Franklin Credit Management Corp

On October 7, 2014, the Board of Directors (the “Board”) of the Company, at a meeting of the Board, and the holders of a majority of the outstanding shares of common stock of the Company, by written consent in lieu of a stockholder meeting, approved proposed amendments to the Company’s Certificate of Incorporation that would effect (1) a 1-for-200 reverse stock split (the “Reverse Stock Split”) of the Company’s outstanding $0.01 par value common stock (“Common Stock”) immediately followed by (2) a 200-for-1 forward stock split (the “Forward Stock Split”) of the Company’s outstanding Common Stock. The combination of the Reverse Stock Split and the Forward Stock Split are referred to as the “Reverse/Forward Split”). Holders of record of less than one share of Common Stock after the Reverse Stock Split would be cashed out at the rate of $0.50 per pre-split share. Holders of record of more than one share of Common Stock after the Reverse Stock Split would participate in the Forward Stock Split. Such amendments would not change the par value per share or the number of authorized shares of Common Stock.

The Company has been and continues to be operating in a difficult environment, and has been significantly and negatively impacted by: continuing operating losses; the Company’s inability to secure new servicing business; the completion of the Capitalization Agreement between the Company and Mr. Axon, which had provided for monthly capital contributions by Mr. Axon to the Company to fund the Company’s operating losses; Mr. Axon’s decision, in his discretion, at this point to not commit to making further capital contributions to the Company; the loss of the Unrelated Client; and Mr. Axon’s decision, on behalf of the Bosco entities, to actively seek possible servicing transfers for the Bosco entity portfolios to other servicing companies. Although the Company had net income of $2.7 million for the three months ended September 30, 2014, this was due to a one-time, non-recurring event in which the Company recognized a gain of $3.7 million in the three months ended September 30, 2014 as a result of Mr. Axon fulfilling the requirements of the Capitalization Agreement with the Company and purchasing certain real estate from the Company per the terms of the Capitalization Agreement (the exchange of Preferred Stock for the Real Estate). Excluding the gain of approximately $3.7 million, the Company had a net loss of approximately $1.0 million in the three months ended September 30, 2014. For the three months ended September 30, 2013, the Company a net loss of $797,000. The Company had net income of $1.6 million for the nine months ended September 30, 2014, compared with a net loss of $2.1 million for the nine months ended September 30, 2013. Included in the net income of $1.6 million for the nine months ended September 30, 2014 was (i) a gain of $3.7 million recognized in the three months ended September 30, 2014 as a result of Mr. Axon fulfilling the requirements of a capital plan with the Company (the Capitalization Agreement) and purchasing certain real estate (the Real Estate) from the Company per the terms of the Capitalization Agreement, (ii) termination fees of approximately $435,000 earned for the sales in March 2014 of substantial portions of the serviced mortgage portfolio by the Company’s Previous Legacy Client, (iii) the recognition of a recovery of a legal settlement in June 2014 in the amount of $110,000, and (iv) a state business incentive grant received in the three months ended March 31, 2014 in the amount of $321,000 (related to the Company’s relocation of its operations to the state of New Jersey in 2005). Excluding the gain of approximately $3.7 million from the exchange of Preferred Stock for the Real Estate, the Company had a net loss of approximately $2.0 million in the nine months ended September 30, 2014.

The intended effect of the Reverse/Forward Split is to ensure that the number of record holders of the Company’s Common Stock (427 as of October 7, 2014) is below 300 so that the Company would be eligible to terminate the public registration of the Company’s Common Stock under the Exchange Act. Provided that the Reverse/Forward Split would have the intended effect, the Company would then file to deregister the Common Stock with the SEC. The Company would then in such case no longer be required to file periodic reports with the SEC, although stockholders would be entitled to have access to certain Company information under Delaware law. The Company expects that the deregistration of its Common Stock under the Exchange Act would eliminate the significant expense required to comply with its Exchange Act reporting obligations and the SEC’s proxy rules. The Company estimates the annual savings would be approximately $131,000 in tangible expenses, in addition to considerable saved senior management time and effort spent on compliance and disclosure matters attributable to the Company’s Exchange Act filings, instead of managing and growing the Company’s business. However, if the Reverse/Forward Split were not to have the intended effect, or if the number of record holders of the Company’s Common Stock were to rise to either 500 or more persons who are not accredited investors or 2,000 persons after any consummation of the Reverse/Forward Split for any reason (in each case, provided the Company had total assets exceeding $10 million), the Company would once again be subject to the periodic reporting obligations under the Exchange Act and the SEC’s proxy rules, which would negate much, if not all, of the savings intended to be accomplished through the Reverse/Forward Split.

