UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT Of 1934
For the quarterly period ended June 30, 1997
[ ] 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
(State or other jurisdiction of incorporation or organization)
75-2243266
(I.R.S. Employer Identification No.)
Six Harrison Street
New York, New York 10013
(212) 925-8745
(Address of principal executive offices, including zip code,
and telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Check whether the registrant 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
As of August 15, 1997, 1,102,077 shares of the issuer's Common Stock,
par value $.01 per share were outanding.
<PAGE>
FRANKLIN CREDIT MANAGEMENT CORPORATION
FORM 10-QSB
JUNE 30, 1997
C O N T E N T S
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1997 (unaudited)
and December 31, 1996 3
Consolidated Statements of Income (unaudited) for the three months
and six months ended June 30, 1997 and 1996 4
Consolidated Statement of Cash Flows (unaudited) for the six months
ended June 30, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity 6
Notes to consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
30-Jun-97 31-Dec-96
ASSETS (unaudited) (audited)
- ------------------------------------------------------------------------------- -----------------
Cash $ 3,112,766 $ 1,967,964
Restricted cash 966,103 828,845
Notes Receivable:
Principal amount 129,692,730 113,610,782
Joint venture participations (345,028) (360,395)
Purchase discount (21,242,608) (18,160,403)
Allowance for loan losses (30,077,585) (23,604,810)
----------- -----------
Net notes receivable 78,027,509 71,485,174
Accrued interest receivable 984,036 1,132,370
Other real estate owned 9,566,536 4,737,085
Other receivables 5,230,479 421,392
Other assets 2,335,024 704,695
Building, furniture & fixtures, net 624,368 640,749
Deferred financing costs 1,263,016 1,358,874
----------- -----------
$102,109,837 $83,277,148
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued
expenses $ 2,414,682 $ 1,874,267
Lines of credit 564,721 583,916
Notes payable 90,424,931 73,538,865
Subordinated debentures 991,875 1,025,000
Notes payable, affiliates and
stockholders 216,159 373,218
Deferred income taxes 2,862,928 1,778,862
---------- -----------
Total liabilities 97,475,297 79,174,128
Commitments and contingencies
Stockholder's Equity:
Common Stock, $.01 par value,
10,000,000 authorized shares,
issued and outstanding 1997 and 1996:
1,102,077 11,022 11,022
Additional paid-in capital 6,534,113 6,534,113
Accumulated deficit (1,910,596) (2,442,115)
----------- -----------
Total stockholders' equity 4,634,539 4,103,020
Total liabilities and ----------- -----------
stockholders' equity $102,109,837 $83,277,148
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Period ended June 30, 1997 and 1996
<S> <C> <C>
Three Months Ended Six Months Ended
30-Jun-97 30-Jun-96 30-Jun-97 30-Jun-96
(unaudited) (unaudited) (unaudited) (unaudited)
- --------------------------------------------------------------------------------
Revenue:
Interest income $1,885,284 $1,368,371 $3,160,548 $3,177,050
Purchase discount earned 1,511,606 1,800,958 3,094,831 3,089,586
Gain on sale of
loan portolfios 973,337 977,519 973,337 977,519
Gain on sale of
other real estate owned 649,172 21,824 683,439 36,563
Other 53,990 72,445 122,386 169,142
---------- ---------- ---------- ----------
5,073,388 4,241,117 8,034,540 7,449,860
---------- ---------- ---------- ----------
Operating expenses:
Interest Expense 2,168,449 1,896,131 4,123,804 3,787,251
Collection, general
and administrative 1,185,654 940,875 2,180,530 1,815,265
Provision for loan losses 7,841 233,465 103,853 440,191
Banking service fees - (19,803) 31,395 196,514
Amortization of deferred
financing costs 254,070 237,711 309,329 336,639
Depreciation 15,672 17,598 31,344 33,394
---------- ---------- ---------- ----------
3,631,687 3,305,977 6,780,256 6,609,254
---------- ---------- ---------- ----------
Operating income (loss) 1,441,701 935,140 1,254,284 840,606
---------- ---------- ---------- ----------
Provision for
income taxes (722,765) (120,358) (722,765) (120,358) - (120,358)
---------- ---------- ---------- ----------
Net income (loss) $ 718,936 $ 814,782 $ 531,519 $ 720,248
========== ========== ========== ==========
Earnings per common share:
Net income (loss) $ 0.62 $ 0.71 $ 0.46 $ 0.63
---------- ---------- ---------- ----------
Weighted average number
of shares outstanding 1,164,706 1,140,696 1,164,760 1,140,696
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 4
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Six Months ended June 30, 1997 and 1996
<S> <C> <C>
30-Jun-97 30-Jun-96
(unaudited) (unaudited)
- --------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ 531,519 $ 720,248
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion, amortization 340,673 370,033
Purchase discount earned (3,094,831) (3,126,149)
(Gain)Loss on sale of assets (973,337)
Provision for loan losses 103,853 440,191
Deferred tax provision (benefit) 52,171
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable 194,027 (6,716)
Accounts receivable 28,386 (17,923)
Inventory repossessions (2,689,979) (1,825,334)
Other assets (725,824) (97,085)
Increase (decrease) in:
Accounts payable and accrued expenses 353,162 691,977
Due to affiliates (82,227) 126,993
Income tax payable 722,765 19,600
------------ -----------
Net cash used in operating activities (5,291,811) (2,651,994)
Cash Flows From Investing Activities
Purchase of property and equipment (272,357) 25,565
Purchase of notes receivable (17,820,766) (2,869,874)
Principal collections on notes receivable 14,913,235 16,590,634
Foreclosures on Real Estate (2,041,230)
Joint venture participation (18,629) (55,728)
Acquisition fees paid (33,063) (61,091)
(Increase) in restricted cash (137,258) (66,058)
------------ -----------
Net cash used in investing activities (5,410,068) 13,563,448
Cash Flows From Financing Activities
Payments on debenture notes payable (33,125) (117,500)
Capital contributions - 428,516
Proceeds from lines of credit 388,608 652,441
Payments on lines of credit (407,803) (916,357)
Proceeds from long-term debt 23,361,039 2,850,902
Principal payments of long-term debt (11,462,039) (13,998,576)
------------ -----------
Net cash provided by financing activities 11,846,680 (11,100,574)
------------ -----------
Net increase (decrease) in cash 1,144,801 (189,120)
Cash:
Beginning 1,967,965 1,335,800
------------ -----------
Ending $ 3,112,765 $ 1,146,680
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 5
<PAGE>
Item 1. Financial Statements
FRANKLIN CREDIT MANAGEMENT CORPORATION AND AFFILIATES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Common Stock Additional Retained
------------------ Paid-In Earnings
Shares Amount Capital (Deficit) Total
- -------------------------------------------------------------------------------
Balance,
December 31, 1995 5,503,896 $55,040 $6,470,952 $(3,271,268) $3,254,724
Conversion of
warrants 10,225 102 20,348 - 20,450
One-for-five reverse
stock split (4,411,297) (44,113) 44,113 - -
Purchase of fractional
shares in connection
with reverse
stock split (747) (7) (1,300) - (1,307)
Net income 829,153 829,153
---------------------------------------------------------
Balance,
December 31, 1996 1,102,077 11,022 6,534,113 (2,442,115) 4,103,020
Net loss 531,519 531,519
---------------------------------------------------------
Balance,
June 30, 1997 1,102,077 $11,022 $6,534,113 $(1,910,596) $4,634,539
=========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1 to
the Company's financial statements included in its Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996.
