-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IbweppQMqAbBaP4K/pxfhXsPu+PCIe0g+1fygSYAVY5nP5tuYhGTobDTl7l85qRk CmhV+74inZtANODMIQ6Uhg== 0000944209-97-001475.txt : 19971111 0000944209-97-001475.hdr.sgml : 19971111 ACCESSION NUMBER: 0000944209-97-001475 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19971110 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANCHISE MORTGAGE ACCEPTANCE CO CENTRAL INDEX KEY: 0001045007 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-34481 FILM NUMBER: 97710967 BUSINESS ADDRESS: STREET 1: 2049 CENTURY PARK EAST STREET 2: STE 350 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 8006613622 MAIL ADDRESS: STREET 1: 2029 CENTURY PARK EAST STREET 2: STE 1190 CITY: LOS ANGELES STATE: CA ZIP: 90067 S-1/A 1 AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997 REGISTRATION NO. 333-34481 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- FRANCHISE MORTGAGE ACCEPTANCE COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6162 95-4649104 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2049 CENTURY PARK EAST, SUITE 350 LOS ANGELES, CALIFORNIA 90067 (310) 229-2600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) WAYNE L. KNYAL PRESIDENT AND CHIEF EXECUTIVE OFFICER FRANCHISE MORTGAGE ACCEPTANCE COMPANY 2049 CENTURY PARK EAST, SUITE 350 LOS ANGELES, CALIFORNIA 90067 (310) 229-2600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- Copies to: THOMAS J. POLETTI, ESQ. TODD H. BAKER, ESQ. SUSAN B. KALMAN, ESQ. GIBSON, DUNN & CRUTCHER LLP DARREN O. BIGBY, ESQ. ONE MONTGOMERY STREET, SUITE 3100 FRESHMAN, MARANTZ, ORLANSKI, COOPER & SAN FRANCISCO, CALIFORNIA 94104- KLEIN 4505 9100 WILSHIRE BOULEVARD, 8TH FLOOR TELEPHONE (415) 393-8200 EAST FACSIMILE (415) 986-5309 BEVERLY HILLS, CALIFORNIA 90212 TELEPHONE (310) 273-1870 FACSIMILE (310) 274-8357 Approximate Date of Commencement of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997 8,750,000 SHARES [LOGO OF FRANCHISE MORTGAGE ACCEPTANCE COMPANY] COMMON STOCK Of the 8,750,000 shares of Common Stock offered hereby (the "Offering"), 5,312,500 are being sold by Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company") and 3,437,500 are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $16.00 and $18.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "FMAX." SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED HEREBY. INVESTORS IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION RANGING FROM $12.83 TO $14.47 PER SHARE BASED ON AN ASSUMED INITIAL PUBLIC OFFERING PRICE RANGE OF $16.00 TO $18.00 PER SHARE, RESPECTIVELY. SEE "DILUTION." ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Price to Underwriting Proceeds to Proceeds to Selling Public Discount(1) Company(2) Stockholders - -------------------------------------------------------------------------------- Per Share................. $ $ $ $ Total (3)................. $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "Underwriting" for information relating to indemnification of the Underwriters and other matters. (2) Before deducting expenses estimated to be $750,000, of which $455,000 are payable by the Company and $295,000 are payable by the Selling Stockholders. (3) The Company and the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 796,875 and 515,625 additional shares of Common Stock, respectively, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public will be $ , Underwriting Discount will be $ , Proceeds to Company will be $ and Proceeds to Selling Stockholders will be $ . See "Underwriting." The shares of Common Stock are offered by the Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the offices of NationsBanc Montgomery Securities, Inc. on or about , 1997. ----------- NationsBanc Montgomery Securities, Inc. Credit Suisse First Boston PaineWebber Incoporated The date of this Prospectus is , 1997 AVAILABLE INFORMATION The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. Copies of such materials can also be obtained by written request to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company has filed a Registration Statement under the Securities Act with the Commission with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission. Statements contained in this Prospectus such as the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. The Commission also maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. The address of the site is http:/ / www.sec.gov. ---------------- The Company intends to furnish its stockholders with annual reports containing financial statements audited by an independent accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. ---------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option (see "Underwriting"), (ii) regarding outstanding shares, excludes shares of Common Stock reserved for issuance under the Company's 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan") and (iii) assumes the reorganization of the Company as a Delaware corporation immediately prior to the closing of this Offering (see "The Reorganization"). Unless the context indicates otherwise, all references herein to the Company refer to Franchise Mortgage Acceptance Company and its predecessor entities, including Franchise Mortgage Acceptance Company LLC, a California limited liability company ("Franchise Mortgage LLC"). This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY The Company is a specialty commercial finance company engaged in the business of originating and servicing loans and equipment leases to small businesses, with a primary focus on established national and regional franchise concepts. Since commencing business in 1991, the Company believes it has become a leading lender to national and regional quick service restaurant ("QSR") franchisees, and the Company has developed a growing presence in the casual dining sector. More recently, the Company has expanded its focus to include retail energy licensees (service stations, convenience stores, truck stops, car washes and quick lube businesses) and golf operating businesses (golf courses and golf practice facilities). The Company originates long-term fixed and variable rate loan and lease products and sells such loans and leases either through securitizations or whole loan sales to institutional purchasers on a servicing retained basis. The Company believes that its loan and lease products are attractive investments to institutional investors because of the credit profile of its Borrowers (as defined herein), relatively long loan and lease terms, call protection through prepayment penalties and appropriate risk-adjusted yields. The Company also periodically makes equity investments or receives contingent equity compensation as part of its core lending and leasing business. The Company originated loans and leases through 11 marketing offices in nine states at June 30, 1997. From the Company's inception through June 30, 1997, it funded over $1.2 billion in loans and leases and at June 30, 1997, had a servicing portfolio of $1.1 billion. The Company's loan and lease originations grew to $458.5 million in 1996 from $218.7 million in 1995 and to $300.6 million for the six month period ended June 30, 1997 from $208.4 million for the comparable period in 1996. At June 30, 1997, the Company's average initial loan balance was $730,000 and the percentage of its loans and leases that were 90 days or more delinquent was 0.1%. The Company's focus is to provide funding to industries that have been historically underserved by banks and other traditional sources of financing. This focus requires the Company to develop specific industry expertise in the sectors which it serves in order to provide individualized financial solutions for its Borrowers. The Company believes that its industry expertise and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. The Company's Borrowers are generally small business operators, most of whom are independent, multi-unit franchisees, with proven operating experience and a history of generating positive operating cash flows. The Company relies primarily upon its assessment of enterprise value, based in part on independent third party valuations, and historical operating cash flows to make credit determinations, as opposed to relying solely on the value of real estate and other collateral. 