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UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
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
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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
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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 the first
day of the respective periods.
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 at any of the aforementioned dates,
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
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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004
Proforma
ASSETS Actual Pro Forma As Adjusted
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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)
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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
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TOTAL ASSETS $ 475,022,007 $ 277,964,322 $ 752,986,329
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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
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TOTAL LIABILITIES 453,309,352 277,964,322 731,273,674
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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
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TOTAL STOCKHOLDERS' EQUITY 21,712,655 21,712,655
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 475,022,007 $ 277,964,322 $ 752,986,329
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4
FRANKLIN CREDIT MANAGEMENT CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
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Three months ended March 31, 2004
Actual Pro Forma Pro Forma
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
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15,059,765 6,910,251 21,970,016
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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
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11,361,416 4,582,406 15,943,822
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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
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NET INCOME $ 2,033,349 $ 1,280,315 $ 3,313,664
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NET INCOME PER COMMON SHARE:
Basic $ 0.34 $ 0.22 $ 0.56
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Diluted $ 0.30 $ 0.19 $ 0.49
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 5,916,527 5,916,527 5,916,527
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Diluted 6,690,627 6,690,627 6,690,627
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5
FRANKLIN CREDIT MANAGEMENT CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003
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Actual Pro Forma Pro Forma
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
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57,566,559 24,813,224 82,379,783
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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
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45,186,102 17,664,653 62,850,755
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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
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NET INCOME $ 6,685,457 $ 3,931,714 $10,617,171
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NET INCOME PER COMMON SHARE:
Basic $ 1.13 $ 0.66 $ 1.79
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Diluted $ 1.02 $ 0.60 $ 1.62
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 5,916,527 5,916,527 5,916,527
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Diluted 6,536,639 6,536,639 6,536,639
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FRANKLIN CREDIT MANAGEMENT CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
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Three Months Ended March 31, 2004
Pro Forma
Actual 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
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Net cash (used in) provided by operating activities (11,815,952) 2,606,713 (9,209,239)
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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)
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Net cash provided by (used in) investing activities 16,979,239 (265,866,322) (248,887,083)
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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)
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Net cash (used in) provided by financing activities (4,253,269) 264,886,777 260,633,508
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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
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,486,628 $ 12,203,778 $ 23,690,406
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 5,436,345 $ 3,233,747 $ 8,670,092
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Cash payments for taxes $ 636,800 $ 1,047,530 $ 1,684,330
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7
FRANKLIN CREDIT MANAGEMENT CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2003
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Actual 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
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Net cash (used in) provided by operating activities (11,800,761) 8,038,416 (3,762,345)
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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)
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Net cash provided by (used in) investing activities (28,296,605) (234,476,948) (262,773,553)
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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)
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Net cash (used in) provided by financing activities 43,939,632 231,692,957 275,632,589
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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
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,418,876 $ 15,831,035 $ 30,249,911
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 21,204,660 $ 12,069,055 $ 33,273,715
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Cash payments for taxes $ 5,713,700 $ 3,216,857 $ 8,930,557
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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.
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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
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Thomas J. Axon
Chairman and Chief Executive Officer
July 16, 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