Nature of business
Franklin Credit Management Corporation (the "Company"), incorporated under
the laws of the State of Delaware, acquires non-performing, non-conforming
and sub-performing notes receivable, promissory notes, and real estate from
financial institutions, mortgage and finance companies and the
Federal Deposit Insurance Corporation ("FDIC"). The Company services and
collects such notes receivable through enforcement of terms of the original
note, modification of original note terms, and, if necessary, liquidation of
the underlying collateral.
In January, 1997 a new wholly owned subsidiary, Liberty Lending Corp.
("Liberty") was formed to originate or purchase, through wholesale agreements
with correspondents, sub-prime residential mortgage loans to individuals
whose borrowing needs are generally not being served by traditional financial
institutions. Liberty is currently licensed as a mortgage banker in the states
of Connecticut, Massachusetts, and Florida. Additionally Liberty has received
approval from the US Housing and Urban Development ("HUD") Administration to
originate Federal Housing Administration ("FHA") Title II loans. Liberty's
application for the New York State mortgage banking license is currently
pending approval with the New York State Banking Commissioner.
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 and the differences could be significant.
Basis of consolidation
The consolidated financial statements include the accounts of the
Company and wholly-owned subsidiaries controlled by the Company. By terms
outlined in the various agreements that are in effect, the Company is
specifically afforded full power and authority on behalf of its subsidiaries
to manage, control, administer and operate the business and affairs of the
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Statement of Cash Flows
For purposes of reporting cash flows, the Company includes all cash accounts
(excluding restricted cash) and money market accounts held at financial
institutions. The Company maintains amounts due from banks which, at times,
may exceed federally insured limits. The Company has not experienced any losses
from such concentrations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__
Notes Receivable and Income Recognition
The Company's notes receivable portfolio consists primarily of secured
consumer and real estate mortgage loans purchased from financial institutions,
mortgage and finance companies and the FDIC. Such notes receivable are
generally non-performing or under-performing at the time of purchase and
accordingly are usually purchased at a substantial discount from the principal
balance remaining.
Notes receivable are stated at the amount of unpaid principal, reduced by the
purchase discount and an allowance for loan losses. The Company has the
ability to hold its notes receivable until maturity, payoff, liquidation of
collateral or sale.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." The method utilized by the
Company to measure impairment of notes receivable prior to the adoption of
Statement No. 114 was essentially equivalent to the method prescribed by
Statement No. 114. The effect of adopting Statement 114 was not significant
to the operations of the Company based on the composition of the notes
receivable in the company's portfolio. Impaired notes are measured based
on the present value of expected future cash flows discounted at the note's
effective interest rate or, as a practical expedient, at the observable
market price of the note receivable or the fair value of the collateral if
the note is secured. A note receivable is impaired when it is probable the
Company will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the note agreement.
Approximately 17% of the Company's note receivable portfolio consists of
smaller balance, homogeneous notes receivable which are collectively
evaluated for impairment and approximately 83% consists of larger balance notes
receivable secured by real estate which are individually evaluated for
impairment.
In general, interest on the notes receivable is calculated based on
contractual interest rates applied to daily balances of the principal amount
outstanding using the simple-interest method.
Accrual of interest on notes receivable, including impaired notes
receivable, is discontinued when management believes, after considering
economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
When interest accrual is discontinued, all unpaid accrued interest is
reversed. Subsequent recognition of income occurs only to the extent
payment is received subject to management's assessment of the collectibility
of the remaining interest and principal. A non-accrual note is restored to
accrual status when it is no longer delinquent and collectibility of interest
and principal is no longer in doubt. Past due interest is recognized at that
time.
Loan purchase discount is amortized to income using the interest method
over the period to maturity. The interest method recognizes income by
applying the effective yield on the net investment in the loans to the
projected cash flows of the loans. Discounts are amortized if the
projected payments are probable and the 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 uncollectability 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 notes purchase discount based on management's assessment of the
portion of purchase discount that represents uncollectible principal.
Subsequently, increases to the allowance are made through a provision for loan
losses charged to expense and the allowance is maintained at a level that
management considers adequate to absorb potential losses in the Company's
portfolio of notes receivable.
Management's judgment in determining the adequacy of the allowance is based
on the evaluation of individual notes receivable within the Company's
portfolio, the known and inherent risk characteristics and size of the
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. Notes receivable,
including impaired notes receivable, are charged against the allowance for
loan losses when management believes that the collectibility of principal is
unlikely based on a note-by-note review. 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 notes receivable are collateralized by real estate
located throughout the United States with a concentration in the Northeast and
California. Accordingly, the collateral value of a substantial portion of the
Company's real estate notes receivable and real estate acquired through
foreclosure is susceptible to changes in market conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on notes
receivable, future additions to the allowance or write-downs may be necessary
based on changes in economic conditions.
