oil and gas - 235,314
Merger expenses (Note 2) - 292,512
------------------------------
11,404,462 6,264,303
------------------------------
Operating income (loss) 356,395 790,378
Litigation proceeds (Note 13) - 760,919
------------------------------
356,395 1,551,297
Provision for income taxes (Note 11) 176,901 1,242,558
------------------------------
179,494 308,739
Minority interest in net income
of consolidated partnerships 54,791 66,436
------------------------------
Net income $ 124,703 $ 242,303
==============================
Earnings per common share:
Income before minority interest $ 0.03 $ 0.06
Minority interest in net income
of consolidated partnerships (0.01) (0.01)
------------------------------
Net income $ 0.02 $ 0.05
==============================
Weighted average number of shares outstanding 5,452,062 5,142,985
==============================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 4
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
Common Stock Additional
-------------- Paid -In Accumulated
Shares Amount Capital Deficit
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 4,760,785 47,608 3,472,732 (2,106,195)
Conversion of subordinated
debentures (Note 8) 487,086 4,871 834,130 -
Restatement in connection
with the termination of
Subchapter S Corporation
election - - 1,532,079 (1,532,079)
Net income - - - 242,303
------------------------------------------------
Balance, December 31, 1994 5,247,871 52,479 5,838,941 (3,395,971)
Conversion of subordinated
debentures (Note 8) 254,457 2,545 484,455 -
Conversion of warrants 1,568 16 2,977 -
Contributed capital(Note 5) - - 144,579 -
Net income - - - 124,703
------------------------------------------------
Balance, December 31, 1995 5,503,896 $ 55,040 $ 6,470,952 $ (3,271,268)
================================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 5
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 124,703 $ 242,303
Adjustments to reconcile net income
to net cash used in operating
activities:
(Gain) on sale of oil and gas interests - (57,433)
Loss (gain) on liquidation of partnership
interests 247,105 (24,925)
(Gain) loss on sale of portfolios (109,067) 48,265
Depreciation 52,584 133,856
Amortization of debt issuance costs 710,663 557,407
Minority interest in net income of affiliates 54,791 66,436
Purchase discount earned (5,321,350) (3,385,443)
Provision for loan losses 1,090,482 701,122
Deferred tax provision 181,928 1,058,612
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (218,419) (465,748)
Accounts receivable 151,543 (413,620)
Other assets (82,147) (822,634)
Increase (decrease) in:
Accounts payable and accrued expenses (80,540) (199,316)
Due to affiliates (232,075) 79,630
Income tax payable (237,576) 163,336
--------------------------------
Net cash used in operating activities (3,667,375) (2,318,152)
--------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (56,605) (72,865)
Proceeds from sale of properties - 453,000
Purchase of notes receivable (37,507,456) (32,373,980)
Principal collections on notes receivable 13,965,811 8,078,904
Joint venture participation (43,120) 113,093
Increase in restricted cash (234,717) (104,016)
--------------------------------
Net cash used in investing activities (23,876,087) (23,905,864)
--------------------------------
</TABLE>
(Continued)
Page 6
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS ( CONTINUED)
Years Ended December 31, 1995 and 1994
1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Financing Activities
Distributions to minority interests $ (2,728,062) $ (1,240,871)
Contributions from minority interest - 1,239,580
Capital contributions 2,993 -
Proceeds from debenture notes 685,000 575,000
Principal payments of debentures (526,600) -
Proceeds from long-term debt 43,237,988 34,581,746
Principal payments of long-term debt (11,728,171) (7,440,327)
Commitment fees paid (745,120) (1,485,356)
--------------------------------
Net cash provided by financing activities 28,198,028 26,229,772
--------------------------------
Net increase (decrease) in cash 654,566 5,756
Cash:
Beginning 681,234 675,478
--------------------------------
Ending $ 1,335,800 $ 681,234
================================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 5,601,403 $ 2,213,068
================================
Cash payments for taxes $ 232,548 $ 20,610
================================
Supplemental Schedule of Noncash Investing and
Financing Activities
Other assets received in settlement
of loans $ 3,908,721 $ 116,828
================================
Conversion of subordinated debentures to
common stock $ - $ 839,000
================================
Conversion of redeemable common stock to
common stock $ 487,000 $ 487,000
================================
Contribution of capital upon liquidation
of limited partnerships $ 144,579 $ -
================================
Acquisition of building assets:
Building acquired $ 309,056 $ -
Long-term debt assumed (309,056) -
--------------------------------
Cash paid for assets $ - $ -
================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 7
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
(FORMERLY MIRAMAR RESOURCES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Franklin Credit Management Corporation, formerly Miramar
Resources, Inc. (the "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, all shares of Franklin Credit Management Corporation were
exchanged for shares of Miramar Resources, Inc. (see Note 2). The newly formed
entity was renamed 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 the Company's significant accounting policies follow:
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 the reported 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 the Company, its wholly-owned subsidiaries and all limited
partnerships controlled by the Company. By terms outlined in the various
partnership agreements in effect during 1995 and 1994, Franklin is specifically
afforded full power and authority on behalf of the partnerships to manage,
control, administer and operate the business and affairs of the partnerships.
During 1995, the Company purchased the interests of the limited partners and all
limited partnerships were liquidated (see Note 5). 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 which are usually purchased at a substantial
discount.
Loans are stated at the amount of unpaid principal, reduced by purchase discount
and an allowance for loan losses. The Company has the ability and intent to hold
its loans until maturity or liquidation of collateral. In general, interest on
the loans is calculated using the simple-interest method applied to 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 collection efforts, that the
borrowers' financial condition is such that collection of interest is doubtful.
Page 8
<PAGE>
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 an 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 loan 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 purchased 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 writedowns 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 portfolios, 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 collectibility of principal is unlikely. Any subsequent recoveries are
credited to the allowance for loan losses when received. In connection with the
determination of the allowance for loan losses, management obtains independent
appraisals for significant properties, when considered necessary.
