UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
_____________ to _____________
Commission file number 0-17771
FRANKLIN CREDIT MANAGEMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 75-2243266
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices, including zip code,
and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value.
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1995 were
$11,760,857.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of the Common Stock on March 8, 1996 was approximately
$2,535,000.
Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes X No
The number of shares of Common Stock, par value $0.01 per share,
outstanding as of March 8, 1995, was 5,503,896.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report on 10KSB for year ended
December 31, 1994 are incorporated by reference into Part I.
Page 1
<PAGE>
PART I
Item 1. 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,
Page 2
<PAGE>
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.
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.
Page 3
<PAGE>
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.
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.
Page 4
<PAGE>
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.
Item 2. Description of Properties.
Properties. Registrant, as of December 31, 1995, holds an undivided 100%
interest in a 6,600 square foot office condominium unit located on the Sixth
Floor of Six Harrison Street, New York, New York. Registrant also rents a
secondary office located at 8201 Greensboro Drive, Suite 601, McLean Virginia.
Registrant's principal offices are located at the Harrison Street location. (See
Part III; Item 12. Certain Relationships and Related Transactions for further
information.)
Item 3. Legal Proceedings.
Trademark Dispute. On January 4, 1994, Franklin received a letter from the
law firm of Townsend and Townsend and Crew (the "Townsend Firm") of San
Francisco, CA, on behalf of their client, Franklin Resources, Inc. The Townsend
Firm stated that their client was the owner of the trademark "Franklin" as well
as other marks utilizing "Franklin" and, as such, demanded that Franklin cease
use of the designation "Franklin" for investment purposes. In September 1995
Franklin Resources, Inc. commenced a civil action (the "Civil Action") titled
Franklin Resources, Inc. v. Franklin Credit Management Corporation, et al.,
Civil Action No. 95 Civ. 7686 (CSH) against the Registrant. The Registrant
believes and it is the opinion of it's counsel that the eventual outcome of this
litigation will have no material impact on its financial condition or
operations.
Registrant is also a party, as a plaintiff, to various actions seeking to
recover amounts due under promissory notes in the Loan Portfolios. The amount
involved in each of these actions does not exceed 10% of the current assets of
Registrant.
Beginning in July of 1991, Registrant has been party to various actions
and settlements with the previous directors and officers of Miramar Resources,
Inc. Information regarding Registrants Legal Proceedings concerning these
matters is incorporated herein by reference to the Registrants 10-KSB filed with
the SEC on March 31, 1995, (Item 3. Legal Proceedings - Pg.5).
Page 5
<PAGE>
In a subsequent event the parties to the original Shultz settlement
agreement have filed an action involving the Registrant. In connection with the
Schultz Settlement, certain defendants commenced an action styled: William B.
Shultz, Sr., Family Living, Q-Tip Trust v. Franklin Credit Management
Corporation formerly known as Miramar Resources, Inc., Case No. 3652H, District
Court, Hartley County, Texas (the "Quiet Title Action"). The plaintiff in Quiet
Title Action seeks a determination that a Deed of Trust protects the security
interest in the collateral assigned Registrant as part of the Shultz settlement
agreement is unenforceable. Franklin has filed an answer in the Quiet Title
Action and management believes the allegations are without merit and the
Registrant will enforce the original provisions of the settlement agreement. It
is the opinion of Company counsel that the Shultz settlement agreement is
enforceable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
ended December 31, 1995.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. The Company's Common Stock was quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System (NASDAQ)
under the symbol "MIRA" until January 1992, when trading was suspended due to
the Company's failure to file timely quarterly and annual reports with the
Securities and Exchange Commission. Registrant became current with all
outstanding SEC filings on November 23, 1993.
The Company has obtained the information in the following table directly
from the NASD Bulletin Board.
