================================================================================ UNITED STATES SECURITIES EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (date of earliest event reported): June 30, 2004 ------------- FRANKLIN CREDIT MANAGEMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 0-17771 75-2243266 (State or other jurisdiction (Commission file number) (I.R.S. ID) of incorporation) Six Harrison Street 10013 New York, New York (Zip code) (Address of principal executive offices) Registrant's telephone number, including area code: (212) 925-8745 ================================================================================ Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in forward-looking statements made by the Company. These factors include, but are not limited to: (i) unanticipated changes in the U.S. economy, including changes in business conditions such as interest rates, and changes in the level of growth in the finance and housing markets; (ii) the status of relations between the Company and its sole Senior Debt Lender and the Senior Debt Lender's willingness to extend additional credit to the Company; (iii) the availability for purchases of additional loans; (iv) the status of relations between the Company and its sources for loan purchases; (v) unanticipated difficulties in collections under loans in the Company's portfolio; and (vi)other risks detailed from time to time in the Company's SEC reports. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in the Company's filings with the Securities and Exchange Commission, including, but not limited to, those factors discussed under the caption "Real Estate Risk" in the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which the Company urges investors to consider. The Company undertakes no obligation to publicly release the revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events, except as other wise required by securities and other applicable laws. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the results on any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Item 2. Acquisition or Disposition of Assets On June 30, 2004, Franklin Credit Management Corporation (the "Company"), through five wholly owned subsidiaries, consummated the acquisition of a mixed pool of $310,431,219 in face amount of performing, sub-performing and nonperforming mortgage loans and related servicing rights, secured by single family residences, from Bank One, N.A., a national banking association, as seller (the "Seller"). The loans acquired pursuant to the Mortgage Loan Purchase and Sale Agreement with Seller include $245,973,970 face amount of first mortgage loans and $64,457,249 face amount of second mortgage loans. The purchase price was $275,141,492. The amount of such consideration was agreed to as a result of arms'-length negotiations between the Company and the Seller and was determined through competitive bidding. The purchase price was funded by five term loan facilities (the "Senior Debt") totaling $277,964,322 made available by Sky Financial Bank, an Ohio corporation (the "Bank") pursuant to five Term Loan and Security Agreements. The Senior Debt has a maturity of three years and is amortized over a 20 year term and bears interest at the FHLB rate of Cincinnati (initially 4.79%) plus 350 basis points adjusted monthly. In addition, a .8674% finance fee and bank legal fee of $10,000 were included in the initial principal balance of the Senior Debt. As collateral for the Senior Debt the Company pledged all of the loans acquired to the Bank. The foregoing description is qualified in its entirety by reference to the full text of the Mortgage Loan Purchase and Sale Agreement, dated as of June 30, 2004, by and between the Company and the Seller, which is filed herewith as Exhibit 2.1, and the Term Loan and Security Agreements between each of FCMC B1 2004A Corp., FCMC B-1 2004B Corp., FCMC B-1 2004C Corp., FCMC B-1 2004D Corp., and FCMC B-1 2004 E Corp. (each a wholly owned subsidiary of the Company) and the Bank. 2 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Assets Acquired N/A (b) Pro Forma Financial Information Franklin Credit Management Corporation Pro Forma Financial Information- Narrative Format The unaudited pro forma condensed consolidated balance sheet of Franklin