The Company's real estate loans are collateralized by real estate located
throughout the United States. Accordingly, the collateral value of a substantial
portion of the Company's real estate loans and real estate acquired through
foreclosure is susceptible to changes in market conditions.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan. Statement
No. 114 has been amended by Statement No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures. As required by
Statement No. 114, as amended, the impairment of loans, that have been
separately identified for evaluation, is measured based on 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 of those loans is
based on the fair value of the collateral. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. The
Company's loan portfolio consists of approximately 10% of smaller balance,
Page 9
<PAGE>
homogeneous loans which were collectively evaluated for impairment and
approximately 90% consists of larger balance real estate loans which were
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 the Company to measure loan
impairment prior to the adoption of Statement 114, was essentially equivalent 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 loan.
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. The Company's depreciation, depletion, amortization
and valuation provision rate per barrel of oil produced during 1994 was $2.93.
Upon the sale of its interests in all wells, the Company realized a gain of
approximately $57,000 on the transactions.
Other real estate owned: Other real estate owned (OREO) represents properties
acquired through foreclosure, accepted by deed in lieu of foreclosure or by
other proceedings. OREO, which is included in other assets, is recorded at the
lower of the carrying amounts of the related loans or fair market value of the
properties less cost to sell. Any write-down to fair value, less cost to sell,
at the time of transfer to OREO, is charged to the allowance for loan losses.
Subsequent write-downs are charged to operations based upon management's
continuing assessment of the fair value of the underlying collateral. Property
is evaluated regularly to ensure that the recorded amount is supported by its
current fair market value. Costs relating to the development and improvement of
the property are capitalized, subject to the limit of fair value of the
collateral, while costs relating to holding the property are expensed. Gains or
losses are included in operations upon disposal.
Deferred income taxes: Deferred taxes are provided on 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 common 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 1994 merger. (See Note 2).
Page 10
<PAGE>
Fair value of financial instruments: Statement of Financial Accounting
Standards No.107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in 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 No. 107 excludes certain financial
instruments and all nonfinancial assets and liabilities 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
approximate 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.
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, which becomes effective for the
Company's year ending December 31, 1996. Statement No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and 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.
Note 2. Merger
On December 30, 1994 Miramar Resources, Inc. acquired, at a conversion rate of
1.045 shares adjusted for a 1 for 20 reverse stock split of the Company's common
stock, all the common shares of Franklin Credit Management Corporation, an
affiliated company, in exchange for 4,667,086 shares of $.01 par value common
stock. The acquisition by the Company of the affiliated company 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.
Page 11
<PAGE>
<TABLE>
<CAPTION>
A summary of the assets acquired and the liabilities assumed in connection with
the acquisition is as follows:
ASSETS 1994
----------------
<S> <C>
Cash $ 370,399
Notes Receivable, net of allowances and purchase discount 42,734,024
Property and Equipment 385,341
Other 4,296,437
----------------
$ 47,786,201
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes Payable $ 40,603,046
Accounts Payable and Accrued Expenses 433,292
Deferred Income Taxes 1,337,590
Other 718,131
----------------
43,092,059
----------------
Minority Interest 2,570,745
Stockholders' Equity 2,123,397
----------------
$ 47,786,201
================
</TABLE>
<TABLE>
<CAPTION>
Since the entities were under common control prior to the acquisition, the
financial statements were restated. Results of operations of the Franklin Credit
Management Corporation and Miramar Resources, Inc. are summarized as follows:
Total Revenue Net Income(Loss)
----------------------------------
<S> <C> <C>
Year ended December 31, 1994:
Franklin Credit Management Corporation $ 5,786,407 $ (69,159) (a)
Miramar Resources, Inc. 1,268,274 311,462
----------------------------------
$ 7,054,681 $ 242,303
==================================
</TABLE>
(a) Includes the effect of a charge to net income of approximately $736,000 as
a result of the termination of Franklin's S election (see Note 11).
All per share information has been restated to include the effects of the
merger.
Page 12
<PAGE>
Note 3. Notes Receivable and Allowance for Loan Losses
<TABLE>
<CAPTION>
Notes receivable consist principally of real estate mortgage and consumer loans
as of December 31, 1995 and 1994 and are classified as follows: (in thousands of
dollars)
1995 1994
-------------------------------
<S> <C> <C>
Real estate secured $ 99,264,936 $ 61,251,755
Consumer - Unsecured 8,821,508 11,619,695
Automobiles 1,191,572 1,785,336
Mobile Homes 3,985,900 5,067,851
Other 3,309,547 2,190,293
------------------------------
116,573,463 81,914,930
less: Joint venture participation (448,966) (492,086)
Purchase discount (28,708,043) (26,421,274)
Allowance for loan losses (20,420,311) (12,267,546)
------------------------------
$ 66,996,143 $ 42,734,024
==============================
</TABLE>
<TABLE>
<CAPTION>
On December 31, 1995, contractual maturities of finance receivables net of the
allowance for loan losses were as follows:
Year Ending December 31, Amount
- - ------------------------------------------------------------------------------
<C> <C>
1996 $ 11,312,735
1997 9,971,960
1998 8,918,470
1999 8,186,919
2000 7,561,505
Thereafter 17,756,288
--------------
$ 63,707,877
==============
</TABLE>
Excluded from the contractual maturities reflected above are the notes
receivable acquired during the last quarter of 1995 which, at principal amount
approximates $35,000,000. Management is in the process of making the final
classification of the loans, the related discount allocation and the initial
determination of the allowance for loan losses associated with this purchase and
the related contractual maturities.
It is the Company's experience that a portion of the loan portfolio may be
renewed or repaid before contractual maturity dates. The above tabulation,
therefore, is not to be regarded as a forecast of future cash collections.
During the years ended December 31, 1995 and 1994, cash collections of principal
amounts totaled approximately $ 14,000,000 and $ 6,200,000, respectively, and
the ratios of these cash collections to average principal balances were
approximately 14% and 11%, respectively.