<TABLE>
<CAPTION>
1994 1995
Bid(*) Bid
-------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $5.00 $2.50 $1.00 $1.00
Second Quarter $5.00 $2.50 $2.50 $2.50
Third Quarter $5.00 $1.00 $2.50 $2.50
Fourth Quarter $1.00 $1.00 $2.25 $2.25
</TABLE>
(Note *: The information for 1994 reflects the Merger and the subsequent
20:1 reverse split).
Trading during these periods was limited and sporadic. The
above-referenced quotations may not, therefore, accurately reflect the market
value of the securities. Moreover, the above referenced quotations reflect
inter-dealer prices without retail markup or markdown or commissions and may not
represent actual transactions.
Page 6
<PAGE>
As of March 8, 1996, there were approximately 2,382 record holders of the
Company's Common Stock.
Dividend Policy. The Company has not paid cash dividends on its Common
Stock to date and does not anticipate paying any significant cash dividend in
1996.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Prior to the Merger, the principal business of the Registrant had been the
production and marketing of oil and gas from wells located in Colorado, Kansas
and Oklahoma. Following the Merger, the Company sold all significant oil and gas
interests which were in Colorado to an unaffiliated third party for $375,000,
plus certain other considerations. The Company has continued in the business of
acquiring performing and non-performing loan portfolios secured by real estate
from various financial institutions.
Loan Acquisitions. In late 1994, the Registrant acquired two loan
portfolios with an aggregate principal balance of approximately $40,000,000.
During 1995 the Registrant acquired six additional loan portfolios totaling
approximately $59,500,000. Three of these portfolios, or approximately
$28,000,000, were acquired in December of 1995. These portfolios were acquired
through term debt facilities from financial institutions (the "Senior Debt") of
approximately $24,000,000 and $35,570,000, respectively. The increase in the
size of Loan Portfolios acquired during 1995, as well as the overall success in
obtaining Loan Portfolios, reflects improved funding capacity resulting from
increases in available bank credit lines from approximately $60,000,000 in 1994
to approximately $100,000,000 at December 31, 1995.
The Registrant believes these acquisitions will result in substantial
increases in interest income and purchase discount income for future periods.
During the initial period following acquisitions, the Registrant incurs
significant administrative carrying costs as new portfolios are incorporated
into the Company's proprietary loan tracking system and contact with the
borrowers begins to produce monthly cash collections utilized to service the
Senior Debt.
The Company's management intends to attempt to continue growth through the
acquisition of additional Loan Portfolios utilizing available credit lines.
Management intends to primarily pursue acquisitions of performing and
non-performing real estate secured loan portfolios through out the northeastern
United States. There can be no assurance the Company will be able to acquire any
additional Loan Portfolios or that it may do so on favorable terms. While
management believes that the acquisition of additional Loan Portfolios would be
beneficial, management does not believe that current operations would be
materially impacted if additional Loan Portfolios are not acquired during 1996.
Management intends to obtain additional Loan Portfolios and to continue
operations at current levels or expand operations.
Page 7
<PAGE>
Interest Rate Impact. The rise in market rates of interest during 1995 has
increased the cost of funds on Senior Debt in connection with Loan Portfolio
acquisitions. As of December 31, 1995, Franklin had thirteen loans with
financial institutions with an aggregate principal balance of approximately
$70,000,000. The Senior Debt accrues interest at a variable rate based upon
prime rate. Registrant incurs additional cost of capital expenditures in the
form of service fees and loan commitment fees. The service fees are a percentage
of gross collections on specific portfolios while loan commitment fees are
points based upon original Senior Debt, both payable directly to the Senior Debt
lenders. Due to increases in the prime rate during 1995, together with service
fees and loan commitment fees, the effective interest rate paid on Franklin's
existing Senior Debt increased, directly reducing net income. The majority of
the Notes Receivable bear interest at a fixed rate; consequently, there is
little corresponding increase in interest income from the fixed rate Notes
Receivable due to increases in market interest rate conditions. The average
effective interest rate on borrowed funds for the Senior Debt increased from
approximately 12% in 1994 to 15% in 1995. Management believes that future
increases in the prime rate may negatively impact the net income of the Company.