Credit Management Corporation. (the "Company") as of March 31, 2004 has been prepared as if the Company's acquisition of the assets had been consummated on March 31, 2004. The unaudited pro forma condensed consolidated income statements for the year ended December 31, 2003 and the three months ended March 31, 2004 are presented as if the Company's acquisition of the assets occurred on January 1, 2004 and the effect was carried forward through the year and the three month period for the year ended March 31, 2004. The pro forma consolidated financial statements do not purport to represent what the Company's financial position or results of operations would have been assuming the completion of this acquisition had occurred on January 1, 2004 and for the period indicated, nor do they purport to project the Company's financial position or results of operations at any future date or for any future period. These pro forma consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. Pro forma and pro forma as adjusted amounts are calculated assuming additional borrowing at the Company's actual blended average interest rate (4.79%) for the period covered. 3 FRANKLIN CREDIT MANAGEMENT CORPORATION ------------------------------------------------------------------------------- UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 Proforma ASSETS Actual Pro Forma As Adjusted ------ ------ --------- ----------- CASH AND CASH EQUIVALENTS $ 15,328,894 $ $ 15,328,894 RESTRICTED CASH 428,927 428,927 NOTES RECEIVABLE: Principal 459,382,163 310,431,219 769,813,382 Purchase discount (26,291,095) (9,697,785) (35,988,880) Allowance for loan losses (50,789,815) (28,640,697) (79,430,512) ------------- ------------- ------------- Net notes receivable 382,301,253 272,092,737 654,393,990 ORIGINATED LOANS HELD FOR SALE 40,271,957 40,271,957 ORIGINATED LOANS HELD FOR INVESTMENT 6,238,882 6,238,882 ACCRUED INTEREST RECEIVABLE 4,251,059 2,545,799 6,796,858 OTHER REAL ESTATE OWNED 13,293,284 13,293,284 OTHER RECEIVABLES 2,827,073 502,956 3,330,029 MARKETABLE SECURITIES 202,071 202,071 DEFERRED TAX ASSET 482,569 482,569 OTHER ASSETS 3,997,414 411,739 4,409,153 BUILDING, FURNITURE AND FIXTURES - Net 1,212,811 1,212,811 DEFERRED FINANCING COSTS- Net 4,185,813 2,411,091 6,596,904 ------------- ------------- ------------- TOTAL ASSETS $ 475,022,007 $ 277,964,322 $ 752,986,329 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued expenses $ 4,677,179 4,677,179 Financing agreements 29,685,759 29,685,759 Notes payable 416,824,117 277,964,322 694,788,439 Income tax liability: Current 265,565 265,565 Deferred 1,856,732 1,856,732 ------------- ------------- ------------- TOTAL LIABILITIES 453,309,352 277,964,322 731,273,674 ------------- ------------- ------------- COMMITMENTS AND CONTENGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value, 10,000,000 authorized shares; issued and outstanding: 5,916,527 59,167 59,167 Additional paid-in capital 6,985,968 6,985,968 Retained earnings 14,667,520 14,667,520 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 21,712,655 21,712,655 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 475,022,007 $ 277,964,322 $ 752,986,329 ============= ============= ============= 4 FRANKLIN CREDIT MANAGEMENT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME ------------------------------------------------------------------------------- Three months ended March 31, 2004 Pro Forma Pro Forma Actual As Adjusted REVENUES: Interest income $10,636,341 $ 6,232,622 $16,868,963 Purchase discount earned 1,341,397 677,629 2,019,026 Gain on sale of notes receivable 844,902 844,902 Gain on sale of originated loans held for sale 892,955 892,955 Gain on sale of other real estate owned 231,246 231,246 Rental income 12,075 12,075 Prepayment penalties and other income 1,100,849 1,100,849 ----------- ----------- 15,059,765 6,910,251 21,970,016 ----------- ----------- ----------- OPERATING EXPENSES: Interest expense 5,313,075 3,233,747 8,546,822 Collection, general and administrative 4,446,182 1,217,884 5,664,066 Provision for loan losses 895,876 895,876 Amortization of deferred financing costs 592,901 130,775 723,676 Depreciation 113,382 113,382 ----------- ----------- 11,361,416 4,582,406 15,943,822 ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 3,698,349 