Page 13
<PAGE>
<TABLE>
<CAPTION>
Changes in the allowance for loan losses for the years ended December 31, 1995
and 1994 are as follows:
1995 1994
----------------------------
<S> <C> <C>
Balance, beginning $ 12,267,546 $ 6,692,597
Initial provision on purchased portfolios 15,506,639 7,102,260
Loans charged to allowance (8,444,356) (2,228,433)
Provision for loan losses 1,090,482 701,122
----------------------------
Balance, ending $ 20,420,311 $ 12,267,546
============================
</TABLE>
At December 31, 1995 and 1994, notes receivable at principal amounts included
approximately $71,000,000 and $67,000,000, respectively, of notes for which
there was no accrual of interest income. At December 31, 1995 and 1994
approximately $34,000,000 and $43,000,000 of such notes at principal amounts
relate to recent portfolio acquisitions whose classification by management is
currently in the process of being determined.
Information about impaired notes receivable as of and for the year ended
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Impaired notes receivable for which there is a related allowance for loan losses
Amount determined:
<S> <C>
Based on discounted cash flows $ 36,862,525
Based on fair value of collateral -
-------------
36,862,525
Impaired notes receivable for which there is no related
allowance for loan losses -
-------------
Total impaired notes receivable 36,862,525
=============
Allowance for loan losses related to impaired notes receivable 18,754,418
=============
Average balance of impaired notes receivable 32,486,853
=============
Interest income recognized $ 2,000,714
=============
</TABLE>
The Company in the normal course of business, restructures or modifies terms on
notes receivable to enhance the collectibility of certain loans which were
impaired at the date of acquisition and included in certain portfolio purchases.
Page 14
<PAGE>
Note 4. Building, Property and Equipment
<TABLE>
<CAPTION>
Building and improvements, furniture and equipment, recorded at cost, consists
of the following at December 31, 1995 and 1994:
1995 1994
-------------------------------
<S> <C> <C>
Building and improvements $ 619,125 $ 310,069
Furniture and equipment 196,958 140,352
-------------------------------
816,083 450,421
Less accumulated depreciation 117,665 65,080
-------------------------------
$ 698,418 $ 385,341
===============================
</TABLE>
Note 5. Investments in Limited Partnerships
During 1994 the Company purchased the interests of certain limited partners and
liquidated the associated limited partnership. During 1995 the Company purchased
the interests of all remaining limited partners and liquidated all limited
partnerships. Income (loss) upon liquidation for 1995 and 1994 was $(247,105)
and $24,925 respectively. Limited partnership interests purchased from limited
partners who also had an ownership interest in the Company were treated as
additional paid in capital.
Note 6. Notes Payable
Notes payable consists of bank loans made to the Company or a subsidiary
primarily to acquire portfolios of notes receivable. All notes payable are
secured by a security interest in the notes receivable, payments to be received
under the notes and the underlying collateral securing the notes.
<TABLE>
<CAPTION>
1995 1994
----------------------------
<S> <C> <C>
Note payable with monthly principal installments
currently of $30,687, plus interest at prime
plus 3.25%, through January 1998 $ - $ 809,818
Note payable with monthly principal installments
currently of $31,795, plus interest at prime
plus 2.5% per annum with an 8% floor
(currently 10.75%) through April 1997,
guaranteed by a stockholder of the Company 635,960 1,010,398
Note payable with monthly principal installments
currently of $79,040 and interest at prime
plus 2.25% per annum (currently 10.5%) through
July 1997, guaranteed by a stockholder of the
Company 1,659,140 2,029,238
Page 15
<PAGE>
Note payable with monthly principal installments
currently of $17,243, plus interest at prime
plus 2% per annum (currently 10.25%) through
December 1997 1,241,556 2,418,433
Note payable with monthly principal installments
currently of $57,998, plus interest at prime
plus 3% per annum (currently 11.25%) through
September 1996, guaranteed by one of the
stockholders of the Company, and by two
companies affiliated by common ownership and
secured by a first priority common ownership - 1,155,454
Note payable with monthly principal installments
currently of $113,043, plus interest at prime
plus 3% per annum (currently at 11.25%) through
June 2000 6,041,773 7,024,290
Note payable with monthly principal installments
currently of $91,667 plus interest at prime
plus 3% per annum (currently at 11.25%) through
October 2004 8,580,871 10,147,912
Note payable with monthly principal installments
currently of $121,184, plus interest at prime
plus 2.5% per annum (currently at 10.75%) through
December 2004 11,249,609 13,815,000
Note payable with monthly principal installments
currently of $17,788, plus interest at prime
plus 3% per annum (currently at 11.25%) through
January 2004, guaranteed by two companies
affiliated by common ownership, and a stockholder
of the Company - 603,460
Note payable with monthly installments currently
of $10,270, starting July 1996, plus interest at
a rate of prime plus 2.5% per annum (currently
10.75%) through December 2006 1,228,229 -
Page 16
<PAGE>
Note payable with monthly installments currently
of $61,822, plus interest at a rate of prime
plus 1.5% per annum (currently 9.75%) through
September 2015 13,891,244 -
Note payable with monthly installments currently
of $31,426, plus interest at a rate of prime
plus 1.5% per annum (currently 9.75%) through
June 2003 2,535,919 -
Note payable with monthly installments currently
of $22,280, starting July 1996, plus interest
at a rate of prime plus 2.0% per annum
(currently 10.25%) through June 2011 4,010,442 -
Note payable with monthly installments currently
of $24,405, starting July 1996, plus interest
at a rate of prime plus 2.0% per annum
(currently 10.25%) through June 2011 4,393,038 -
Note payable with monthly installments currently
of $45,141, plus interest at a rate of prime
plus 2.0% per annum (currently 10.25%) through
December 2010 8,125,450 -
Note payable with monthly installments currently
of $78,171, plus interest at a rate of prime
plus 2.0% per annum (currently 10.25%) through
December 2001 5,628,344 -
Other 94,342 172,368
-----------------------------
$ 69,315,917 $ 39,186,371
============================
</TABLE>
The above financing agreements also provide for additional monthly principal
reductions based on cash collections received by the Company. Substantially all
notes receivable are pledged as collateral on the above debt.
Certain agreements require that a noninterest-bearing cash account be
established at the closing of the loan and may require additional deposits based
on a percentage of monthly collections up to a specified dollar limit. The
aggregate balance of restricted cash at December 31, 1995 and 1994 was $617,111
and $382,394, respectively.