Change in Taxpayer Status. Prior to June 30, 1994, Franklin elected to be
taxed under Subchapter S of the Internal Revenue Code and as a result the pro
rata share of Franklin's items of income, deductions, losses and credits were
reported on the tax returns of Franklin's stockholders. Franklin's eligibility
under Subchapter S terminated on July 1, 1994. As a result, the Company was
required to report items of income, deductions, losses and credits attributable
to Franklin on its federal tax return for periods after July 1, 1994. As a
result of the termination of Franklin's eligibility under Subchapter S, the
Company recognized a charge to income tax expense in 1994 in the amount of
$736,741 representing timing differences between financial reporting and the
income tax basis of discounts, allowances, receivables and other assets of the
Company. The charge to income tax expense as a result of termination of its S
Status is non-recurring.
Investments in Limited Partnerships. 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 with Senior Debt and liquidated all limited partnerships.
Income (loss) upon such liquidations for 1995 and 1994 were $(247,105) and
$24,925 respectively. Limited partnership interests purchased from limited
partners who also had a significant ownership interest in the Company were
recorded as an increase of $144,579 to paid in capital.
The operations of Franklin are not materially affected by seasonal
variations.
Page 8
<PAGE>
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
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
Page 9
<PAGE>
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.
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
Page 10
<PAGE>
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.
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
Page 11
<PAGE>
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.
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
Page 12
<PAGE>
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.
Page 13
<PAGE>
Item 7. Financial Statements.
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 16
- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets 17 - 18
Consolidated statements of income 19
Consolidated statements of stockholders' equity 20
Consolidated statements of cash flows 21 - 22
Notes to consolidated financial statements 23 - 37
- ------------------------------------------------------------------------------
</TABLE>
Page 15
<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 16
<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 17
<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 18
<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 19
<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 20
<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 21
<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 22
<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 23
<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 24
<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 25
<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 26
<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 27
<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 28
<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 29
<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 30
<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 31
<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 32
<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 33
<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 34
<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 35
<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 36
<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 37
<PAGE>
Item 8. 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.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of Exchange Act.
Officers and Directors of the Company. As of December 31, 1995, the
officers and Directors whose terms end in 1996, were as follows:
Thomas J. Axon age 43
Mr Axon has been the President and a Director of Franklin since its inception in
1990. Mr. Axon is also the President of Axon Associates, Inc., a company engaged
in investor note and bridge financing. Mr. Axon is the founding President of
RMTS Associates, Inc., a reinsurance firm located in New York. He is a general
partner of several real estate partnerships in New York. Mr. Axon is retained as
financial advisor to professional sports leagues. Mr. Axon received a Bachelor
of Arts in economics from Franklin and Marshall College and attended the New
York University Graduate School of Business.
Frank B. Evans, Jr. age 44
Mr. Evans is the Vice President, Treasurer, Chief Financial Officer, Secretary
and a Director of Franklin, positions he has held since its inception in 1990.
Mr. Evans is CEO of Convault Mid-Atlantic, Inc., an environmental products
company located in McLean, Virginia. Mr. Evans is also President of First
Chesapeake Capital Corporation, a financial services firm providing investment
banking and portfolio consulting services. Mr. Evans also serves as the
President of First Chesapeake Futures Corporation which is general partner of
two managed futures funds with approximately $4,500,000 in total assets. Mr.
Evans is a Certified Public Accountant and has received degrees from the
University of Maryland (Bachelor of Science) and the University of Southern
California (Master of Business Administration).
Page 38
<PAGE>
Harvey R. Hirschfeld age 47
Mr. Hirschfeld has been a Vice President and Director of Franklin since
its inception in 1990, where he is responsible for daily operations and
portfolio review and evaluation. Prior to joining Franklin, he held the position
of Director of Investor Note Financing for Ingersoll- Rand Financial Corporation
(1979-1986), served as Executive Vice President of National Capital Corporation
(1986-1988), and was the Senior Loan Manager for First City National Bank and
Trust Company. Subsequent to December 31, 1995, Mr. Hirschfeld resigned as Vice
President to pursue other opportunities.