2,327,845 6,026,194 PROVISION FOR INCOME TAXES 1,665,000 1,047,530 2,712,530 ----------- ----------- ----------- NET INCOME $ 2,033,349 $ 1,280,315 $ 3,313,664 =========== =========== =========== NET INCOME PER COMMON SHARE: Basic $ 0.34 $ 0.22 $ 0.56 =========== =========== =========== Diluted $ 0.30 $ 0.19 $ 0.49 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 5,916,527 5,916,527 5,916,527 =========== =========== =========== Diluted 6,690,627 6,690,627 6,690,627 =========== =========== =========== 5 -------------------------------------------------------------------------------- FRANKLIN CREDIT MANAGEMENT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR 2003 2004 Pro Forma Pro Forma Actual As Adjusted REVENUES: Interest income $42,699,710 $22,263,742 $64,963,452 Purchase discount earned 5,154,601 2,549,482 7,704,083 Gain on sale of notes receivable 1,118,239 1,118,239 Gain on sale of originated loans held for sale 3,236,616 3,236,616 Gain on sale of other real estate owned 1,027,130 1,027,130 Rental income 113,255 113,255 Prepayment penalties and other income 4,217,008 4,217,008 ----------- ----------- 57,566,559 24,813,224 82,379,783 ----------- ----------- ----------- OPERATING EXPENSES: Interest expense 21,672,993 12,069,055 33,742,048 Collection, general and administrative 17,864,786 5,132,884 22,997,670 Provision for loan losses 3,164,103 3,164,103 Amortization of deferred financing costs 1,979,208 462,714 2,441,922 Depreciation 505,012 505,012 ----------- ----------- 45,186,102 17,664,653 62,850,755 ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 12,380,457 7,148,571 19,529,028 PROVISION FOR INCOME TAXES 5,695,000 3,216,857 8,911,857 ----------- ----------- ----------- NET INCOME $ 6,685,457 $ 3,931,714 $10,617,171 =========== =========== =========== NET INCOME PER COMMON SHARE: Basic $ 1.13 $ 0.66 $ 1.79 =========== =========== =========== Diluted $ 1.02 $ 0.60 $ 1.62 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 5,916,527 5,916,527 5,916,527 =========== =========== =========== Diluted 6,536,639 6,536,639 6,536,639 =========== =========== =========== 6 FRANKLIN CREDIT MANAGEMENT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS -------------------------------------------------------------------------------- Three Months Ended March 31, Pro Forma 2004 Pro Forma As Adjusted CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 2,033,349 $ 1,280,314 $ 3,313,663 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Gain on sale of notes receivable (844,902) (844,902) Gain on sale of other real estate owned (231,246) (231,246) Depreciation 113,382 113,382 Amortization of deferred financing costs 592,901 130,775 723,676 Origination of mortgage loans held for sale (33,358,278) (33,358,278) Proceeds from the sale of and principal collections on loans held for sale-net of gain 19,746,182 19,746,182 Purchase discount earned (1,341,397) (677,629) (2,019,026) Provision for loan losses 895,876 895,876 Changes in operating assets and liabilities: Accrued interest receivable 81,360 (2,545,799) (2,464,439) Other receivables 66,662 66,662 Deferred tax asset 198,829 198,829 Other assets (277,251) (914,695) (1,191,946) Current tax liability 265,565 265,565 Deferred tax liability 545,643 545,643 Accounts payable and accrued expenses (302,627) 5,333,747 5,031,120 ------------- ------------- ------------- Net cash (used in) provided by operating activities (11,815,952) 2,606,713 (9,209,239) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) in restricted cash (15,484) (15,484) Purchase of notes receivable (38,432,630) (275,141,492) (313,574,122) Principal collections on notes receivable and loans held for investment 44,438,122 12,098,000 56,536,122 Acquisition and loan fees (449,595) (2,822,830) (3,272,425) Proceeds from sale of other real estate owned 4,955,454 4,955,454 Proceeds from sale of notes receivable 6,556,853 6,556,853 Purchase of building, furniture and fixtures (73,481) (73,481) ------------- ------------- ------------- Net cash provided by (used in) investing activities 16,979,239 (265,866,322) (248,887,083) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 49,771,473 277,964,322 327,735,795 Principal payments of notes payable (60,395,200) (13,077,545) (73,472,745) Proceeds from financing agreements 34,052,232 34,052,232 