In addition, the Reverse/Forward Split would provide small stockholders of record (holding fewer than 200 shares) with a liquidity event whereby their shares would be converted to cash at a 323% premium based on the average closing price for the 30 trading days prior to the Company’s public announcement of the Reverse/Forward Split after the close of trading on October 7, 2014 and a 667% premium based on the average closing price for the 90 trading days prior to such announcement.

As of August 19, 2014, Mr. Axon fulfilled the requirements of a capital contribution agreement (the “Capitalization Agreement”) by making a total of $4.1 million in capital contributions to the Company and was issued a total of 2,050,000 shares of non-transferrable restricted preferred stock of the Company, under the terms of the Capitalization Agreement with the Company. As of August 19, 2014, Mr. Axon was issued a total of 2,050,000 shares of non-transferrable restricted Series A convertible preferred stock, par value $0.001 (the “Preferred Stock”) of the Company, which he had purchased from the Company for $4,100,000, under the terms of the Capitalization Agreement. On September 12, 2014, Mr. Axon exercised his irrevocable and exclusive option under the Capitalization Agreement to exchange his 2,050,000 shares of Preferred Stock for all right, title and interest of the Company in a certain residential apartment and a commercial condominium unit, both of which are located in the borough of Manhattan in the city of New York (the “Real Estate”). The net book value of the Real Estate as of the date of the exercise was approximately $318,000. On the same day, the Company conveyed to Mr. Axon by recordable quitclaim deeds the fee simple interests in the Real Estate, with the commercial condominium unit conveyed subject to a particular non-recourse mortgage the Company had pledged as collateral in favor of a third party. On or about September 25, 2014, Mr. Axon, on behalf of the Company, paid $119,549 in transfer tax and recording fees associated with the transfer of the Real Estate from the Company to him. As such transfer tax and recording fees were the responsibility of the Company, as transferor, the Company has an outstanding payable to him for that amount.

The intended effect of the Reverse/Forward Split is to ensure that the number of record holders of the Company’s Common Stock (427 as of October 7, 2014) is below 300 so that the Company would be eligible to terminate the public registration of the Company’s Common Stock under the Securities Exchange Act of 1934, as amended (the Exchange Act). Provided that the Reverse/Forward Split would have the intended effect, the Company would then file to deregister the Common Stock with the Securities and Exchange Commission (SEC). The Company would then in such case no longer be required to file periodic reports with the SEC, although stockholders would be entitled to have access to certain Company information under Delaware law. The Company expects that the deregistration of its Common Stock under the Exchange Act would eliminate the significant expense required to comply with its Exchange Act reporting obligations and the SEC’s proxy rules. The Company estimates the annual savings would be approximately $131,000 in tangible expenses, in addition to considerable saved senior management time and effort spent on compliance and disclosure matters attributable to the Company’s Exchange Act filings, instead of managing and growing the Company’s business. However, if the Reverse/Forward Split were not to have the intended effect, or if the number of record holders of the Company’s Common Stock were to rise to either 500 or more persons who are not accredited investors or 2,000 persons after any consummation of the Reverse/Forward Split for any reason (in each case, provided the Company had total assets exceeding $10 million), the Company would once again be subject to the periodic reporting obligations under the Exchange Act and the SEC’s proxy rules, which would negate much, if not all, of the savings intended to be accomplished through the Reverse/Forward Split.