All of the Company's outstanding financing with respect to its loan portfolio
acquisition activities is primarily with one financial institution.
Page 17
<PAGE>
Aggregate maturities of all long-term debt at current amounts, including
subordinated debentures (Note 8), financing agreement (Note 10) and notes
payable to affiliates (Note 9), at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
- - ------------------------------------------------------------------------------
<C> <C>
1996 $ 9,789,587
1997 8,729,709
1998 7,584,475
1999 7,584,475
2000 7,556,454
Thereafter 31,489,961
-----------------
$ 72,734,661
=================
</TABLE>
Note 7. Convertible Subordinated Debentures and Redeemable Common Stock
During 1995, the Company fully repaid the remaining outstanding obligation on
the $2,000,000, 15% convertible subordinated debentures issued in 1993. The
debentures were convertible into common stock of the Company at the rate of
$2.00 per share. Warrants, exercisable to the extent that conversion rights have
not been exercised, to purchase common stock at the rate of $2.00 per share,
were issued on principal repayment dates and expire one year thereafter.
During 1994, the rights of the debenture holders were modified relating to the
conversion of debentures to common stock. Debenture holders who elected to
convert their debenture into common stock received a "Put Agreement" ("Put")
which remained effective until July 1, 1995. The "Put Agreement" stated that if
at any time during the period, the debenture holder decided to exercise the
"Put", the Company would be obligated to buy back the stock held by the
converting debenture holder at $2.00 per share payable in quarterly installments
with interest at 10% per annum on the outstanding balance. If the average
closing price of the Company's common stock during the "Put" period equaled or
exceeded $2.00 per share for 30 consecutive days, the "Put" would expire
automatically. Debenture holders who did not elect the "Put" feature were
allowed to convert the debenture into common stock of the Company at a price of
$1.80 per share instead of the $2.00 per share.
During the year ended December 31, 1994, the holders of debentures having a
principal balance of $487,000 converted the debentures into 243,500 shares of
common stock at $2.00 per share and obtained the "Put"; $839,000 converted the
debentures into 466,000 share of common stock at $1.80 per share; and $674,000
received the scheduled principal reductions of $147,400 and received warrants.
Amounts converted under the "Put" option prior to expiration are included as
redeemable common stock in the accompanying balance sheet. There were no
conversions of debentures to common stock during 1995 and all put agreements
expired during 1995.
As of December 31, 1995 and 1994 warrants to purchase 174,514 and 38,508 shares
of common stock for $2.00 per share are outstanding.
Page 18
<PAGE>
In connection with the acquisition of a loan portfolio during 1994 the Company
offered $750,000 in subordinated debentures. As of December 31, 1995 and 1994,
$705,000 and $575,000 respectively, of these debentures were outstanding. The
debentures bear interest at 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 subordinate to the Notes
Payable (see Note 6) encumbering the loan portfolio.
In connection with the acquisition of a loan portfolio during 1995, the Company
offered $800,000 in subordinated debentures. As of December 31, 1995, $555,000
of these debentures had been issued. The debentures bear interest at a rate of
12% per annum payable in quarterly installments. The principal is to be repaid
over 5 years in 11 equal quarterly installments commencing September 30, 1997
with the remaining balloon payment due on June 30, 2000. The debenture is
secured by a lien on the Company's interest in certain notes receivable and are
subordinate to the Notes Payable (see Note 6) encumbering the loan portfolio.
<TABLE>
<CAPTION>
Note 9. Notes Payable, Affiliates
Notes payable, affiliates consist of the following at December 31, 1995 and
1994:
1995 1994
--------------------------
<S> <C> <C>
Note payable to a stockholder of the Company,
payable in quarterly installments of $6,000
plus interest at a rate of 10% per annum
through August 31, 1997 $ 114,804 $ 120,000
Note payable to a stockholder of the Company,
payable with interest of 15% per annum - 100,000
Note payable to a company affiliated through
certain common ownership, payable in monthly
principal payments of $1,805 plus interest at
a rate of 10.75% per annum through June 1, 2008 272,639 174,417
Note payable to a company affiliated through
certain common ownership, due on demand, with
interest payable monthly at a rate of prime
plus 1/2% per annum (currently 8.75%) Subsequent
to year end, the note was paid in full 125,000 75,000
Note payable to a company affiliated through
certain common ownership, due on demand, with
interest payable monthly at a rate of 10% per
annum 75,000 -
Note payable to a company affiliated through
certain common ownership, due on demand, with
interest payable monthly at a rate of 10% per
annum 75,000 -
Page 19
<PAGE>
Note payable to a stockholder of the Company,
due on demand, with interest payable monthly
at a rate of 10% per annum 82,139 -
Note payable to a stockholder of the Company,
payable in monthly installments of $4,155
including interest at a rate of 10% per annum 90,034 -
-------------------------
$ 834,616 $ 469,417
=========================
</TABLE>
Note 10. Financing Agreements
During 1995, the Company entered into a financing agreement with a bank. The
agreement provides the Company with 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.
The facility is to be utilized through a series of loans made to purchase the
underlying collateral of certain non performing real estate secured loans.
Principal repayment of each resulting loan is due six months from the date of
each advance, interest is payable monthly. As of December 31, 1995, $1,324,128
is outstanding on this facility.
The financing agreement is secured by a first priority security interest in the
notes receivable, the individual real estate that may be purchased, payments to
be received under the notes receivable, an unconditional suretyship by one of
the stockholders of the Company and collateral securing the notes of certain
loan portfolios.
The Company obtained an additional credit facility with a bank during fiscal
year 1995. The facility provides the Company with the ability to borrow a
maximum of $50,000,000 at a rate equal to the bank's prime rate plus two percent
per annum. The facility is to be utilized through a series of loans made to
purchase loan portfolios. The term of each resulting loan will be thirty-six
months calling for a balloon payment at the end of such term.
The facility is secured by a first priority security interest in the loan
portfolio, the respective collateral for each loan purchased and a lien position
of certain other loan portfolios. As of December 31, 1995, no amount is
outstanding on this facility.
