Form 8K Current Report
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 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): March 31, 2006
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FRANKLIN
CREDIT MANAGEMENT CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
(State
or
other jurisdiction of incorporation)
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0-17771
(Commission
file number)
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75-2243266
(I.R.S.
employer identification no.)
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Six
Harrison Street
New
York, New York
(Address
of principal executive offices)
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10013
(Zip
Code)
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Registrant’s
telephone number, including area code: (201) 604-4402
______________________________________________________________________________
Check
the
appropriate box below in the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General
Instruction A.2. below):
r
Written
communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
r
Soliciting
material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240. 14a-12)
r
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
r
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item
4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review.
On
March
31, 2006, the management, Board of Directors and Audit Committee of the Board
of
Directors of Franklin Credit Management Corporation (the “Company”), in
consultation with the Company’s independent registered public accounting firm,
Deloitte & Touche LLP, concluded that certain previously issued financial
statements covering the fiscal years ended December 31, 2004 and 2003, the
quarterly periods within those years and the first three quarterly periods
in
the fiscal year ended December 31, 2005 should be restated principally in order
to reflect a correction of the accounting treatment of certain fees and costs
related to the successful acquisition of pools of residential mortgage loans.
Accordingly, the Company’s financial statements for such periods, as well as the
related reports of the Company’s independent registered public accounting firm,
should no longer be relied upon.
The
fees
and costs in question had been deferred and amortized over the estimated life
of
the acquired assets in accordance with the Company’s previous interpretation of
SFAS No. 91,
“Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases.”
The
restated financial statements will reflect the expensing of such fees and costs
directly related to successful investments in purchased pools of residential
mortgage loans. The restatement only affects the timing of recognition of
these fees and costs, rather than the fundamental economics of the investment
in
these pools of loans or the Company’s business. Specifically, it does
not impact the Company’s operations, cash flows, investment decisions
or compliance with borrowing agreements with the Company’s lenders. All other
costs related to the Company’s loan purchase activities were expensed in the
period incurred.
The
Company’s restated financial statements will also include certain other
adjustments that affect net income for the periods referred to above. The
estimated aggregate impact of these adjustments is a net, after tax decrease,
in
net income of $771,000 ($0.11 per diluted share) and $439,000 ($0.07 per diluted
share) for the previously reported fiscal years ended December 31, 2004 and
2003, respectively, and a net, after tax, decrease in net income of $257,000
($0.04 per diluted share) for the nine-months ended September 30, 2005. In
addition, in order to present the effect of the adjustments on net income in
the
years prior to 2003, the opening balance of stockholders’ equity at January 1,
2003 will be reduced by approximately $1.2 million.
In
addition, the Company will restate (for the periods referred to above)
previously reported “Cash and cash equivalents” to classify the restricted
portion separately on the balance sheet with related adjustments to the
statements of cash flows in accordance with SFAS No. 95, “Statement of Cash
Flows,” and will restate the presentation of deferred origination costs for
loans sold by reclassifying these costs from “Collection, general and
administrative” expenses to “Gain on sale of originated loans held for sale.”
Neither restatement will have an impact on previously reported net
income.
The
Company, in consultation with Deloitte & Touche LLP, is also reevaluating
its accounting treatment for success fees both currently and potentially payable
to its principal lender following repayment of existing term debt. If the
Company determines that SFAS No.
133,
“Accounting for Derivative Instruments and Hedging Activities” is applicable to
such fees, additional adjustments to the financial statements for the periods
mentioned above will be required. SFAS No. 133 would require establishing and
maintaining an estimate of the anticipated net present value of future payment
of such fees at each reporting period and amortizing to interest expense that
estimate over the estimated pay down of the related term debt. While the Company
has not yet completed its evaluation of this accounting matter, the potential
impact, after tax, on net income is estimated to be a decrease of approximately
$500,000 for the fiscal year ended December 31, 2004 and approximately $500,000
for the previously reported nine-months ended September 30, 2005. The Company
has not yet estimated the potential impact on net income for the fiscal year
ended December 31, 2003.
As
of the
date of this filing, the Company has not completed its assessment of the
accounting matters discussed above, and Deloitte & Touche LLP has not
completed its audit. Accordingly, there can be no assurance that the results
of
any adjustments will not differ materially from the above disclosure. The
Company filed a Form 12b-25 with the Securities Exchange Commission on April
3,
2006 to extend the filing deadline of its Form 10-K and audited financial
statements, and expects to file its 10-K on or before this
deadline.
While
the
Company's review of its internal control over financial reporting is ongoing,
the Company has identified material weaknesses as defined by the Public Company
Accounting Oversight Board (United States) with respect to the matters discussed
above. In connection with the restatement, the Company is in the process of
reviewing and remedying its related systems of internal controls over financial
reporting.
The
Audit
Committee has discussed with Deloitte & Touche LLP the matters disclosed in
this filing pursuant to this Item 4.02(a).
On
April
5, 2006, the Company issued a press release regarding the restatement described
in this Report, a copy of which is attached hereto as Exhibit 99.1 and
incorporated by reference in this Item 4.02.
Item
9.01. Financial Statements and Exhibits.
(c)
Exhibits
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Exhibit
No.
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Description
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99.1
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Press
Release, dated April 5, 2006, entitled “Franklin Credit Management
Announces Revision to Financial Statements.”
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SIGNATURE
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.
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FRANKLIN
CREDIT
MANAGEMENT CORPORATION |
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| Date: April
6, 2006 |
By: |
/s/ Paul
D.
Colasono |
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Name:
Paul D. Colasono |
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Title:
Chief Financial Officer and
Executive
Vice President
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