John T. Devine age 27
Mr. Devine has been the Assistant Secretary of Franklin since January 1995
and is not a Director. Mr. Devine has been with employed by Franklin since
inception as one of the key personnel responsible for the daily operations,
portfolio review and acquisition due diligence. Prior to his employment
with Franklin, Mr. Devine worked for Axon Associates, Inc. in their
investor note division.
Joseph Bartfield age 40
Mr. Bartfield, a Director to the Company, has been practicing law in New
York State since 1980. He graduated from New York Law School and holds a masters
degree in political science from Long Island University. Mr. Bartfield has been
self-employed since 1988 and specializes in the commercial and real estate
fields with particular emphasis on commercial litigation and commercial
arbitration.
Joseph Caiazzo age 37
Mr. Caiazzo, a Director to the Company, has been corporate controller of
R.C. Dolner, Inc., a general contractor, since 1989. He has over 15 years
experience in the construction industry. Mr. Caiazzo has a B.A. in
accounting from St.Francis College in New York and a Masters of Business
Administration in finance from Long Island University and resides in New
York. Subsequent to December 31, 1995, Mr. Caiazzo has accepted an offer
from Franklin to replace Mr. Hirschfeld as Vice President.
Page 39
<PAGE>
Robert M. Chiste age 48
Mr. Chiste, a Director to the Company, is Chief Executive Officer of
American National Power, Inc., the successor corporation to Transco Energy
Ventures Company ("TEVCO") of which he served as President since it was created
in 1986. 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. He is currently pursuing a Doctorate in Business
Administration--International from Nova University.
Allan R. Lyons age 54
Mr. Lyons, a Director to the Company, has been a director of Action
Performance Companies, Inc. since January 1994. Mr. Lyons is a Certified
Public Accountant who has been an owner 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. Since
June 1990, he has also been a director of The Score Board, Inc., a New
Jersey corporation primarily engaged in the sale of sports and
entertainment memorabilia.
Eugene T. Wilkinson age 44
Mr. Wilkinson, a Director to the Company, is President and CEO of
Management Facilities Corporation ("MFC"), a Warren, New Jersey reinsurance
facilities manager, underwriter and consultant primarily in the health care
field. Mr. Wilkinson has been President and CEO since MFC was incorporated
in 1987.
Robert E. Rupert age 41
Mr. Rupert has served as a director of Miramar since May 1988 and as
Secretary and Treasurer since October 8, 1991. From 1975 to 1991, he served as
President of Dynateria, a North Carolina corporation engaged in providing
various services to United States military bases.
Since 1991, he has been self-employed.
Page 40
<PAGE>
<TABLE>
<CAPTION>
Item 10. Executive Compensation.
The following table sets forth certain information regarding the aggregate
annual renumeration of the three highest paid persons who are officers or
directors of Franklin for the fiscal years ended December 31, 1994 and 1995.
SUMMARY COMPENSATION TABLE
Name and ANNUAL COMPENSATION
Principal LONG TERM
Position Year Salary ($) Bonus ($) COMPENSATION
- -------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas J. Axon (2) 1994 $-0- (1) $-0- (1) $-0- (1)
President 1995 $-0- (1) $-0- (1) $-0- (1)
Frank B. Evans, Jr. 1994 $-0- (1) $-0- (1) $-0- (1)
Treasurer, Secretary 1994 $-0- (1) $-0- (1) $-0- (1)
Harvey R. Hirschfe1994 $105,000 $-0 $-0-
Vice President 1995 $130,962 $-0 $-0-
</TABLE>
(1) Mr. Axon and Mr. Evans have foregone any salary for 1994 and 1995.
(2) Mr. Axon received health insurance benefits of approximately $7,000
in fiscal 1994 and 1995.