Payments on financing agreements (27,681,774) (27,681,774) ------------- ------------- ------------- Net cash (used in) provided by financing activities (4,253,269) 264,886,777 260,633,508 ------------- ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 910,018 1,627,168 2,537,186 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,576,610 10,576,610 10,576,610 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,486,628 $ 12,203,778 $ 23,690,406 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest $ 5,436,345 $ 3,233,747 $ 8,670,092 ============= ============= ============= Cash payments for taxes $ 636,800 $ 1,047,530 $ 1,684,330 ============= ============= ============= 7 FRANKLIN CREDIT MANAGEMENT CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS AS OF DECEMBER 31, 2003 -------------------------------------------------------------------------------- For The Year 2003 Pro Forma Pro Forma As Adjusted CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 6,685,457 $ 3,931,714 $ 10,617,171 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Gain on sale of notes receivable (1,118,239) (1,118,239) Gain on sale of other real estate owned (1,027,130) (1,027,130) Depreciation 505,012 505,012 Amortization of deferred financing costs 1,979,208 462,714 2,441,922 Origination of mortgage loans held for sale (97,143,554) (97,143,554) Proceeds from the sale of and principal collections on loans held for sale-net of gain 80,810,221 80,810,221 Purchase discount earned (5,154,601) (2,549,482) (7,704,083) Provision for loan losses 3,164,103 3,164,103 Changes in operating assets and liabilities: Accrued interest receivable (174,804) (2,549,799) (2,724,603) Other receivables (634,192) (502,956) (1,137,148) Deferred tax asset (293,631) (293,631) Other assets (1,087,834) (2,822,830) (3,910,664) Current tax liability Deferred tax liability 527,974 527,974 Accounts payable and accrued expenses 1,161,249 12,069,055 13,230,304 ------------- ------------- ------------- Net cash (used in) provided by operating activities (11,800,761) 8,038,416 (3,762,345) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in restricted cash (219,440) (219,440) Purchase of notes receivable (213,638,801) (275,141,492) (488,780,293) Principal collections on notes receivable and loans held for investment 156,924,859 43,487,374 200,412,233 Investment in marketable securities (203,771) (203,771) Acquisition and loan fees (2,564,246) (2,822,830) (5,387,076) Proceeds from sale of other real estate owned 16,407,503 16,407,503 Proceeds from sale of notes receivable 15,648,149 15,648,149 Purchase of building, furniture and fixtures (650,858) (650,858) ------------- ------------- ------------- Net cash provided by (used in) investing activities (28,296,605) (234,476,948) (262,773,553) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 226,367,253 277,964,322 504,331,575 Principal payments of notes payable (194,185,553) (46,271,365) (240,456,918) Proceeds from financing agreements 101,322,968 101,322,968 Payments on financing agreements (89,565,036) (89,565,036) ------------- ------------- ------------- Net cash (used in) provided by financing activities 43,939,632 231,692,957 275,632,589 ------------- ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 3,842,266 5,254,425 9,096,691 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,576,610 10,576,610 10,576,610 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,418,876 $ 15,831,035 $ 30,249,911 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest $ 21,204,660 $ 12,069,055 $ 33,273,715 ============= ============= ============= Cash payments for taxes $ 5,713,700 $ 3,216,857 $ 8,930,557 ============= ============= ============= 8 (c) Exhibits. The following exhibits are filed as part of this report: 2.1 Mortgage Loan Purchase and Sale Agreement, dated as of June 30, 2004 by and between Franklin Credit Management Corporation and Bank One, Inc. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FRANKLIN CREDIT MANAGEMENT CORPORATION By: /s/ Thomas J. Axon ----------------------------------- Thomas J. Axon Chairman and Chief Executive Officer July 15, 2004 10 Exhibits Index 2.1 Mortgage Loan Purchase and Sale Agreement, dated as of June 30, 2004 by and between Franklin Credit Management Corporation and Bank One, Inc. 11