Other real estate owned
Other real estate owned ("OREO") consists of properties acquired through,
or in lieu of, foreclosure or other proceedings or portfolio acquisitions,
and is initially recorded at fair market value at the date of foreclosure
which establishes a new cost basis. After foreclosure, the properties are
held for sale and are carried at the lower of cost or fair market value less
estimated costs of disposal. Any write-down to fair market value, less
cost to sell, at the time of acquisition is charged to the allowance for loan
losses. Subsequent write-downs are charged to operations based upon
management's continuing assessment of the fair market value of the underlying
collateral. Property is evaluated regularly to ensure that the recorded
amount is supported by current fair market values and valuation allowances
are recorded as necessary to reduce the carrying amount to fair market value
less estimated cost to dispose. Revenue and expenses from the operation
of OREO and changes in the valuation allowance are included in operations.
Costs relating to the development and improvement of the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
property are capitalized, subject to the limit of fair market value of the
collateral, while costs relating to holding the property are expensed. Gains
or losses are included in operations upon disposal.
Building, property and equipment
Building, property and equipment are recorded at cost net of accumulated
depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets which range from 3 to 40 years.
Gains and losses on dispositions are recognized upon realization.
Maintenance and repairs are expensed as incurred.
Deferred financing costs
Debt financing costs, which include loan origination fees incurred by the
Company in connection with obtaining financing, are deferred and are amortized
based on the principal reduction of the related loan.
Mortgage servicing rights
The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," on January 1, 1996.
Statement No. 122 requires an entity which acquires mortgage servicing
rights through either purchase or origination of mortgage loans and
subsequent sale or securitization with servicing rights retained, to
allocate the total cost of the mortgage loans, proportionately, to the
mortgage servicing rights and the loans based on the relative fair value.
The servicing rights capitalized are amortized in proportion to and over
the period of estimated net servicing income, including prepayment
assumptions based upon the characteristics of the underlying loans.
Capitalized servicing rights are periodically assessed for impairment
based on the fair value of the rights with any impairment recognized through a
valuation allowance.
Pension plan
The Company has a defined contribution retirement plan (the "Plan") covering
all full-time employees who have completed one year of service.
Contributions to the Plan are made in the form of payroll reductions based
on employees' pretax wages. Currently, the Company does not offer a matching
provision for the Plan.
Income taxes
The Company recognizes income taxes under an asset and liability method.
Under this method, deferred tax assets are recognized for deductible temporary
differences and operating loss or tax credit carry forwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per common share
Primary earnings per share amounts are computed by dividing net income by the
weighted average number of shares actually outstanding plus the shares that
would be outstanding assuming the exercise of dilutive stock options and
warrants, which are considered common stock equivalents. The number of
shares that would be issued from the exercise of stock options and warrants
has been reduced by the number of shares that could have been purchased from
the proceeds at the average market price of the Company's stock.
Earnings per common share has been retroactively restated for the effects of
the 1996 one-for-five reverse stock split.
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 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 values reported in the
balance sheet are a reasonable estimate of fair value.
Notes receivable: Fair value of the net note receivable 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 in the balance
sheet approximate their fair value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent accounting pronouncements
The Financial Accounting Standards Board has issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996. This
Statement provides financial reporting standards for the derecognition and
recognition of financial assets, including the distinction between transfers
of financial assets which should be recorded as sales and those which should
be recorded as secured borrowings. Certain provisions of Statement No. 125
are effective beginning January 1, 1997, while other provisions are
effective January 1, 1998. The Company has adopted Statement No. 125 for
transfers and servicing of financial assets and extinguishment of liabilities
during the year ended December 31, 1997.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" in February, 1997. This
pronouncement establishes standards for computing and presenting earnings per
share, and is effective for the Company's 1997 year-end financial
statements. The Company's management has determined that this standard will
have no impact on the Company's computation or presentation of net income per
common share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Forward-Looking Statements. When used in this report, press releases
and elsewhere by management of the Company from time to time, the words
"believes", "anticipates", and "expects" and similar expressions are
intended to identify forward-looking statements that involve certain risks
and uncertainties. Additionally, certain statements contained in this
discussion may be deemed forward-looking statements that involve a number of
risks and uncertainties. Among the factors that could cause actual
results to differ materially are the following: unanticipated changes in
the U.S. economy, business conditions and interest rates and the level of
growth in the finance and housing markets, the availability for purchases
of additional loans, the status of relations between the Company and its
primary sources for loan purchases, the status of relations between the
Company and its primary Senior Debt lender and other risks detailed from
time to time in the Company's SEC reports. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date thereof. The Company undertakes no obligation to publicly release the
results on any events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Loan and OREO Acquisitions. The Company purchased nine portfolios of
notes receivable, with an aggregate face value of $35,365,660 and a purchase
price of $17,503,609 or 49.5% of aggregate face value, and one portfolio of
OREO with a purchase price of $3,911,840 during the six months ended June 30,
1997, as compared with purchases of three portfolios of notes receivable
with an aggregate face value of $8,887,949 for an aggregate purchase price of
$5,576,135 or 62.7% of aggregate face value, and no portfolios of OREO, during
the six months ended June 30, 1996. The Company believes that this 441%
increase in OREO and notes receivable acquisitions during the six months
ended June 30, 1997 as compared to the six months ended June 30, 1996 reflects
the more competitive bids submitted by the Company as a result of the reduction
in its cost of funds. See"-Cost of Funds." Acquisitions of were funded
through term debt facilities from a financial institution (the "Senior
Debt") of $21,415,449 and $5,576,135, during the six month periods ended June
30, 1997 and 1996, respectively. Total Senior Debt funding capacity was
approximately $100 million at June 30, 1997, of which approximately $90 million
had been drawn down as of such date. As of June 30, 1997 approximately
$13 million of Senior Debt had been syndicated by the Senior Debt lender to
other participating banks. The Senior Debt lender has verbally informed the
Company that it will not deem such syndicated amounts as outstanding for
purposes of determining availability under the Company's agreement with such
lender. As a result, under the current senior debt agreement FCMC has
approximately $23 million available at the prime rate to purchase additional
loan portfolios.