Directors Compensation. Directors receive no compensation for their service as
such, although the board of directors of the Company may propose the adoption of
a stock option plan or other incentive compensation packages in 1996.
Employment Agreements. Other than salary, Franklin has no plans or
arrangements pursuant to which compensation is to be paid in the future to the
directors and officers. The only exception is the severance package offered
to Mr. Hirschfeld in the amount of $75,000.
Committees of the Board of Directors.
Audit Committee. The Company's audit committee (the "Audit Committee") is
responsible for making recommendations to the Board of Directors concerning the
selection and engagement of the Company's independent public accountants and for
reviewing the scope of the annual audit, audit fees, and results of the audit.
The Audit Committee also reviews and discusses with management and the Board of
Directors such matters as accounting policies and internal accounting controls,
and procedures for preparation of financial statements. Mr.
Caiazzo and Mr. Bartfield are the members of the Audit Committee.
Page 41
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of December 31, 1995 the number of
shares of Franklin Common Stock beneficially owned by each person known to be
the beneficial owner of more than 5% of the outstanding shares of Franklin
Common Stock, by each director and by all officers and directors as a group.
Unless otherwise indicated, all persons have sole voting and dispositive power
with respect to such shares.
<TABLE>
<CAPTION>
Amount
and nature of
Name and Address beneficial Percent
of beneficial owner ownership of class
<S> <C> <C> <C>
Thomas J. Axon * 2,823,582 (1) 51.50%
881 Union Street
Brooklyn, NY 11215
Frank B. Evans, Jr. * 865,400 (2) 15.72%
227 Falcon Ridge Road
Great Falls, VA 22066
Harvey R. Hirschfeld * 391,875 (3) 7.12%
59 Garden Oval
Springfield, NJ 07081
</TABLE>
All executive officers
and directors as a
group (3 individuals)(3)
* Member of the Board of Directors
(1) Includes 11,112 shares of Franklin Common Stock owned by Anne Axon,
the mother of Mr. Axon. Mr. Axon disclaims any beneficial ownership
of such shares.
(2) Includes 11,112 shares of Franklin Common Stock owned by Frank B.
Evans, the father of Mr. Evans. Mr. Evans disclaims any beneficial
ownership of such shares.
(3) Subsequent to December 31, 1995 and in connection with the resignation
of Mr. Hirschfeld, Mr. Axon and Mr. Evans were transferred shares in
the amount of 218,906 and 72,969, respectively.
Page 42
<PAGE>
Item 12. 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
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.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(b) No reports on Form 8-K were filed during the last quarter of 1995.
Page 43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
March 29, 1996 FRANKLIN CREDIT MANAGEMENT
CORPORATION
By: THOMAS J. AXON
Thomas J. Axon
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
THOMAS J. AXON President, Chief Executive Officer March 29, 1996
Thomas J. Axon and Director
(Principal executive officer)
FRANK B. EVANS, Jr. Vice President, Treasurer, March 29, 1996
Frank B. Evans, Jr. Chief Financial Officer and Director
Secretary (Principal financial and
accounting officer)
JOSEPH CAIAZZO Director March 29, 1996
Joseph Caiazzo
Page 44
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCAIL INFORMATION EXTRACTED FROM DECEMBER 31,
1995, 10KSB AND IS QUAILIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 2.25
<CASH> 1,335,800
<SECURITIES> 0
<RECEIVABLES> 116,573,463
<ALLOWANCES> (20,420,311)
<INVENTORY> 4,053,079
<CURRENT-ASSETS> 0
<PP&E> 698,418
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,931,067
<CURRENT-LIABILITIES> 74,676,343
<BONDS> 0
<COMMON> 55,040
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 77,931,067
<SALES> 0
<TOTAL-REVENUES> 11,760,857
<CGS> 0
<TOTAL-COSTS> 11,404,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,090,482
<INTEREST-EXPENSE> 5,511,264
<INCOME-PRETAX> 356,395
<INCOME-TAX> 176,901
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,703
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.02
</TABLE>