Note 11. Income Tax Matters
Prior to the merger in 1994 (see Note 2), Franklin Credit Management
Corporation, with the consent of their stockholders, elected to be taxed under
sections of the federal and Virginia income tax laws (S Corporation status),
which provide that, in lieu of corporation income taxes, the stockholders
separately account for their pro rata shares of the Company's items of income,
deductions, losses and credits. On July 1, 1994 the Company terminated its
election to be treated as an S Corporation.
Page 20
<PAGE>
As a result of the July 1, 1994 termination, the Company recorded a net deferred
tax liability of approximately $736,000 by a charge to income tax expense for
temporary differences between the financial reporting and the income tax basis
of discounts, allowances, receivables, and other assets. Unaudited proforma net
income for the Company for the year ended December 31, 1994 would have been
approximately $853,000 had the Company not initially elected S corporation
status and been terminated in the current year.
<TABLE>
<CAPTION>
The components of income tax (benefit) expense for the years ended December 31,
1995 and 1994 are as follows:
1995 1994
-------------------------
Current:
<S> <C> <C>
Federal $ - $ 110,000
State and local 26,833 73,946
Over accrual of prior year state taxes (31,860) -
-------------------------
(5,027) 183,946
-------------------------
Deferred:
Federal 120,072 689,455
State and local 61,856 369,157
-------------------------
181,928 1,058,612
-------------------------
$ 176,901 $ 1,242,558
=========================
</TABLE>
A reconciliation of the anticipated income tax expense (computed by applying the
Federal Statutory income tax rate of 34% to income before income tax expense) to
the reported income tax (benefit) expense for the years ended December 31, 1995
and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------
<S> <C> <C>
Tax at federal statutory rate $ 121,173 $ 527,518
Increase (decrease) in taxes resulting from:
State and local income taxes, net of
federal benefit 37,506 296,879
Pre-merger income not taxed pursuant
to S Corporation statutes - (209,780)
Change in valuation allowance - (108,800)
Federal tax effect of S-election termination - 736,741
Non deductible expenses 15,492 -
Other 2,730 -
-------------------------
$ 176,901 $ 1,242,558
=========================
</TABLE>
Page 21
<PAGE>
The tax effect of temporary differences that give rise to significant components
of deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------------------------
<S> <C> <C>
Deferred tax liabilities:
Interest receivable $ 348,108 $ 445,959
Purchase discount 1,176,551 891,631
-------------------------
1,524,659 1,337,590
-------------------------
Deferred tax assets:
Accounts payable and accrued expenses 62,418 66,725
Syndication costs 50,713 192,410
Inventory repossessed 170,988 -
Allowance for doubtful accounts - 19,843
-------------------------
284,119 278,978
-------------------------
$ 1,240,540 $ 1,058,612
=========================
</TABLE>
Note 12. Due to Affiliates
Due to affiliates represents advances made on behalf of the Company by a company
affiliated by common ownership for shared expenses related to the operating
facility.
Note 13. Commitments and Contingencies
During 1994 the Company reached a settlement agreement with prior management and
third parties settling various claims which it held. The settlement indicates
that the Company will receive $750,000 against a judgment and $375,000 in
settlement of a separate legal action. In connection with these settlements, the
Company recognized $625,000 in income during 1994 of which $502,000 and $593,500
is included in litigation proceeds receivable as of December 31, 1995 and 1994,
respectively.
Page 22
FRANKLIN CREDIT MANAGEMENT CORPORATION
1996 STOCK INCENTIVE PLAN
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
ARTICLE I
GENERAL
<S> <C>
Page
1.1 Purpose 1
1.2 Administration 1
1.3 Persons Eligible for Awards 2
1.4 Types of Awards Under Plan 3
1.5 Shares Available for Awards 3
1.6 Definitions of Certain Terms 4
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards 7
2.2 Grant of Stock Options 7
2.3 Exercise of Options 9
2.4 Termination of Employment; Death 11
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards 13
3.2 Restrictions 15
3.3 Nonassignability 16
3.4 Requirement of Notification of Election Under
Section 83(b) of the Code 16
3.5 Requirement of Notification Upon Disqualifying
Disposition Under Section 421(b) of the Code 16
<PAGE>
3.6 Withholding Taxes 17
3.7 Right of Discharge Reserved 17
3.8 Nature of Payments 18
3.9 Non-Uniform Determinations 18
3.10 Other Payments or Awards 19
3.11 Section Headings 19
3.12 Effective Date and Term of Plan 19
3.13 Governing Law 20
</TABLE>
-ii-
<PAGE>
ARTICLE I
GENERAL
1.1 Purpose
The purpose of the Franklin Credit Management Corporation 1996 Stock
Incentive Plan (the "Plan") is to provide for officers, directors and other
employees of, and consultants to, Franklin Credit Management Corporation (the
"Company") an incentive (a) to enter into and remain in the service of the
Company, (b) to enhance the long-term performance of the Company, and (c) to
acquire a proprietary interest in the success of the Company.
1.2 Administration
1.2.1 All determinations under the Plan concerning the selection of persons
eligible to receive awards with respect to the timing, pricing and amount of an
award shall be made by the administrator (the "Administrator") of the Plan. The
Administrator shall be either: (a) the Board of Directors or (b) in the
discretion of the Board of Directors, a committee (the "Committee") of not less
than two members of the Board of Directors. In the event the Plan is
1
<PAGE>
administered by the Committee, the Committee shall select one of its members to
serve as the chairman thereof and shall hold its meetings at such times and
places as it may determine. In such case, a majority of the total number of
members of the Committee shall be necessary to constitute a quorum; and (i) the
affirmative act of a majority of the members present at any meeting at which a
quorum is present, or (ii) the approval in writing by a majority of the members
of the Committee, shall be necessary to constitute action by the Committee.
1.2.2 The Administrator shall have the authority (a) to exercise all of
the powers granted to it under the Plan, (b) to construe, interpret and
implement the Plan and any Plan Agreements executed pursuant to Section 2.1, (c)
to prescribe, amend and rescind rules and regulations relating to the Plan,
including rules governing its own operations, (d) to make all determinations
necessary or advisable in administering the Plan, (e) to correct any defect,
supply any omission and reconcile any inconsistency in the Plan, and (f) to
amend the Plan to reflect changes in applicable law.