The Company believes these acquisitions will increase the level of
operating income during future periods. During the initial period following
acquisitions, the Company incurs the carrying costs of the related Senior Debt
and administrative costs of new portfolios. Payment streams are only generated
once the loans are incorporated into the Company's computerized loan
tracking system and contact is made with the borrower. Non-performing
loans generate payment streams once such loans are restructured or
collection litigation is settled or successfully concluded.
In the ordinary course of business, the Company acquires properties
either from portfolio acquisitions or via foreclosures. Such properties are
classified as OREO and are evaluated regularly to ensure that recorded amounts
are supported by current fair market values.
<PAGE>
Management intends to continue to expand the Company's earning
asset base through the acquisition of additional portfolios including
performing and non-performing real estate secured loans. The Company believes
that its current infrastructure is adequate to service additional loans
without any material increases in expenses. There can be no assurance the
Company will be able to acquire any additional loans 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 were not acquired during 1997.
Cost of Funds. The Company's cost of funds on Senior Debt during
the six months ended June 30, 1997 decreased as compared with previous
periods. As of June 30, 1997, the Company had Senior Debt of approximately
$90 million. The Senior Debt accrues interest at a variable rate based upon the
prime rate.
The weighted average interest rate on borrowed funds for the Senior
Debt decreased by approximately .49% to approximately to 10.07% for the six
months ended June 30, 1997 from 10.56% for the six months ended June 30 1996.
Management believes that any future decreases in the prime rate will
positively impact the net income of the Company while increases may be expected
to negatively impact such net income.
In March, 1997, the Company renegotiated its interest rates with
the Senior Debt lender effective February 28, 1997. Senior Debt incurred to
finance portfolio acquisitions after December 31, 1996, will bear interest
at the prime rate. Additionally, in March 1997 the Senior Debt lender agreed
to a .375% reduction in the interest rate on all Senior Debt outstanding to the
prime rate plus 1.75% from the prime rate plus 2.125%.
During the six months ended June 30, 1997 and 1996 the Company
incurred additional financing costs in the form of service fees and loan
commitment fees. The service fees were calculated as a percentage of gross
collections on four specific portfolios while loan commitment fees are
points based upon origination of Senior Debt. During March 1997 the Company
negotiated the prospective elimination of such fees. Under this new
arrangement the Company has ceased paying service fees on Senior Debt
and will incur a 1% exit fee upon completing repayment of the Senior Debt
outstanding as of December 31, 1996, or approximately $700,000. If the funds
collected from the notes receivable underlying such Senior Debt are
insufficient to satisfy the related Senior Debt and exit fee, any shortfall up
to the amount of the exit fee will be forgiven.
Inflation. The impact of inflation on the Company's operations during both
the six months ended June 30, 1997 and 1996 was immaterial.
Subsequent Events. The Company purchased a portfolio of $3.7 million
principal amount of notes receivable from Preferred Credit Corporation
("PCC") for $1.8 million. Although the Company conducted its own review of
each loan file, it has discovered since the closing of such purchase that
certain information had been removed from or falsified in certain of such
files. The Company is currently evaluating the extent and responsibility
for such fraud and identifying and quantifying whether and the extent to
which any losses are expected to be incurred resulting from such fraud.
The Company currently believes that these events will not have a material
adverse effect on its financial condition.
<PAGE>
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Total revenue, comprised of interest income, purchase discount
earned, gain on sale of portfolios, gain of sale of other real estate owned
and other revenue, increased by $832,271 or 20% to $5,073,388 for the three
months ended June 30, 1997, from $4,241,117 for the three months ended
June 30, 1996.
The Company recognizes interest income on notes included in its
portfolio based upon three factors: interest on performing notes, interest
received with settlement payments on non-performing notes and the balance of
settlements in excess of the carried principal balance. Revenues from
interest income on notes receivable increased by $516,913 or 38%, to
$1,885,284 for the three months ended 1997 from $1,368,371 for the three
months ended 1996. This increase resulted primarily from an increases in the
weighted average portfolio interest rate of the notes receivable included in
the portfolio, in the number performing loans, and in settlement payments on
non-performing notes, all of which were only partially offset by the
reduction in performing assets sold in the second quarter of 1996. The
majority of the loans purchased by the Company bear interest at a fixed
rate; consequently, there is little change in interest income due to changes in
market interest rate conditions.
Purchase discount earned decreased by $289,352 or 16%, to
$1,511,606 for the three months ended 1997 from $1,800,958 for three months
ended 1996. This decrease reflected the aging of the portfolio and the sale of
performing assets in the second half of 1996.
Gain on sale of portfolios decreased by $4,182, or .4%, to $973,337
for the three months ended June 30, 1997 from $977,519 for the three months
ended June 30, 1996. This decrease resulted primarily from a decrease in the
size of the portfolio sold which was partially offset by an increase in the
sale price. Gain on sale of OREO increased by $627,348 to $649,172 for the
three months ended June 30, 1997 from $21,824 for the three months ended
June 30, 1996. This increase resulted primarily from an increase in the
number of OREO properties held during the respective periods.
Total revenue as a percentage of notes receivable included in the
Company's portfolio as of the last day of the respective quarters, net of
allowance for loan losses, decreased to 5.1% for the three months ended
June 30, 1997 from 5.5% for the three months ended June 30, 1996. This
decrease resulted primarily from the increase of loan portfolio
acquisitions, which acquisitions only begin to produce cash flow following
the Company's incorporation of a major portion of the underlying loans into its
collection system. See "General-Loan Acquisitions."
Total operating expenses increased by $325,710 or 10%, to $3,631,687
for the three months ended June 30, 1997 from $3,305,977 for the three months
ended June 30, 1996. Total operating expenses includes interest expense,
collection, general and administrative costs, provisions for loan losses,
service fees, amortization of loan commitment fees and depreciation expense.