3 In 1991, the Company began making loans to franchisees of Taco Bell Corp. In 1992 and 1993, other national QSR concepts, such as Burger King, Wendy's, Pizza Hut, KFC and Hardee's, were approved. The Company's principal loan products at that time were fixed rate, 15-year, fully amortizing loans. In 1995, the Company began making loans to casual dining concepts such as TGI Friday's, Applebee's and Denny's and offering its Borrowers adjustable rate loans. Also in 1995, the Company began offering development and construction ("DEVCO") loans to its more experienced Borrowers to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. In 1996, the Company expanded its approved concepts to include strong regional restaurants such as Carl's, Jr., Church's Chicken and Golden Corral and launched its Golf Finance Group to provide financing to owners and operators of golf courses and golf practice facilities. The Equipment Finance Group also commenced activities in 1996 to provide equipment loans and leases to the sectors which the Company serves. In February 1997, the Company created its Retail Energy Finance Group to make loans to businesses that distribute retail petroleum products. The Company's goal is to become a leading national small business lender in each of its target markets. The Company's growth and operating strategy is based on the following key elements: Growth in Existing Sectors. The Company plans to replicate its success in the restaurant sector in other business sectors that it has entered more recently, such as retail energy and golf, through focused product development, customer service and support. The Company forms specialized teams for each sector to assess customer needs, generate customer loyalty and enhance service and support. Management believes that its industry leadership position, relationships with major Borrowers, franchisors and vendors, and expertise within sectors will assist the Company in increasing its market share. Controlled Expansion into New Sectors. Management believes that substantial opportunities exist to extend the Company's expertise into other business sectors. The Company believes that its experience in lending to restaurant franchisees has allowed it to develop a template for efficiently originating and servicing loans and leases in other industry sectors. The Company's philosophy is to provide complete business solutions to identified industries by developing strategies and financial products which are based on industry characteristics and each Borrower's specific needs. The Company carefully reviews industry data, seeking business sectors with a combination of large funding requirements, proven cash flow generating capabilities, standardized operations, a scarcity of long-term funding sources and characteristics attractive to secondary market investors. Maintenance of Credit Quality. The Company's delinquency and loss experience has been extremely low, due in part to lending to experienced operators, its detailed industry knowledge, active oversight of its existing servicing portfolio, strict underwriting criteria and the Company's ability to locate qualified replacement Franchisees/Borrowers to assume delinquent loans. At June 30, 1997, the Company had only two loans, representing 0.1% of all loans and leases held in the Company's servicing portfolio as of such date, 90 days or more delinquent and, from its inception in April 1991 through June 30, 1997 had experienced no net charge offs. Efficient Secondary Market Execution. The Company is committed to maintaining effective secondary market execution on loans and leases that it originates and sells. The Company believes that the favorable execution it has experienced to date is primarily the result of the attractive terms and the credit quality of the loans and leases that it originates. Of the $37.5 million in gain on sale from securitizations recognized by the Company since January 1, 1996, $30.3 million was comprised of cash received by the Company at the time of securitization and not the present value of anticipated cash flows on retained interests. As a result, the Company has reduced its exposure to the risks associated with holding large amounts of such retained interests on its balance sheet. From the beginning of 1996 through June 30, 1997, the Company completed three securitizations and a whole loan sale totaling $483.6 million and $15.3 million, respectively. In all such transactions, the Company has retained the right to service the sold or securitized loans. 4 Diversification of Revenue Sources. Management is committed to developing a diversified revenue base to reduce revenue volatility and enhance profitability. The Company continually monitors and adjusts its loan and lease products and securitization structures to improve the stability of its cash flows. Revenue sources include loan and lease origination points and fees, interest income earned prior to the sale of the loans and leases, whole loan and lease sale profits, securitization profits, loan and lease servicing fees and equity investment returns. Prior to this Offering, the business of the Company has been conducted by Franchise Mortgage LLC. Immediately prior to this Offering, Franchise Mortgage LLC will merge into Franchise Mortgage Acceptance Company, a Delaware corporation, which was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC. Prior to this Offering, 66.7% of the membership interest in Franchise Mortgage LLC was owned by Imperial Credit Industries, Inc. ("ICII") and 33.3% was owned by FLRT, Inc., a California corporation controlled by Wayne L. Knyal, the Company's President and Chief Executive Officer. See "The Reorganization." The Company has experienced substantial growth in loan and lease originations and total revenues since inception, and in particular since June 1995 when ICII acquired the operations of Franchise Mortgage LLC from Greenwich Capital Financial Products, Inc. ("Greenwich"). There can be no assurance that these rates of growth will be sustainable or indicative of future results. The Company incurred a net loss of $659,000 for the six months ended December 31, 1995, and its predecessor incurred net losses of $1.9 million, $728,000, $3.9 million and $157,000 for the six months ended June 30, 1995 and the years ended December 31, 1994, 1993, and 1992, respectively. Although the Company has been profitable for the six months ended June 30, 1997 and the year ended December 31, 1996, there can be no assurance that the Company will be profitable in the future. Prior to June 1995, the Company benefitted from the financial, administrative and other resources of Greenwich. From its acquisition from Greenwich in June 1995 through this Offering, the Company benefited from the financial, administrative and other resources of ICII. Prior to this Offering, ICII had extended loans to the Company and guaranteed the Company's warehouse lines of credit, repurchase facilities and leases. ICII does not intend to guarantee any of the Company's future financing facilities or leases nor does it currently expect to extend loans to the Company. Accordingly, the Company's prospects must be evaluated in light of the risks, expenses and difficulties it will encounter as an independent company. Although the Company will enter into a services agreement with ICII upon the effective date of this Offering under which ICII will provide human resource administration, securitization capability and certain accounting functions to the Company, there can be no assurance that the Company will develop the financial, management or other resources necessary to operate successfully as an independent company. See "Certain Transactions--Arrangements with ICII and its Affiliates." The Company's administrative offices are located at 2049 Century Park East, Suite 350, Los Angeles, California 90067, and its telephone number is (310) 229-2600. 5 RECENT DEVELOPMENTS The following table summarizes the Company's loan and lease origination and financial information for the nine months ended September 30, 1997 and 1996.