2
<PAGE>
1.2.3 The determination of the Administrator on all matters relating to
the Plan or any Plan Agreement shall be final, binding and conclusive.
1.2.4 Neither the Administrator nor any member thereof shall be liable for
any action or determination made in good faith with respect to the Plan or any
award thereunder.
1.3 Persons Eligible for Awards
Awards under the Plan may be made to such officers, directors and employees
of the Company, and to such consultants to the Company (collectively,
"key persons"), as the Administrator shall in its sole discretion select.
1.4 Types of Awards Under Plan
Awards may be made under the Plan in the form of (a) incentive stock
options, and/or (b) nonqualified stock options, all as more fully set forth in
Article II. The term "award" means any of the foregoing. No incentive stock
option may be granted to a person who is not an employee of the Company on the
date of grant.
3
<PAGE>
1.5 Shares Available for Awards
1.5.1 The total number of shares of common stock of the Company, par value
$.01 per share ("Common Stock"), with respect to which awards may be granted
pursuant to the Plan shall not exceed six hundred thousand (600,000) shares.
Such shares may be authorized but unissued Common Stock or authorized and issued
Common Stock held in the Company's treasury or acquired by the Company for the
purposes of the Plan. The Administrator may direct that any stock certificate
evidencing shares issued pursuant to the Plan shall bear a legend setting forth
such restrictions on transferability as may apply to such shares pursuant to
the Plan.
1.5.2 If there is any change in the outstanding shares of Common Stock by
reason of a stock dividend or distribution, stock split-up, recapitalization,
combination or exchange of shares, or by reason of any merger, consolidation,
spinoff or other corporate reorganization in which the Company is the surviving
corporation, the number of shares available for issuance both in the aggregate
and with respect to each outstanding award, and the purchase price per share
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under outstanding awards, shall be equitably adjusted by the Administrator,
whose determination shall be final, binding and conclusive. After any adjustment
made pursuant to this Section 1.5.2, the number of shares subject to each
outstanding award shall be rounded to the nearest whole number.
1.5.3 Any shares subject to an award under the Plan that remain unissued
upon the cancellation or termination of such award for any reason whatsoever
shall again become available for awards under the Plan. Except as provided in
this Section 1.5 and in Section 2.2.4, there shall be no limit on the number or
the value of the shares of Common Stock issuable to any individual under the
Plan.
1.5.4 In no event shall the number of shares of Common Stock subject to
options awarded during the term of the Plan to any employee exceed 480,000
shares.
1.6 Definitions of Certain Terms
1.6.1 The "Fair Market Value" of a share Common Stock on any day shall be
determined as follows.
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(a) If the principal market for the Common Stock (the "Market") is a
national securities exchange or the Nasdaq National Market, the last sale price
or, if no reported sales take place on the applicable date, the average of the
high bid and low asked price of Common Stock as reported for such Market on such
date or, if no such quotation is made on such date, on the next preceding day on
which there were quotations, provided that such quotations shall have been made
within the ten (10) business days preceding the applicable date;
(b) If the Market is the Nasdaq Small Cap Market or another market,
the average of the high bid and low asked price for Common Stock on the
applicable date, or, if no such quotations shall have been made on such date,
on the next preceding day on which there were quotations, provided that such
quotations shall have been made within the ten (10) business days preceding the
applicable date; or,
(c) In the event that neither paragraph (a) nor (b) shall apply, the
Fair Market Value of a share of Common Stock on any day shall be determined by
the Administrator.
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1.6.2 The term "incentive stock option" means an option that is intended
to qualify for special federal income tax treatment pursuant to sections 421 and
422 of the Internal Revenue Code of 1986, as now constituted or subsequently
amended (the "Code"), or pursuant to a successor provision of the Code, and
which is so designated in the applicable Plan Agreement. Any option that is not
specifically designated as an incentive stock option shall under no
circumstances be considered an incentive stock option. Any option that is not an
incentive stock option is referred to herein as a "nonqualified stock option."
1.6.3 The term "employment" means, in the case of a grantee of an award
under the Plan who is not an employee of the Company, the grantee's association
with the Company as a director, consultant or otherwise.
1.6.4 A grantee shall be deemed to have a "termination of employment" upon
ceasing to be employed by the Company and all of its subsidiaries or by a
corporation assuming awards in a transaction to which section 424(a) of the Code
applies. The Administrator may in its discretion determine (a) whether any leave
of absence constitutes a termination of employment for purposes of the Plan,
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(b) the impact, if any, of any such leave of absence on awards theretofore made
under the Plan, and (c) when a change in a non-employee's association with the
Company constitutes a termination of employment for purposes of the Plan. The
Administrator shall have the right to determine whether the termination of a
grantee's employment is a dismissal for cause and the date of termination in
such case, which date the Administrator may retroactively deem to be the date of
the action that is cause for dismissal. Such determinations of the Administrator
shall be final, binding and conclusive.
1.6.5 The terms "parent corporation" and "subsidiary corporation" have the
meanings given them in section 424(e) and (f) of the Code, respectively.
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards
Each award granted under the Plan shall be evidenced by a written agreement
("Plan Agreement") which shall contain such provisions as the Administrator may
in its sole discretion deem necessary or desirable. By accepting an award
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pursuant to the Plan, a grantee thereby agrees that the award shall be subject
to all of the terms and provisions of the Plan and the applicable Plan
Agreement.
2.2 Grant of Stock Options
2.2.1 The Administrator may grant incentive stock options and nonqualified
stock options (collectively, "options") to purchase shares of Common Stock from
the Company, to such key persons, and in such amounts and subject to such terms
and conditions, as the Administrator shall determine in its sole discretion,
subject to the provisions of the Plan.
2.2.2 Each Plan Agreement with respect to an option shall set forth the
amount (the "option exercise price") payable by the grantee to the Company upon
exercise of the option evidenced thereby. The option exercise price per share
shall be determined by the Administrator in its sole discretion; provided,
however, that the option exercise price of an incentive stock option shall be at
least 100% of the Fair Market Value of a share of Common Stock on the date the
option is granted, and provided further that in no event shall the option
exercise price be less than the par value of a share of Common Stock.