<PAGE>
Interest expense increased by $272,318 or 14%, to $2,168,449 for
the three months ended June 30, 1997 from $1,896,131 for the three months
ended June 30, 1996. This resulted from an increase in the average total
debt outstanding of $17.3 million, or 25%, to $87.8 million for the three
months June 30, 1997 ended from $70.5 for the three months ended June 30, 1996,
which increase was only partially offset by a reduction of .49% in the weighed
average interest rate of the Company's total outstanding debt. Total
debt includes Senior Debt, debentures, lines of credit and loans from
affiliates. The increase in total debt and interest expense reflected
increased borrowings to purchase portfolios of notes receivable and OREO.
Collection, general and administrative expenses increased by
$244,779 or 26%, to $1,185,654 for the three months ended June 30, 1997 from
$940,875 for the three months ended June 30, 1996. Collection, general and
administrative expenses include personnel expenses, OREO related expenses,
litigation expenses and all other overhead expenses. Personnel expenses
increased by $51,060 or 19%, to $325,892 for three months ended June 30, 1997
from $274,832 for three months ended June 30, 1996, reflecting principally the
staffing of Liberty Lending .
OREO related expenses increased by $86,895 or 240%, to $123,045 for
the three months ended June 30, 1997 from $36,160 for the three months ended
June 30, 1996. This increase resulted from the increased carrying costs
associated with the increase in OREO properties. Properties held as OREO
as of June 30, 1997, increased by $4,829,451 or 102%, to $9,566,536 from
$4,737,085 as of December 31, 1996. This increase reflected increased
foreclosure activity resulting from the growth in size of the Company's
portfolio and the Company's OREO acquisitions.
Litigation expenses decreased by $80,797 or 24%, to $255,315 for
the three months ended June 30, 1997 from $336,112 for the three months ended
June, 30 1996. This decrease reflected fewer assets entering the legal
recovery process, which reduces the costs incurred by the Company to initiate
new proceedings which represent the majority of the legal expenses typically
incurred in bringing the loans to resolution.
Direct collection expenses relating to credit reports and
repossession fees, increased by $21,315 or 24%, to $111,645 for three months
ended June 30, 1997 from $90,330 for three months ended June 30, 1996. This
increase reflected the increase in the loan portfolio for the three months
ended June 30, 1997 as compared with the three months ended June 30, 1996.
Additionally, costs incurred related to obtaining current title searches
and credit reports for the portfolio sale of second mortgages during the
three months ended June 30, 1997 were not present during the three months ended
June 30, 1996.
Provisions for loan losses decreased by $225,624 or 97%, to $7,841
for three months ended June 30, 1997 from $233,465 for three months ended
June 30, 1996. Provisions for loan losses, for the three months ended
June 30, 1997 and three months ended June 30, 1996, expressed as a percentage
of gross notes receivable, as of the last day of the respective period, was
approximately 0.01 % and 0.2 %, respectively. These decreases are believe
to reflect the greater accuracy of its estimates of future performance of
newly acquired notes receivable as its level of experience with such notes
increases.
<PAGE>
There were no service fees expensed in the three months ended
June 30, 1997 as compared with a refund of $19,803 of service fees for the
three months ended June 30, 1996. This increase resulted principally
from a reduction in service fees negotiated with the Company's Senior Debt
lender in June 1996, and the elimination of service fees negotiated with the
Company's Senior Debt lender effective February 28, 1997.
Operating income increased by $506,561 or 54%, to a gain of
$1,444,701 for the three months ended June 30, 1997 from an operating profit
of $935,140 for the three months ended June 30, 1996 for the reasons set forth
above.
Provisions for income taxes increased by $602,407, or 600% to
$722,765 for the three months ended June 30, 1997 from $120,358 for the three
months ended June 30, 1996. This increase was primary due to exhaustion of
net operating loss carry forwards, an increase in taxable income, and
increases in the net deferred tax liabilities.
Net income decreased by $95,846 or 11%, to a profit of $718,836 in
the three months ended 1997 from income of $814,782 for the three months
ended 1996, for the reasons described above.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total revenue increased by $584,680 or 8% to $8,034,540 for the six
months ended June 30, 1997, from $7,449,860 for the six months ended
June 30, 1996.
Revenues from interest income on notes receivable decreased by
$16,502 or 1%, to $3,160,548 for the six months ended June 30, 1997 from
$3,177,050 for the six months ended June 30, 1996. This decrease resulted
primarily from the increased age of loans in the Company's portfolios,
which results in a larger portion of payments on such loans being credited
to principal rather than interest, and the bulk sale in June 1996 of
$6,311,404 in face amount of performing loans, which loans, had they
continued to perform, could have been expected to produce approximately
$320,000 of interest income during the six months ended June 30, 1997.
Purchase discount earned decreased by $5,245 or .2%, to $3,089,586
for the six months ended June 30, 1997 from $3,126,149 for the six months ended
June 30, 1996. The decrease reflected the aging of the portfolio and the sale
of performing assets in the second quarter of 1996.
Gain on sale of portfolios decreased by $4,182, or .4%, to $973,337
for the six months ended June 30, 1997 from $977,519 for the six months ended
June 30, 1996. This decrease resulted primarily from a decrease in the size
of the portfolio sold which was only partially offset by an increase in the
sale price. Gain on sale of OREO increased by $646,876 to $683,439 for the
six months ended June 30, 1997 from $36,563 for the six months ended
June 30, 1996. This increase resulted primarily from a more aggressive
marketing of the OREO properties and an increased pool of such properties
available and prepared for sale.
Total revenue as a percentage of notes receivable included in the
Company's portfolio as of the last day of the six months ended June 30, 1997
and June 30, 1996, net of allowance for loan losses, increased to 8.1% for
the six months ended June 30, 1997 as compared with 6.7% for the six ended
June 30, 1996. This increase resulted primarily from the improve performance
of the Company's portfolio.