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 --------------- --------------- (IN THOUSANDS) Loan originations: Total loan originations..................... $484,283 $305,554 Average initial principal balance per loan.. $ 737 $ 770 Weighted average interest rate: Fixed rate loans............................ 10.40% 10.31% Variable rate loans......................... 9.65% 9.44% Equipment finance originations: Total equipment finance originations........ $ 26,538 $ 538 Average initial principal balance per financing.................................. $ 204 $ 135 Total loan and lease originations............ $510,821 $306,092 Lending sector originations: Restaurant loans............................ $378,468 $302,354 Retail energy loans......................... 94,365 -- Golf loans.................................. 11,450 3,200 Equipment finance........................... 26,538 538 NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 FINANCIAL INFORMATION: --------------- --------------- (IN THOUSANDS) Gain on sale of loans........................ $ 40,497 $ 14,209 Total revenues............................... 45,298 15,562 Total expenses............................... 16,633 8,566 Net income................................... 28,665 6,996 Pro forma net income(1)...................... 16,626 4,058
- -------- (1) From July 1, 1995 through the date of the Offering, the Company qualified to be treated as a partnership for federal and state income tax purposes. Pro forma net income reflects the Reorganization and the income tax expense that would have been recorded had the Company not been taxed as a partnership. The Company originated loans and leases through 14 marketing offices in 12 states at September 30, 1997. From the Company's inception through September 30, 1997, the Company funded approximately $1.4 billion in loans and leases. Loan and lease originations increased to $510.8 million for the nine months ended September 30, 1997, as compared to $306.1 million for the same period of the prior year. The increase was primarily attributable to an increase in originations in the Restaurant Finance Group as well as originations by the newly formed Retail Energy Finance Group and the Golf Finance Group. At September 30, 1997, the Company's average initial loan balance was $737,000. At September 30, 1997, the Company had a servicing portfolio of $1.2 billion, and the percentage of its loans and leases that were 90 days or more delinquent was 0.7%. From its inception in April 1991 through September 30, 1997, the Company had experienced no net charge offs. Net income for the third quarter of 1997 was $14.7 million, bringing net income for the nine months ended September 30, 1997 to $28.7 million, as compared to net income of $7.0 million for the nine months ended September 30, 1996. Total revenues increased 191.1% to $45.3 million for the nine months ended September 30, 1997 from $15.6 million for the comparable period in 1996. The increases in revenues and net income were primarily due to an increase in gain on sale of loans. During the nine months ended September 30, 1997, the Company sold $343.7 million in two securitizations for a gain on sale of $38.8 million (of which $38.1 million 6 was cash), as compared to $272.6 million sold in two securitizations for a gain on sale of $12.5 million (of which $5.8 million was cash) for the nine months ended September 30, 1996. The gain on sale of loans includes $1.7 million in the nine months ended September 30, 1997 from three whole loan sales of approximately $28.1 million. From the Company's inception through September 30, 1997, it completed nine securitizations of pooled loans totaling approximately $1.0 billion. Total expenses increased 94.2% to $16.6 million for the nine months ended September 30, 1997 as compared to $8.6 million for the same period of the prior year primarily due to infrastructure additions needed to fund increased loan and lease originations. In October 1997, the Company finalized a warehouse line of credit with Morgan Stanley Asset Funding Inc. ("Morgan Stanley") for a commitment amount of $200 million, bearing interest at rates ranging from the London interbank offered rate ("Libor") plus 95 to 155 basis points, depending upon the loan product type. This warehouse line of credit is expected to provide additional financing for the Company's continued growth in loan and lease originations and is not guaranteed by ICII. The Company is currently negotiating with a major investment bank to form a joint venture pursuant to which all loan and lease activities of the Company's Golf Finance Group would be exclusively conducted by a new entity which would be 50% owned and managed by each of the Company and the investment bank. In connection therewith, the investment bank would make available to the new entity a 12 month $100.0 million warehouse line of credit bearing interest at Libor plus 100 basis points. The parties could by mutual agreement utilize the joint venture, if formed, to exclusively originate other types of loans and leases, which may include loans and leases in the Company's existing sectors or in new sectors. Any income distributed by the new entity would be shared equally by the Company and the investment bank. THE OFFERING Common Stock offered hereby: By the Company....................... 5,312,500 shares By the Selling Stockholders.......... 3,437,500 shares Common Stock to be outstanding after the Offering(1)....................... 27,200,000 shares Use of Proceeds........................ The net proceeds will be used to repay certain indebtedness to ICII, to fund future loan and lease originations and equity investments and for general corporate purposes. Proposed Nasdaq National Market Symbol................................ "FMAX"
- -------- (1) Excludes shares of Common Stock reserved for issuance pursuant to the Company's Stock Option Plan. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. Options to acquire 1,200,000 shares are expected to be granted to certain employees, officers and directors of the Company on the effective date of the Offering at an exercise price equal to the initial public offering price. See "Management--Stock Options." RISK FACTORS See "Risk Factors" for a description of certain factors which should be carefully considered before making an investment in the Company. 7 SUMMARY FINANCIAL AND OTHER DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
PREDECESSOR ----------------------------------- SIX MONTHS ENDED SIX MONTHS SIX MONTHS YEAR ENDED JUNE 30, YEAR ENDED ENDED ENDED DECEMBER 31, -------------------- DECEMBER 31, DECEMBER 31, JUNE 30, ------------------------ 1997 1996 1996 1995 1995 1994 1993 1992 ----------- -------- ------------ ------------ ---------- -------- ------- ----- STATEMENT OF OPERATIONS DATA: Revenues: Gain on sale(1)......... $19,808 $ 12,520 $ 18,671 $ -- $ -- $ 4,052 $ 1,430 $ -- Net interest income..... 1,373 302 1,641 239 154 37 35 2 Loan servicing income... 1,376 649 1,191 349 326 306 345 147 Other income............ -- 63 63 -- -- 68 -- -- ------- -------- -------- ------- -------- -------- ------- ----- Total revenues.......... 22,557 13,534 21,566 588 480 4,463 1,810 149 Expenses: Personnel and commission............. 4,665 3,901 8,270 356 931 1,723 1,035 -- General and administrative......... 1,467 495 1,094 294 684 1,804 2,952 306 Other................... 2,462 1,375 2,878 597 776 1,664 1,718 -- ------- -------- -------- ------- -------- -------- ------- ----- Total expenses.......... 8,594 5,771 12,242 1,247 2,391 5,191 5,705 306 ------- -------- -------- ------- -------- -------- ------- ----- Net income (loss)....... $13,963 $ 7,763 $ 9,324 $ (659) $ (1,911) $ (728) $(3,895) $(157) ======= ======== ======== ======= ======== ======== ======= ===== Pro forma earnings data (2): Net income as reported.............. $13,963 $ 7,763 $ 9,324 Pro forma income taxes................. 5,935 3,366 3,873 ------- -------- -------- Pro forma net income... $ 8,028 $ 4,397 $ 5,451 ======= ======== ======== Pro forma net income per share(3).......... $ 0.37 $ 0.20 $ 0.25 ======= ======== ======== Supplemental pro forma earnings data(2): Net income as reported.............. $13,963 Establishment of deferred tax liability......... 7,018 ------- Supplemental pro forma net income............ $ 6,945 ======= Supplemental pro forma net income per share(3).............. $ 0.32 ======= AS OF JUNE 30, 1997 AS OF DECEMBER 31, --------------------------------- ------------------------------------------------ PREDECESSOR ------------------------ AS PRO ADJUSTED(4) FORMA(5) ACTUAL 1996 1995 1994 1993 1992 ----------- -------- ------------ ------------ ---------- -------- ------- ----- BALANCE SHEET DATA: Cash and cash equivalents............ $70,554 $ 15 $ 15 $ -- $ -- $ 102 $ 205 $ 1 Securities available for sale................... 2,581 2,581 2,581 39,349 -- 9,541 5,025 -- Loans and leases held for sale............... 208,014 208,014 208,014 98,915 181,254 -- -- -- Retained interest in loan securitizations(6)..... 7,002 7,002 7,002 6,908 -- -- -- -- Accrued interest receivable............. 1,137 1,137 1,137 560 1,108 138 39 -- Goodwill................ 4,571 4,571 4,571 4,332 4,226 -- -- -- Other assets............ 9,636 9,636 9,636 10,112 2,460 467 862 309 ------- -------- -------- ------- -------- -------- ------- ----- Total assets........... 303,495 232,956 232,956 160,176 189,048 10,248 6,131 310 Overdraft............... -- -- -- 171 445 -- -- -- Payable to ICII......... -- 12,997 9,997 17,728 -- -- -- -- Borrowings.............. 195,922 195,922 195,922 125,240 181,632 13,548 7,160 460 Deferred income taxes... 7,018 7,018 -- -- -- -- -- -- Other liabilities....... 4,939 4,939 4,939 2,580 3,198 1,543 3,086 70 ------- -------- -------- ------- -------- -------- ------- ----- Total liabilities...... 207,879 220,876 210,858 145,719 185,275 15,091 10,246 530 Members' equity......... -- -- $ 22,098 $14,457 $ 3,773 $(4,843) $(4,115) $(220) ======== ======= ======== ======== ======= ===== Common stock............ 27 22 Additional paid in capital................ 95,589 12,058 ------- -------- Total stockholders' equity................ $95,616 $ 12,080 ======= ========
8
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- 1997 1996 1995 1994 1993 1992 ---------- -------- -------- -------- ------- ------- OPERATING STATISTICS: Loan originations: Total loan originations.......... $ 285,370 $456,981 $218,742 $109,166 $29,367 $26,101 Average initial principal balance per loan.................. $ 730 $ 837 $ 706 $ 635 $ 452 $ 458 Weighted average interest rate: Fixed rate loans....... 10.70% 10.29% 10.12% 10.21% 9.48% 10.94% Variable rate loans.... 9.60% 9.34% 8.40% 8.13% -- % -- % Equipment finance originations: Total equipment finance originations.......... $ 15,247 $ 1,486 $ -- $ -- $ -- $ -- Average initial principal balance per financing............. $ 186 $ 149 $ -- $ -- $ -- $ -- Weighted average interest rate......... 12.08% 12.14% -- % -- % -- % -- % Total loan and lease originations........... $ 300,617 $458,467 $218,742 $109,166 $29,367 $26,101 Loan sales: Whole loan sales....... $ 15,349 $ -- $ -- $ -- $ -- $ -- Loans sold through securitizations(1).... 158,554 325,088 147,972 105,686 28,973 -- ---------- -------- -------- -------- ------- ------- Total................. $ 173,903 $325,088 $147,972 $105,686 $28,973 $ -- Loans and leases held in servicing portfolio (at period end)(7)..... $1,049,843 $737,176 $358,579 $180,367 $81,030 $55,164 Net charge offs as a percentage of total servicing portfolio.... -- % -- % -- % -- % -- % -- %
- -------- (1) Gain on sale for the six months ended June 30, 1997 and 1996 and the year ended December 31, 1996 includes $18.4 million, $5.8 million and $11.9 million of cash gains, of which $2.4 million, $3.6 million and $7.8 million, respectively, represented loan fees. The gain on sale of loans for the December 1995 securitization was not recognized until the first quarter of 1996. (2) From July 1, 1995 through the closing date of the Offering, the Company qualified to be treated as a partnership for federal and state income tax purposes (the "LLC Qualification"). Pro forma earnings data reflect the Reorganization and the income tax expense that would have been recorded had the Company not been taxed as a partnership. As a result of terminating the Company's limited liability company ("LLC") status upon completion of this Offering, the Company will be required to record a one-time non-cash charge against historical earnings for deferred income taxes. This charge will occur in the quarter ending December 31, 1997 and the year ending December 31, 1997. If this charge were recorded at September 30, 1997, the amount would have been approximately $11.1 million. This amount is expected to increase through the closing date of this Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3, 4 and 14 of Notes to Financial Statements. (3) 21,887,500 outstanding shares were used in computing pro forma and supplemental pro forma net income per share. See Note 3 of Notes to Financial Statements. (4) As adjusted to reflect the sale of the shares of Common Stock by the Company in this Offering at an assumed initial public offering price of $17.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (5) Pro forma balance sheet data reflects the Reorganization, the distribution by Franchise Mortgage LLC to its members of the Final LLC Distribution of $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) immediately prior to the completion of this Offering, such amount to be funded with a short term loan from ICII repayable with a portion of the net proceeds of this Offering (the "Final LLC Distribution"), the recording by the Company of deferred income taxes (see footnote (2) above), and the reclassification of members' equity to additional paid-in capital in connection therewith. See "LLC Distributions," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (6) See Note 8 of Notes to Financial Statements. (7) Total delinquencies, which include all loans and leases 90 or more days past due as a percentage of all loans and leases held in the Company's servicing portfolio, was 0.11% as of June 30, 1997. 9 RISK FACTORS Before investing in the shares offered hereby, prospective investors should give special consideration to the following risk factors in addition to other information set forth elsewhere in this Prospectus. The following risk factors are interrelated, and consequently, investors should treat such risk factors as a whole. This Prospectus contains forward-looking statements that inherently involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. SUBSTANTIAL NEED FOR LIQUIDITY TO FUND LENDING ACTIVITIES The Company has an ongoing need to finance its lending activities, which is expected to increase to the extent that the volume of loan and lease originations increases. The Company's primary operating cash requirements will include the funding of (i) loans and leases pending their sale, (ii) fees and expenses incurred in connection with its securitization program, (iii) overcollateralization or reserve account requirements in connection with loans pooled and securitized, (iv) interest, fees and expenses associated with the Company's warehouse lines of credit and repurchase facilities with certain financial institutions, (v) federal and state income tax payments and (vi) ongoing administrative and other operating expenses. The Company currently funds these cash requirements primarily through securitizations, whole loan and lease sales and borrowings from Banco Santander, Sanwa Bank, Morgan Stanley and Credit Suisse First Boston. No assurance can be given that the Company will have access to the capital markets in the future for equity or debt issuances or for securitizations or that financing through borrowings will be available on acceptable terms to satisfy the Company's cash requirements. The Company's inability to access the capital markets or obtain acceptable financing could have a material adverse effect on the Company's business and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." SUBSTANTIAL DEPENDANCE ON SECURITIZATIONS The Company currently pools and sells through securitization substantially all of the loans which it originates. Under the Company's current securitization structure, the Company sells a pool of loans on a non-recourse basis to a single purpose trust. The trust issues securities in the form of certificates which are denominated in multiple tranches throughout the credit rating spectrum from the highest investment grade rating of "AAA" descending to a non-investment grade rating of "B." In addition, the Company structures an interest only security ("I/O") in its financings that is generally rated AAA. Several factors affect the Company's ability to complete securitizations of its loans, including conditions in the securities markets generally, conditions in the asset-backed securities markets specifically, the credit quality of the Company's loans, compliance of the Company's loans with the eligibility requirements established by the securitization documents, the Company's ability to adequately service its loans and the absence of any material downgrading or withdrawal of ratings given to certificates issued in the Company's