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2.2.3 Each Plan Agreement with respect to an option shall set forth the
periods during which the award evidenced thereby shall be exercisable, whether
in whole or in part. Such periods shall be determined by the Administrator in
its sole discretion; provided, however, that no incentive stock option shall be
exercisable more than 10 years after the date of grant.
2.2.4 To the extent that the aggregate Fair Market Value (determined as
of the time the option is granted) of the stock with respect to which incentive
stock options are first exercisable by any employee during any calendar year
shall exceed $100,000, or such higher amount as may be permitted from time to
time under section 422 of the Code, such options shall be treated as
nonqualified stock options. In applying this provision, there shall be taken
into account solely incentive stock options granted after December 31, 1986 to
the employee under this Plan and under all other plans of the Company and any
subsidiary thereof.
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2.2.5 Notwithstanding the provisions of Section 2.2.2 and 2.2.3, an
incentive stock option may not be granted under the Plan to an individual who,
at the time the option is granted, owns stock possessing more than 10% of the
total combined voting power of all classes of stock of his employer corporation
or of its parent or subsidiary corporations (as such ownership may be determined
for purposes of section 422(b)(6) of the Code) unless (a) at the time such
incentive stock option is granted the option exercise price is at least 110% of
the Fair Market Value of the shares subject thereto and (b) the incentive stock
option by its terms is not exercisable after the expiration of 5 years from the
date it is granted.
2.3 Exercise of Options
Subject to the provisions of this Article II, each option granted under the
Plan shall be exercisable as follows:
2.3.1 Unless the applicable Plan Agreement otherwise provides, an option
shall become exercisable in four substantially equal installments, the first of
which shall become exercisable on the first anniversary of the date of grant and
the remaining three of which shall become exercisable, respectively, on the
second, third and fourth anniversaries of the date of grant.
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2.3.2 Unless the applicable Plan Agreement otherwise provides, once an
installment becomes exercisable, it shall remain exercisable until expiration,
cancellation or termination of the award.
2.3.3 Unless the applicable Plan Agreement otherwise provides, an option
may be exercised from time to time as to all or part of the shares as to which
such award is then exercisable.
2.3.4 An option shall be exercised by the filing of a written notice with
the Company, on such form and in such manner as the Administrator shall in its
sole discretion prescribe.
2.3.5 Any written notice of exercise of an option shall be accompanied by
payment for the shares being purchased. Such payment shall be made:(a) by
certified or official bank check (or the equivalent thereof acceptable to the
Company) for the full option exercise price; or (b) with the consent of the
Administrator, by delivery of shares of Common Stock having a Fair Market Value
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(determined as of the exercise date) equal to all or part of the option exercise
price (but only if held by the grantee for a period of time sufficient to
prevent a pyramid exercise that would create a charge to the Company's earnings)
and a certified or official bank check (or the equivalent thereof acceptable to
the Company) for any remaining portion of the full option exercise price; or (c)
at the discretion of the Administrator and to the extent permitted by law, by
such other provision, consistent with the terms of the Plan, as the
Administrator may from time to time prescribe.
2.3.6 Promptly after receiving payment of the full option exercise price,
the Company shall, subject to the provisions of Section 3.2, deliver to the
grantee or to such other person as may then have the right to exercise the
award, a certificate or certificates for the shares of Common Stock for which
the award has been exercised. If the method of payment employed upon option
exercise so requires, and if applicable law permits, an optionee may direct the
Company to deliver the certificate(s) to the optionee's stockbroker.
2.3.7 No grantee of an option (or other person having the right to exercise
such award) shall have any of the rights of a stockholder of the Company with
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respect to shares subject to such award until the issuance of a stock
certificate to such person for such shares. Except as otherwise provided in
Section 1.5.2, no adjustment shall be made for dividends, distributions or other
rights (whether ordinary or extraordinary, and whether in cash, securities or
other property) for which the record date is prior to the date such stock
certificate is issued.
2.4 Termination of Employment; Death
2.4.1 Except to the extent otherwise provided in Section 2.4.2 or 2.4.3
or in the applicable Plan Agreement, all options not theretofore exercised shall
terminate upon termination of the grantee's employment for any reason (including
death).
2.4.2 If a grantee's employment terminates for any reason other than death
or dismissal for cause, the grantee may exercise any outstanding option on the
following terms and conditions: (a) exercise may be made only to the extent that
the grantee was entitled to exercise the award on the date of employment
termination; and (b) exercise must occur within three months after employment
terminates, except that the three-month period shall be increased to one year
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if the termination is by reason of disability, but in no event after the
expiration date of the award as set forth in the Plan Agreement. The term
"Disability" shall be defined as determined by the Administrator in its sole
discretion provided, however, that if any such determination in the case of an
Incentive Stock Option does not meet the requirements of Section 422(c)(6) of
the Code, the option shall be converted to a non-qualified stock option.
2.4.3 If a grantee dies while employed by the Company or any subsidiary, or
after employment termination but during the period in which the grantee's awards
are exercisable pursuant to Section 2.4.2, any outstanding option shall be
exercisable on the following terms and conditions: (a) exercise may be made only
to the extent that the grantee was entitled to exercise the award on the date of
death; and (b) exercise must occur by the earlier of the first anniversary of
the grantee's death or the expiration date of the award. Any such exercise of an
award following a grantee's death shall be made only by the grantee's executor
or administrator or personal representative, unless the grantee's will
specifically disposes of such award, in which case such exercise shall be made
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only by the recipient of such specific disposition. If a grantee's personal
representative or the recipient of a specific disposition under the grantee's
will shall be entitled to exercise any award pursuant to the preceding sentence,
such representative or recipient shall be bound by all the terms and conditions
of the Plan and the applicable Plan Agreement which would have applied to the
grantee including, without limitation, the provisions of Sections 3.2 and 3.7
hereof.
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards
3.1.1 The Board may from time to time suspend, discontinue, revise or amend
the Plan in any respect whatsoever, except that no such amendment shall
materially impair any rights or materially increase any obligations under any
award theretofore made under the Plan without the consent of the grantee (or,
upon the grantee's death, the person having the right to exercise the award).