<PAGE>
Total operating expenses increased by $171,002 or 3%, to
$6,780,256 in the six months ended June 30, 1997 from $6,609,254 in the six
months ended June 30, 1996.
Interest expense increased by $336,553 or 8.9%, to $4,123,804 in the
six months ended June 30, 1997 from $3,787,251 for six months ended
June 30, 1996. This increase resulted from an increase in the average total
debt outstanding of $17.6 million, or 25% to $85.7 million for the six
months ended June 30, 1997 from $68.1 for the six months ended June 30, 1996,
which was only partially offset by a reduction of .49% in the weighed
average interest rate of the Company's total outstanding debt.
Collection, general and administrative expenses increased by $365,265
or 20%, to $2,180,530 for the six months ended June 30, 1997 from $1,815,265 for
the six months ended June 30, 1996. Personnel expenses increased by $88,920
or 16%, to $653,369 for the six months ended June 30, 1997 from $564,449 for the
six months ended June 30, 1996. This increase reflected the staffing of Liberty
Lending and salary increases granted to existing personnel.
OREO related expenses increased by $60,258 or 52%, to $175,501 for the
six months ended June 30, 1997 from $115,243 for the six months ended
June 30, 1996. This increase reflected increased foreclosure activity resulting
from the growth in size of the Company's portfolio and OREO acquisitions.
Litigation expenses increased by $48,332 or 9%, to $579,609 for the six
months ended June 30, 1997 from $531,277 for the six months ended June 30, 1996.
This increase reflected both an increase in quantity of notes receivable
purchased by the Company and a decreased loan-to-value ratio of notes receivable
purchased by the Company. The Company believes that the latter decrease gave
rise to a more assertive legal defense by borrowers attempting to preserve their
collateral, thereby increasing the Company's legal expense.
Direct collection expenses relating to credit reports and repossession
fees, decreased by $31,933 or 17%, to $157,202 for the six months ended
June 30, 1997 from $189,135 for the six months ended June 30, 1996.This decrease
reflected economies of scale resulting from the growth in size and improved
performance of the Company's portfolio, which was only partially offset by the
increased costs associated with the sale of the second mortgage portfolio.
Provisions for loan losses decreased by $336,338 or 76%, to $103,853
for the six months ended June 30, 1997 from $440,191 for the six months ended
June 30, 1996. Provisions for loan losses during the six months June 30, 1997
as compared with the six months ended June 30, 1996 expressed as a percentage
of gross notes receivable as of the last day of the respective period,
was approximately 0.07 % and 0.40 %, respectively. These decreases are
believe to reflect the greater accuracy of its estimates of future
performance of newly acquired notes receivable as its level of experience
with such notes increases.
Service fees decreased by $165,119 or 84%, to $31,395 for the
six months ended June 30, 1997 from $196,514 for the six months ended
June 30, 1996. This decrease resulted from a reduction in service fees
negotiated with the Company's Senior Debt lender in June 1996, and the
elimination of service fees negotiated with the Company's Senior Debt lender
effective February 28, 1997.
Operating income increased by $413,678 or 49%, to $1,254,284 for the
six months ended June 30, 1997 from income of $840,606 for the six months ended
June 30, 1996.
<PAGE>
Net income decreased by $188,729 or 26%, to a gain of $531,519 for
the six months ended June 30, 1997 from net income of $720,248 for the six
months ended June 30, 1996, for the reasons described above.
Liquidity and Capital Resources
General. During the six months ended June 30, 1997, the
Company purchased $35,365,660 of notes receivable for an aggregate
purchase price of $17,503,609 or 49.5% of face value. Additionally
107 OREO properties were purchased for $3,911,840, compared with purchases
of $8,887,949 of notes receivable for an aggregate cost of $5,576,135,
or 62.7% of face value and no OREO properties during the six months ended
June 30, 1996. The Company believes that this increase reflected attractive
market opportunities, the reduction in the Company's cost of funds,
redirection to private negotiated purchases from independent financial
institutions from the FDIC/RTC competitive bid auctions, the re-organization
of the Company's senior management during the six months ended June 30, 1996
and the increased name recognition of the Company achieved as a result of
its hiring of a public relations firm in the fourth quarter of 1996.
During the six months ended June 30, 1997, the Company renegotiated
its credit arrangements with its senior lenders thereby reducing its cost
of funds and increasing its price competitiveness. See "- General - Cost of
Funds". All of the loans acquired by the Company during 1996 were acquired
after the second quarter. The Company believes that the redirection of its
marketing efforts and the reduction in its cost of funds has enhanced its
competitiveness.
The Company's portfolio of notes receivable at June 30, 1997 had a
face value of approximately $129.7 million and net of joint venture
participations, purchase discount and allowance for loan losses and had net
notes receivable of approximately $99.6 million. The Company's portfolio of
notes receivable at June 30, 1996 had a face value of approximately
$98.9 million and included net notes receivable of approximately $56 million.
The Company has the ability to hold its notes receivable until maturity,
payoff or liquidation of collateral or sale, however, the Company's strategy
is to restructure its notes to performing status, then arrange an economically
beneficial sale of these assets.
During the six months ended June 30, 1997, the Company used cash
in the amount of $5,288,105 in its operating activities primarily for
interest expense, ordinary litigation expense incidental to its collections
and for the foreclosure and improvement of OREO and overhead. The Company
used $20,323,303 in its investing activities, primarily for the purchase of
notes receivable, which uses were only partially offset by principal
collections of $10,083,227 upon its notes receivable, resulting in a net
use of $10,240,076 in investing activities. Cash used in operating and
investing activities was funded by $16,676,668 of net cash provided by
financing activities, primarily from a net increase in Senior Debt of
$16,729,008. The above activities resulted in a net increase in cash during the
six months ended June 30, 1997 of $1,148,507.