previous securitizations. Adverse changes in any of these factors would impair the Company's ability to originate and sell loans on a favorable or timely basis which could have a material adverse effect upon the Company's business and results of operations. In addition, the securitization market for the Company's loans and leases is relatively undeveloped and may be more susceptible to market fluctuations or other adverse changes than more developed capital markets. To the extent the Company makes loans and leases in new industry sectors or to different types of entities in existing industry sectors, there is a risk that such loans and leases will not be securitizable or will be securitizable only on terms disadvantageous to the Company. The "gain on sale" associated with securitizations and loan and lease sales is the largest component of the Company's revenues. The gain on sale of loans in a securitization is computed as cash received from securitization plus the fair value of any retained interests held from a loan securitization less the book value of the loans sold (including par value of loans, plus or minus premiums, discounts and unearned loan fees) less any reserves required to be held by a securitization trust. The fair value of retained interests in loan securitizations is computed as the present value of the estimated cash flows associated with the retained interest, using an 10 appropriate discount factor and prepayment and credit loss assumptions. Of the $37.5 million gain on sale from securitizations recognized by the Company since January 1, 1996, $30.3 million was comprised of cash received by the Company at the time of securitization and not the present value of anticipated cash flow on retained interests. However, depending upon the securitization structure and execution of the transaction, in future transactions the Company may not receive some or all of the cash representing such gain until much later, as payments are received on the securitized assets, or may never receive some or all of such cash. In connection with securitizations, the Company also establishes retained interests in loan securitizations as a balance sheet asset, which are amortized over the estimated life of the loans securitized. While, to date, the Company's retained interest in loan securitization has been relatively small, it could become much larger in future periods. As a result, although an accounting gain may be recognized, future securitization transactions may not generate commensurate cash flows to the Company for an extended period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting for Gain on Sale" and "--Liquidity and Capital Resources." The anticipated payments to the Company on its retained interest in loan securitizations are discounted at a specified rate and further reduced by the Company's estimate of future credit losses and prepayments over the lives of the loans securitized. Such amounts, if any, are held back and serve as additional collateral for the repayment of the related certificates. To date, the default rate used by the Company has been zero because the Company has incurred no credit losses. Generally, the Company has used a zero prepayment rate because prepayment penalties contained in loan documents have deterred Borrower prepayments significantly. If prevailing interest rates rise, the required discount rate might also rise, thereby causing the Company to record an expense reducing the Company's gain on sale and the carrying value of retained interests in loan securitizations. The actual rate of credit losses and prepayments are influenced by a variety of economic and other factors, including general economic conditions and business competition. Accordingly, there can be no assurance that the actual rate of credit losses on the loans sold in the Company's securitizations will not exceed the Company's estimates or historical experience. If actual credit losses and prepayments exceed the Company's estimates, this would cause the Company to record an expense in a future period or periods reducing the carrying value of retained interests in loan securitizations. There can be no assurance that future changes in the Company's securitization structures, interest rates or future credit loss and prepayment levels will not result in losses which could have a material adverse effect on the Company's business and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In order to gain access to the secondary market for its loans, in parallel with the accumulation of the collateral and the structuring of the securities sold in each securitization, independent rating agencies are retained to rate each series of securities issued. To date one or more classes of each of these series of securities has received investment grade ratings (BBB and above). The Company's inability to obtain such an investment grade rating could have a material adverse effect on the Company's operations and financial position; in such event the Company's costs of such securitization likely would increase and its gain on sale recognized on such securitization would be reduced. The Company has periodically relied on credit enhancements provided by monoline insurance carriers to guarantee the securities issued by the trust to enable it to improve the bond rating. Any substantial reduction in the size or availability of the securitization market for the Company's loans or the unwillingness of insurance companies to guarantee the certificates issued by the trust, could have a material adverse effect on the Company's business and results of operations and prospects. In addition, the documents governing the Company's securitizations also require the Company to build overcollateralization levels through retention of a specified amount of loan payments and the application thereof to reduce the principal balances of the notes issued or to create reserve funds. Such overcollateralization levels are pre-determined by the rating agencies or the insurance company issuing the guarantee of the certificates and are a condition to obtaining an investment grade rating thereon. The application of such amounts to collateral causes the aggregate principal amount of the loans to exceed the aggregate principal balance of certificates. Such excess amounts serve as a credit enhancement for the trust issuing the certificates or notes and fund losses realized on loans held by such trust. Accordingly, the Company continues to be subject to risks of delinquencies and charge-offs following the sale of loans through securitizations to the extent such amounts are required to be retained or applied by the trust. In addition, such retention slows, and in some circumstances, reduces over the 11 life of the related securitization, the flow of cash to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company is the originator and servicer of the loans that it securitizes. However, legal and beneficial ownership of securitized loans is held by the issuing trust and such loans serve as collateral for the certificates issued by the trust. The assets of the trust are not available to pay creditors of the Company. The Company's ongoing interest in such assets is limited to its participation in retained interests and servicing fees. The Company endeavors to execute material securitization transactions on not less than a quarterly basis. Market and other considerations, including the conformity of loan pools to the requirements of rating agencies, affect the timing of such transactions and may cause the Company's results of operations to fluctuate accordingly. Any delay in the sale of a loan pool beyond a quarter-end would postpone the recognition of gain related to such loans until their sale and may result in losses for such quarter being reported by the Company. In addition, the Company's securitization transactions currently permit it to defer paying taxes on a majority of the amount it records as gain on sale in securitization of loans. Taxes are deferred at the time the Company records gain on sale in securitization of loans, and are paid as cash is received from Borrowers. To the extent that the Company is unable to defer such taxes in future securitization transactions or is required by the Internal Revenue Service to accelerate the payment of taxes which previously had been deferred, the Company's liquidity, and thus its ability to pursue its growth strategy and to fund its future loan origination and securitization activities, may be adversely affected. SIGNIFICANT RELIANCE ON WAREHOUSE LINES OF CREDIT AND REPURCHASE FACILITIES The Company is dependent upon its ability to access warehouse lines of credit and repurchase facilities to fund new originations. The Company had warehouse lines of credit and repurchase facilities of approximately $365.0 million at June 30, 1997. The Company expects to be able to maintain existing warehouse lines of credit and repurchase facilities (or to obtain replacement or additional financing) as current arrangements expire or become fully utilized; however, there can be no assurance that such financing will be obtainable on favorable terms. To the extent that the Company is unable to arrange new warehouse lines of credit and repurchase facilities, the Company may have to curtail its loan and lease origination activities, which could have a material adverse effect on the Company's operations and financial position. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." SUBSTANTIAL LEVERAGE CAN REDUCE NET INCOME AND CAUSE LOSSES The Company's Certificate of Incorporation and Bylaws do not limit the amount of indebtedness the Company can incur. The Company leverages its assets through securitizations and other borrowings, generally through the use of warehouse lines of credit and reverse repurchase facilities. The percentage of leverage used varies depending on, among other things, the Company's estimate of the cash flow that its assets will generate, and the stability of that cash flow. There can be no assurance that the Company will be able to continue to meet its debt service obligations resulting from leverage and, to the extent that it cannot, the Company risks the loss of some or all of its assets. CERTAIN UNDERWRITING REQUIREMENTS AND RISKS MAY ADVERSELY AFFECT CREDIT QUALITY RISKS ASSOCIATED WITH LOANS TO BORROWERS OPERATING SMALL AND MEDIUM SIZED BUSINESSes. Loans to franchisees ("Franchisees"), licensees of petroleum retailers and convenience store, truck stop, car wash and quick lube businesses ("Licensees") and owners and operators of golf courses and golf facilities ("Operators") (for purposes of this Prospectus, any Franchisee, Licensee, or Operator is referred to as a "Borrower") generally involve all of the risks associated with small business loans. Since small businesses are typically privately-owned, there is generally no publicly available information about such companies and the Company must rely on the diligence of its employees and agents to obtain information in connection with the Company's lending 12 decisions. Typically, the success of small and medium sized businesses depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the related company. In addition, small and medium sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial variations in operating results, any of which may have an adverse effect on a Borrower's ability to repay a loan or lease. While publicly available information permits the Company to perform certain risk analysis concerning the default, failure, and closure risks within industries and among Borrower groups, generally there is no assurance that the available information correctly reflects the risks associated with lending to Borrowers in each industry in general or to any particular Borrower within any particular industry. Moreover, there is no assurance that the underwriting formulas derived by the Company for Franchisees, Licensees and Operators generally or for particular business concepts will adequately assess the risk of making a loan to any particular Borrower. THE COMPANY'S VALUATION OF A BORROWER'S BUSINESS MAY NOT BE INDICATIVE OF ITS TRUE VALUE. The Company's loans are underwritten in accordance with the Company's underwriting guidelines which permit Borrowers to borrow up to a specified percentage of the value of the business unit and, in certain instances, the real estate pledged as collateral in connection with the loans. The value of the business unit is derived from a formula based upon the business concept and the revenues and cash flows generated by the business unit from its operations, as well as a valuation for each loan is performed by an independent third-party hired by the Company. However, there can be no assurance that the Company's valuations actually reflect an amount that could be realized upon a current sale of a Borrower's business unit and related personal and real property. Moreover, such a valuation is not indicative of the value of the enterprise at any time after the date of the valuation. Future values may depend upon a variety of factors, including the economic success of the business unit, local and general competitive and economic conditions, as well as the strength of the relevant business concept, the franchisor or other licensor and the related Borrower. In addition, a Borrower's franchise or license agreement is not typically included in the collateral securing a loan, and as a result the Company may not foreclose on the franchise or license agreement in the event of a default by the Borrower. As a result, there is no assurance that the value of the collateral securing the loan will equal or exceed the amount of the loan and related Borrower obligations at any time. In addition, in the event of a default by a particular Borrower, there may be factors present that reduce the revenues or cash flow derived at the location and the value of the enterprise. Moreover, the liquidation value of the collateral securing the loan generally will be less than the value of the enterprise as determined above. Accordingly, in order to realize the full value of the collateral (which may or may not be sufficient to satisfy a Borrower's obligations to the Company), the Company generally will be required to obtain the cooperation of the franchisor or licensor. However, there is no assurance that such cooperation will be obtained, and that the interests of the Company and the franchisor or licensor will be comparable. THE COMPANY'S VALUATION OF A BORROWER'S INTEREST IN REAL PROPERTY MAY NOT REFLECT ITS FUTURE VALUE. The Company's loans are often secured by a mortgage or deed of trust on a Borrower's interest in the business unit-related real property upon which the unit operates. However, in many instances such interest is in a lease of limited value other than to one who also has the right to operate the business at such location, and as noted above, a Borrower's franchise or licensee agreement is not typically included in the collateral securing a loan. Accordingly, the Company's underwriting guidelines for leased properties do not require the Borrower to provide title insurance or reports and such policies or reports are typically not obtained in connection with the loans where the related property is a leasehold. In instances where the Company's underwriting guidelines permit a Borrower to borrow amounts based upon the value of the Borrower's interest in the business unit-related real estate, the Company determines the value of such real property interest based upon an independent, third-party appraisal. Such appraisals value the real property on an in-use, income approach which assumes that the property is in use as an income producing business property. Such value, even if realized in a sale or liquidation, generally would not provide such Borrower with sufficient proceeds to satisfy its obligations to the Company. Moreover, such an appraisal is not indicative of the value of the real property interest at any time after the date of the appraisal. Future values may depend upon a variety of factors, including changes in the surrounding area, 13 including, but not limited to, changes which alter the visibility of the location and traffic patterns, duration of the lease, and absence of sufficient nondisturbance agreements, as well as changes in general or local economic conditions, increases in interest rates, real estate taxes and other operating expenses (including energy costs), changes in governmental rules and regulations (including environmental rules), acts of God and other factors. Accordingly, there is no assurance that the Company's valuations actually reflect the amount that could be realized upon a current sale of the real property interest. THE COMPANY MAY INCUR SUBSTANTIAL CREDIT RISKS TO THE EXTENT IT CANNOT SECURITIZE OR SELL LOANS OR LEASES. Certain of the Company's loans and leases may not be readily saleable or securitizable, or may be saleable or securitizable only after the individual loan or lease portfolio performance characteristics become apparent over time. To the extent that such loans and leases are not sold or securitized, the Company must fund such assets with borrowings or internally generated funds and bears the entire credit risk associated with such assets. The Company's inability ultimately to sell or