For purposes of this Section 3.1, any action of the Board or the Administrator
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that alters or affects the tax treatment of any award shall not be considered
to materially impair any rights of any grantee.
3.1.2 Shareholder approval shall be required with respect to any amendment
which: (a) increases the aggregate number of shares which may be issued pursuant
to incentive stock options or changes the class of employees eligible to receive
such options; or (b) materially increases the benefits under the Plan to persons
whose transactions in Common Stock are subject to Section 16(b) of the
Securities Exchange Act of 1934 (the "1934 Act"), materially increases the
number of shares which may be issued to such persons, or materially modifies the
eligibility requirements affecting such persons.
3.1.3 The Administrator may amend any outstanding Plan Agreement,
including, without limitation, by amendment which would (a) accelerate the time
or times at which the award may be exercised, or (b) waive or amend any goals,
restrictions or conditions set forth in the Plan Agreement, or (c) extend the
scheduled expiration date of the award. However, any such cancellation or
amendment that materially impairs the rights or materially increases the
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obligations of a grantee under an outstanding award shall be made only with the
consent of the grantee (or, upon the grantee's death, the person having the
right to exercise the award).
3.2 Restrictions
3.2.1 If the Administrator shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other action
thereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained to the full satisfaction of
the Administrator.
3.2.2 The term "Consent" as used herein with respect to any Plan Action
means (a) any and all listings, registrations or qualifications in respect
thereof upon any securities exchange or under any federal, state or local law,
rule or regulation, (b) any and all written agreements and representations by
the grantee with respect to the disposition of shares, or with respect to any
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other matter, which the Administrator shall deem necessary or desirable to
comply with the terms of any such listing, registration or qualification or to
obtain an exemption from the requirement that any such listing, qualification or
registration be made and (c)any and all consents, clearances and approvals in
respect of a Plan Action by any governmental or other regulatory bodies.
3.3 Nonassignability
No award or right granted to any person under the Plan or under any Plan
Agreement shall be assignable or transferable other than by will or by the laws
of descent and distribution. All rights granted under the Plan or any Plan
Agreement shall be exercisable during the life of the grantee only by the
grantee or the grantee's legal representative.
3.4 Requirement of Notification of Election
Under Section 83(b) of the Code
If any grantee shall, in connection with the acquisition of shares of
Common Stock under the Plan, make the election permitted under section 83(b) of
the Code (i.e., an election to include in gross income in the year of transfer
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the amounts specified in section 83(b)), such grantee shall notify the Company
of such election within 10 days of filing notice of the election with the
Internal Revenue Service, in addition to any filing and notification required
pursuant to regulations issued under the authority of Code section 83(b).
3.5 Requirement of Notification Upon Disqualifying
Disposition Under Section 421(b) of the Code
Each Plan Agreement with respect to an incentive stock option shall require
the grantee to notify the Company of any disposition of shares of Common Stock
issued pursuant to the exercise of such option under the circumstances described
in section 421(b) of the Code (relating to certain disqualifying dispositions),
within 10 days of such disposition.
3.6 Withholding Taxes
3.6.1 Whenever shares of Common Stock are to be delivered pursuant to an
award under the Plan, the Company shall be entitled to require as a condition of
delivery that the grantee remit to the Company an amount sufficient in the
opinion of the Company to satisfy all federal, state and other governmental tax
withholding requirements related thereto. With the approval of the
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Administrator, which it shall have sole discretion to grant, the grantee may
satisfy the foregoing condition by electing to have the Company withhold from
delivery shares having a value equal to the amount of tax to be withheld. Such
shares shall be valued at their Fair Market Value on the date as of which the
amount of tax to be withheld is determined (the "Tax Date"). Fractional share
amounts shall be settled in cash. Such a withholding election may be made with
respect to all or any portion of the shares to be delivered pursuant to an
award.
3.7 Right of Discharge Reserved
Nothing in the Plan or in any Plan Agreement shall confer upon any grantee
the right to continue in the employ of the Company or affect any right which the
Company may have to terminate such employment.
3.8 Nature of Payments
3.8.1 Any and all grants of awards and issuances of shares of Common Stock
under the Plan shall be in consideration of services performed for the Company
by the grantee.
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3.8.2 All such grants and issuances shall constitute a special incentive
payment to the grantee and shall not be taken into account in computing the
amount of salary or compensation of the grantee for the purpose of determining
any benefits under any pension, retirement, profit-sharing, bonus, life
insurance or other benefit plan of the Company or under any agreement between
the Company and the grantee, unless such plan or agreement specifically provides
otherwise.
3.9...Non-Uniform Determinations
The Administrator's determinations under the Plan need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Administrator
shall be entitled, among other things, to make non-uniform and selective
determinations, and to enter into non-uniform and selective Plan
Agreements, as to (a) the persons to receive awards under the Plan, (b) the
terms and provisions of awards under the Plan, and (c) the treatment of leaves
of absence pursuant to Section 1.6.4.
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3.10 Other Payments or Awards
Nothing contained in the Plan shall be deemed in any way to limit or
restrict the Company from making any award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.
3.11 Section Headings
The section headings contained herein are for the purpose of convenience
only and are not intended to define or limit the contents of said sections.
3.12 Effective Date and Term of Plan
3.12.1 The Plan was adopted by the Board in May 1996, subject to approval
by the Company's shareholders. All awards under the Plan prior to such
shareholder approval are subject in their entirety to such approval. If such
approval is not obtained prior to the first anniversary of the date of adoption
of the Plan, the Plan and all awards thereunder shall terminate on that date.
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3.12.2 Unless sooner terminated by the Board, the provisions of the Plan
respecting the grant of incentive stock options shall terminate on the tenth
anniversary of the adoption of the Plan by the Board, and no incentive stock
option awards shall thereafter be made under the Plan. All such awards made
under the Plan prior to its termination shall remain in effect until such awards
have been satisfied or terminated in accordance with the terms and provisions of
the Plan and the applicable Plan Agreements.
3.13 Governing Law
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of Delaware, without
giving effect to principles of conflict of laws.