In the ordinary course of its business, the Company accelerates and
forecloses upon real estate securing non-performing notes receivable included
in its portfolio. As a result of such foreclosures and the purchase of OREO
portfolios, at the end of the six months ended June 30, 1997 and the six months
ended June 30, 1996, the Company held OREO having a net realizable value of
$6,325,978 and $5,723,019, respectively. OREO is recorded on the financial
statements of the Company at the lower of cost or fair market value. The
Company generally holds OREO as rental property or sells such OREO in the
ordinary course of business when it believes such sales to be economically
beneficial.
<PAGE>
On June 30, 1997 and 1996, the Company held no automobile
inventory. Management believes that any additional automobile inventory
acquired in the ordinary course of business from the Company's remaining
automobile loans will be sold. The Company has ceased to purchase notes
receivable secured by automobiles. Approximately $562,000 or 0.5 % of the
Company's gross loan portfolio at June 30, 1997 was secured by automobiles.
Management believes that the Company's existing cash balances,
credit lines, and anticipated cash flow from operations will provide
sufficient working capital resources for its anticipated short-term
operating needs. The Company has negotiated with its Senior Debt lender a
modification of the terms of its funding of cash flows for operation, which
may improve cash flows. See "Cash Flow from Financing Activities". The
modifications permit the Company to retain operating cash flows in connection
with budgeted expenditures to operate the Company after the current principal,
interest and escrow obligations are met. Funds remaining after such
obligations have been met are used first to fund the Company's budgeted
operating cash flows, and then to fund certain reserve agreements, with any
remaining funds to be applied toward the prepayment of Senior Debt.
In order to expand its capacity to fund Liberty and to support
increases in its borrowing for the purchase of portfolios of notes
receivable, the Company, on June 2, 1997 entered into a letter of intent (the
"Letter of Intent") for a best efforts private offering by the Company of a
minimum of $4.0 million and a maximum of $6.3 million of the Company's equity
securities to accredited investors. There can be no assurance that the
offering will be successful and that any of the offered securities will be
sold, and if sold, that such sale will be on terms favorable to the Company.
In the event that the offering is consummated, the securities offered
thereby will not have been registered with or approved or disapproved by the
Securities and Exchange Commission or any state securities commission or will
the Securities and Exchange Commission or any state commission have passed
upon the accuracy or adequacy of any documentation under which such
securities are sold. Any representation to the contrary will be a criminal
offense.
In the event that such offering is not consummated, the Company will
consider other alternatives for financing its medium-term growth. There
can be no assurance that such alternative sources of financing will be
available, and if available, that such availability will be on terms favorable
to the Company.
Cash Flow From Operating and Investing Activities
Substantially all of the assets of the Company are invested in its
portfolio of notes receivable. The Company's primary source of cash flow
for operating and investing activities is collections on notes receivable.
See "General". At June 30, 1997, the Company had cash, cash equivalents and
marketable securities ofapproximately $3.1 million. Management believes
that sufficient cash flow from the collection of notes receivable will be
available to repay the Company's secured obligations and that sufficient
additional cash flows will exist, through collections of notes receivable,
the bulk sale of performing loan portfolios, continued modifications to the
secured debt credit agreements or additional borrowing, to repay the current
liabilities arising from operations and to repay the long term indebtedness of
the Company.
<PAGE>
From time to time, the Company seeks merger and acquisition
opportunities of companies in the specialty financing industry.
On May 9, 1997, the Company through its wholly owned subsidiary Liberty Lending
Corporation ("Liberty"), entered into a letter of intent (the "Letter of
Intent") to acquire the assets of K Mortgage Corporation
("K"), an originator of certain classes of Federal Housing Administration
mortgages ("Qualified Products"). The Company believes that this transaction
will enable Liberty, subject to receipt of appropriate licenses and other
contingencies, to integrate K's existing network of mortgage brokers, Realtors
and potential home buyers as well as its remaining infrastructure, thereby
accelerating Liberty's entry into the mortgage loan origination industry.
Pursuant to the Letter of Intent, Liberty will acquire the right to certain
trademarks associated with K's business, enter into an employment agreement with
a two year term and a one year renewal term with one principal of K and into
consulting agreements with five year terms with the three additional principals
of K. In exchange, Liberty will pay to such principals an aggregate of 50% of
its Gross Profits (as defined in the Letter of Intent) on all Qualified Products
as defined in the Letter of Intent brought to the Company by such principals,
payable quarterly for five years, assume certain scheduled liabilities of K, not
to exceed $350,000, which amount shall be credited against the Gross Profit
payments due to such principals, and pay to the principal retained as an
employee a salary of $104,000 per annum plus benefits.
The Company is currently completing its due diligence and expects to complete
this transaction by during the third quarter of 1997. While, the Company does
not have a commitment to purchase any other companies, management is in the
process of reviewing certain opportunities. Depending upon circumstances this
may not cause the Company to incur additional capital expenditures, outside the
acquisitions of additional notes receivable. Although the Company from time to
time engages in discussions and negotiations with respect to acquisitions,
except as discussed herein, it currently has no agreements with respect to any
material acquisition.
Cash Flow From Financing Activities
Senior Debt. As of June 30, 1997, the Company and its wholly owned
subsidiaries owed an aggregate amount of approximately $90 million of Senior
Debt.
The Senior Debt is collateralized by first liens on the respective loan
portfolios for the purchase of which the debt was incurred and is guaranteed by
the Company. The monthly payments on the Senior Debt have been, and the Company
intends for such payments to continue to be, met by the collections from the
respective loan portfolios. The loan agreements for the Senior Debt call for
minimum interest and principal payments each month; a fixed monthly allowance
for operating expenses and accelerated payments based upon the collection of the
notes receivable securing the debt during the preceding month. The Senior Debt
accrues interest at variable rates ranging from prime rate to 1.75% over the
prime rate. See "General - Cost of Funds." The accelerated payment provisions
are generally of two types: the first requires that all collections from notes
receivable, other than a fixed monthly allowance for servicing operations, be
applied to reduce the Senior Debt; the second requires a further amount to be
applied toward additional principal reduction from available cash after
scheduled principal and interest payments have been made. As a result of the
accelerated payment provisions, the Company is repaying the amounts due on the
Senior Debt at a rate faster than the minimum scheduled payments. The Company
has negotiated with its Senior Debt lender to eliminate service fees, reduce the
interest rates and increase the portion of collections retained by the Company
for operations after payment of its contractual principal, interest and escrow
payments, rather than applied to payment of its Senior Debt. Management believes
this may reduce periods of irregular cash flows, however, there can be no
assurance that the Company will not encounter periods of cash flow shortages.