securitize substantially all of the loans and leases it originates would have a material adverse effect on the Company's business and results of operations. See "--Substantial Need for Liquidity to Fund Lending Activities" and "-- Concentration on Restaurant, Retail Energy and Golf Sectors May Expose the Company to Concept Failures, Industry Cycles, Environmental Liabilities and Other Industry Specific Risks." THE COMPANY'S DEVELOPMENT AND CONSTRUCTION LOANS HAVE RISKS DIFFERENT FROM OTHER LOANS ORIGINATED BY THE COMPANY. The Company's DEVCO loans are a short- term product (up to 18 months) offered to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. For the six months ended June 30, 1997 and the year ended December 31, 1996, DEVCO loans represented 17.9% and 23.3%, respectively, of total loan and lease originations. DEVCO loans have different risks than the permanent loans originated by the Company including the fact that in underwriting such loans, the Company relies more heavily on operator experience and the strength of the business concept rather than the historical profitability of the unit and that generally no payments are applied to reduce the principal or interest due on such loans until maturity. In addition, DEVCO loans which are construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of the business unit under construction, which is of uncertain value prior to completion of construction and commencement of operations of the unit. In the event that construction is not completed or the business unit does not commence operations successfully, the collectibility of the related loan may be impaired. In the event the Company's evaluation of creditworthiness is less accurate for DEVCO loans than for permanent loans, the Company may be exposed to a greater risk of loss on such loans. Also, the Company does not currently securitize any of its DEVCO loans and funds such loans primarily with warehouse borrowings. However, the Company may refinance such loans with permanent financing, subject to its credit underwriting guidelines. In the event that the Company is unwilling or unable to refinance a DEVCO loan at maturity and no other lender refinances such loan, the Company may incur losses upon foreclosure or other collection action. See "Business--Loan Originations--Type of Loan Products." BANKRUPTCY OF A BORROWER MAY ADVERSELY AFFECT LOAN REPAYMENT. The bankruptcy of a Borrower could result in substantial delays in the enforcement of such Borrower's obligations to the Company and the enforcement and realization of the Company's interest in the collateral securing the obligations. In this regard, in the event of a bankruptcy of a Borrower, the Company would be stayed from foreclosing on its collateral and enforcing its rights against such Borrower. In addition, in the event that the value of the collateral securing a Borrower's obligations to the Company, as determined by the bankruptcy court, is less than the amount of the obligations owed to the Company, the Company's claim against such Borrower would be divided into secured and unsecured claims. Interest or attorneys' fees would not accrue in respect of either claim when such Borrower is in bankruptcy. As a result of, among other things, the issues relating to the value of the collateral securing the obligations owed by the borrower to the Company summarized above, there is no assurance that the Company's claim against the Borrower would not exceed the value of the collateral securing the obligations owed by the borrower to the secured party. 14 The Company's Borrowers generally are corporations, limited liability companies and other limited liability entities, and the principals of the Borrowers generally are not required to personally guarantee the loans. As a result, in the event of a default by a Borrower under any particular loan, the stockholders or other principals of the defaulting Borrower generally will have no personal liability to repay the loan. REAL PROPERTY WITH ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR THE COMPANY. Contamination of real property by hazardous substances may give rise to a lien on that property to assure payment of the cost of clean-up or, in certain circumstances, subject the lender to liability. Such contamination may also reduce the value of the business and property. Under the laws of some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), a lender may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the property if the lender engages in certain activities. In 1996 CERCLA was amended to eliminate federal lender liability under CERCLA in certain circumstances, including foreclosure if the lender resells the property at the earliest practicable, commercially reasonable time on commercially reasonable terms. In addition, the amendments provided some guidance to lenders with respect to the nature of activities that would and would not give rise to liability under CERCLA. These amendments do not apply to state environmental laws. Also, foreclosure and other activities on contaminated property may subject a lender to state tort liability. In the course of its business, the Company may acquire real property securing loans that are in default. There is a risk that hazardous substances or waste, contaminants, pollutants or sources thereof could be discovered on such properties after acquisition by the Company. In such event, the Company might be required to remove such substances from the affected properties at its sole cost and expense. There can be no assurance that the cost of such removal would not substantially exceed the value of the affected properties or the loans secured by such properties or that the Company would have adequate remedies against the prior owners or other responsible parties, or that the Company would not find it difficult or impossible to sell the affected real properties either prior to or following any such removal. The Company's servicing guidelines require it to obtain an environmental site assessment of a business property prior to acquiring title thereto. Such requirement effectively precludes enforcement of the security for the related loan until a satisfactory environmental site assessment is obtained or until any required remedial action is thereafter taken but will decrease the likelihood that the Company will become liable for a material adverse environmental condition at the business property. However, there can be no assurance that the servicing guidelines will effectively insulate the Company from potential liability for a materially adverse environmental condition at any business property. See "Business--Regulation--Environmental Laws Affecting Borrowers in Specific Sectors." POTENTIAL ADVERSE EFFECT OF "CHANGES IN CONTROL" IN FRANCHISE AGREEMENTS AND LIMITATIONS INCLUDING NATURAL PERSON FRANCHISEES. The franchise agreements of the Borrowers often prohibit "Changes in Control" whether by death, disability or otherwise. While in the event of the death or disability of a natural person franchisee or of the principals of an entity franchisee, the executors and representatives of natural person franchisees are often permitted a period of months to locate a person acceptable to the franchisor to acquire the disabled or deceased person's interest in the business entity or to become a successor franchisee, there is no assurance that any such person would be found or, if found, would be acceptable to the franchisor and secured party. In the event that an acceptable person is not located, the Borrower would be in default under its franchise agreement and loan, and, among other things, the Borrower's right to operate the business unit could be terminated. License agreements of Borrowers on retail energy loans may contain similar provisions. FRANCHISE TERMINATION OR NONRENEWAL COULD HAVE A MATERIAL ADVERSE EFFECT ON A BORROWER'S ABILITY TO REPAY A LOAN. A Borrower's franchise agreement may be subject to termination in the event of default after applicable cure periods. Default provisions under franchise agreements are generally drafted broadly, and include, among other things, failure to meet operating standards, actions which may threaten licensed intellectual property, and investments by principals in a competitive business. In addition, certain of the Borrower's franchise agreements may have remaining terms which are less than the full term of the respective Borrower's loans. In such cases, the respective Borrowers have the option, or are 15 expected to be granted an option, to renew the franchise agreement for an additional term. Such option, however, often is contingent on the Borrower's execution of the then