See "- General - Cost of Funds".
<PAGE>
Certain of the Senior Debt credit agreements required establishment of
restricted cash accounts, funded by an initial deposit at the loan closing and
additional deposits based upon monthly collections up to a specified dollar
limit. The restricted cash is maintained in a interest bearing account, with its
Senior Debt lender. Restricted cash may be accessed by the lender only upon the
Company's failure to meet the minimum monthly payment due if collections from
notes receivable securing the loan are insufficient to satisfy the installment
due. Historically, the Company has not called upon these reserves. The aggregate
balance of restricted cash in such accounts was $966,103 on June 30, 1997 and
$828,845 on December 31, 1996.
Lines of Credit. The Company has a line of credit with the Senior Debt lender
permitting it to borrow a maximum of approximately $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. The total amounts outstanding under the lines of credit as of
June 30, 1997 and 1996, were $564,721 and $1,060,213, respectively. Advances
made under the line of credit were used to satisfy senior lien positions and
fund property repair costs in connection with foreclosures of certain real
estate loans financed by the Company. Management believes the ultimate sale of
these properties will satisfy the related 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 this credit facility to cover additional
properties foreclosed upon by the Company which the Company may be required to
hold as rental property to maximize its return. Historically the Senior Debt.
Harrison First Corporation 12% Debentures. In connection with the acquisition of
a loan portfolio during 1995, the Company offered to investors $800,000 of
subordinated debentures. As of each of June 30, 1997 and June 30, 1996,
$555,000, of these debentures were outstanding. The Harrison 1st 12% Debentures
bear interest at the rate of 12% per annum payable in quarterly installments.
The principal is to be repaid over three years in ten equal quarterly
installments of $22,200 commencing September 30, 1997 with the remaining balloon
payment of $333,000 due June 30, 2000. The Harrison 1st 12% Debentures are
secured by a lien on the Company's interest in certain notes receivable and are
subordinated to the Senior Debt encumbering the loan portfolio.
12% Debentures. In connection with the acquisition of a loan portfolio during
1994, the Company offered to investors $750,000 of subordinated debentures. As
of June 30, 1997 and June 30, 1996, $484,687 and $587,500, respectively, of
these debentures were outstanding. The 12% Debentures bear interest at the rate
of 12% per annum payable in quarterly installments. The principal is to be
repaid over four years in sixteen equal installments of $44,062 which payments
commenced on March 31, 1996. The 12% Debentures are secured by a lien on the
Company's interest in certain notes receivable and are subordinated to the
Senior Debt encumbering the loan portfolio.
<PAGE>
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 11, 1997 at the Company's annual meeting the shareholders voted to
reelect the following persons as Directors to the Company expiring upon the
election and qualification of their successors at the annual meeting of the
Company in the year 2000 and to ratify the appointment of McGladrey & Pullen,
LLP as the Company's independent public auditors for fiscal year ending December
31, 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
August 15, 1997 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 August 15, 1997
Thomas J. Axon and Director
(Principal executive officer)
FRANK B. EVANS, Jr. Vice President, Treasurer, August 15, 1997
Frank B. Evans, Jr. Chief Financial Officer and Director
Secretary (Principal financial and accounting officer)
JOSEPH CAIAZZO Vice President, Chief Operating August 15, 1997
Joseph Caiazzo Officer and Director
Page 21
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
Computation of earnings per share second quarter 1996.
<S> <C> <C> <C> <C> <C>
Restated for
effect of
No. Of Shares Weight stock split
12/31/95 Common Stock 5,503,896
O/S warrants 137,674
5,641,470 33% 1,860,532 372,106
3/31/96 Common stock 5,503,896
O/S warrants 127,349
warrants exercised 10,225
5,641,470 33% 1,860,466 372,093
6/30/96 Common stock 5,503,896
O/S warrants 127,349
warrants exercised (17,216)
Stock options 209,500
5,823,529 34% 1,982,483 396,497
Weighted average number of shares 5,703,481 1,140,696
Earnings per Common share:
Net income $ 720,248 $0.13 $0.63
</TABLE>
Page 22
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
Computation of earnings per share second Quarter 1997.
<S> <C> <C> <C> <C> <C>
Restated for
effect of
No. Of Shares Weight stock split
12/31/96 Common stock 5,503,896
O/S warrants
(Extended for 1 year) 110,133
Stock options 209,500
5,823,529 33% 1,941,176 388,235
3/31/97 Common stock 5,503,896
O/S warrants
(Extended for 1 year) 110,133
Stock options 209,500
5,823,529 33% 1,941,176 388,235
6/30/97 Common stock 5,503,896
O/S warrants
(Extended for 1 year) 110,133
Stock options 209,500
5,823,529 33% 1,941,176 388,235
Weighted average number of shares 5,823,529 1,164,706
Earnings per Common share:
Net Income $531,519 $0.09 $0.46
</TABLE>
Page 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE
30, 1997, 10-QSB AND IS QUAILIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 3,112,766
<SECURITIES> 0
<RECEIVABLES> 130,676,766
<ALLOWANCES> (30,077,585)
<INVENTORY> 9,566,536
<CURRENT-ASSETS> 110,165,717
<PP&E> 624,368
<DEPRECIATION> 0
<TOTAL-ASSETS> 102,109,837
<CURRENT-LIABILITIES> 97,475,297
<BONDS> 0
<COMMON> 11,022
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 102,109,837
<SALES> 0
<TOTAL-REVENUES> 8,034,540
<CGS> 0
<TOTAL-COSTS> 6,780,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 103,853
<INTEREST-EXPENSE> 4,123,804
<INCOME-PRETAX> 1,254,284
<INCOME-TAX> 722,765
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531,519
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