current form of franchise agreement (which may include increased royalties, advertising and other costs and which contained further restrictions on the franchisee's geographic and other rights) and satisfaction of certain conditions (including modernization of the business unit and related operations), the satisfaction of which may require the expenditure of substantial sums by the Borrower. The Company's standard loan documentation provides that the termination of a Borrower's franchise agreement is a default under the related loan which entitles the Company to declare the principal amount of such loan, immediately due and payable. There is no assurance that the Borrowers will not default under their respective franchise agreements, or that the Borrowers will be able to satisfy the requirements for renewal of the franchise agreement for an additional term. In the event a franchise agreement terminates, the related Borrower would not be able to continue to operate the business unit. In many instances, the sole business and source of revenue for the Borrowers is the operation of the business unit and the termination of the franchise agreement would mean that such Borrowers would cease business operations. Because the success of the business of the franchisee is largely dependent upon brand recognition and the strength of the business concept in which it operates, Borrowers whose rights to operate within the business concepts have been terminated will likely have substantially depleted revenues and/or higher operating costs, if they are able to operate at all. Accordingly, the termination or nonrenewal of the franchise agreement likely will result in a Borrower's inability to satisfy its obligations under the loan and a substantial decrease in the value of the collateral securing such obligations. License agreements by Borrowers on retail energy loans may contain similar provisions. See "Business-- Underwriting." PREPAYMENT RESTRICTIONS ON LOANS MAY BE INSUFFICIENT TO DETER PREPAYMENTS. Substantially all of the Company's loans contain provisions restricting prepayments of such loans. Prepayment provisions included in fixed rate loan documents provide for a prepayment fee equal to (i) the greater of a percentage (declining from 4.0% to 1.0% over the first five years) of the unpaid loan balance or the present value of the unpaid balance multiplied by the spread between the U.S. Treasury rate at the date the loan was originated and the U.S. Treasury rate on the date the loan is prepaid plus (ii) the present value of 0.13% of the remaining principal payments. The prepayment fee for floating rate loans is equal to a percentage (declining from 3.5% to 1.5% over the first four years) of the unpaid loan balance. Such restrictions may prohibit prepayments in whole or in part during a specified period of time and/or require the payment of a prepayment fee in connection with the prepayment thereof. Such prepayment restrictions can, but do not necessarily, provide a deterrent to prepayments. As a result, if actual prepayments exceed Company estimates, the carrying value of the Company's retained interest in loan securitizations may become impaired, and the Company may be unable to effect future securitizations on terms similar to its recent securitization transactions, thereby having an adverse effect on the Company's financial condition and operating results. Prepayment charges may be in an amount which is less than the figure which would fully compensate for the difference in yield upon reinvestment of the prepayment proceeds against its expected yield to maturity of the loans. There can be no assurance that the Borrower on a loan which is being prepaid will have sufficient financial resources to pay all or a portion of any required prepayment charges, particularly where the prepayment results from acceleration of the loans following a payment default. No assurance can be given that, at the time any prepayment charges are required to be made in connection with a defaulted loan, foreclosure proceeds will be sufficient to make such payments. No representation or warranty is made as to the effect of such prepayment charges on the rate of prepayment of the related loan. The enforceability, under the laws of a number of states, of provisions similar to the provisions in the loans providing for the payment of prepayment charges upon a voluntary or involuntary bankruptcy is unclear. In particular, no assurance can be given that, at any time that any prepayment charge is required to be made in connection with an involuntary prepayment, the obligation to pay such prepayment charge will be enforceable under applicable law or, if enforceable, that foreclosure proceeds will be sufficient to make such payment. Proceeds recovered in respect of any defaulted loan will, in general, be applied to cover outstanding property protection expenses and servicing expenses and unpaid principal and interest prior to being applied to cover any prepayment charge due in connection with the liquidation of such loan. 16 BALLOON PAYMENT AT MATURITY AND EXTENSION INCREASES LENDER RISKS. The Company may from time to time originate loans with a balloon payment due at maturity. The ability of a Borrower to pay such amount will normally depend on its ability to fully refinance the loan or sell the business unit and related property at a price sufficient to permit the Borrower to make balloon payments. The ability of a Borrower to refinance will be affected by a number of factors, including, without limitation, the value of the related property, the financial condition and operating history of the Borrower and the related property limitations on transfer imposed by franchise or license agreements, the strength of the commercial real estate market, tax laws, and prevailing general economic conditions. LIMITED COVENANT RESTRICTIONS IN COMPANY LOAN DOCUMENTS MAY LIMIT THE COMPANY'S ABILITY TO RECOVER LOAN PROCEEDS. The Company's loan documents with each Borrower generally contain only a limited number of restrictive financial covenants, including covenants to maintain a specified fixed charge coverage ratio and covenants restricting encumbering or disposing of the collateral (other than dispositions in the ordinary course of business and encumbrances in connection with purchase money financings and certain other permitted encumbrances). The loan documents generally do not contain other financial covenants, such as covenants requiring maintenance of minimum levels of loan to value ratios, net worth or liquid assets, or covenants restricting or prohibiting distributions. The absence of such covenants (which are often included in traditional bank financings) may limit the secured party's ability to respond to declining collateral values and/or recover amounts in respect of any loans in the event of default. CONCENTRATION ON RESTAURANT, RETAIL ENERGY AND GOLF SECTORS MAY EXPOSE THE COMPANY TO CONCEPT FAILURES, INDUSTRY CYCLES, ENVIRONMENTAL LIABILITIES AND OTHER INDUSTRY SPECIFIC RISKS FRANCHISE CONCEPTS HAVE SPECIFIC RISKS. The ability of a Borrower operating as a Franchisee to repay its loan is subject to general business risks typically associated with operating a business and particularly with operating a QSR/casual dining restaurant or other franchised business, including, without limitation, (i) an increase in the cost of labor (including, without limitation, mandatory increases in the minimum wage payable to employees) or food products, (ii) a decrease in the consumer demand for a particular product or class of products offered by a particular franchise concept and (iii) adverse changes in the economy in the geographic location in which a particular restaurant is located. A BORROWER'S ABILITY TO REPAY A LOAN OR LEASE MAY BE ADVERSELY AFFECTED BY THE STRENGTH OF THE SUBJECT FRANCHISE CONCEPT. A Franchisee's success is largely dependent upon brand recognition and the strength of the franchise system in which it operates. The continued success of a Borrower's business may be directly dependent upon the strength of the franchise concept, which in turn may be dependent upon the continued strength of the franchisor and the support which it provides to the franchise concept. While all of the Company's loans are made to Borrowers within approved franchise concepts and the approval of a franchise concept is based, among other things, on the historical results of the franchise concept, the strength of the franchisor and the support which it provides to the franchise concept, there is no assurance that the prior performance of the franchise concept will be indicative of future results, or that the franchisor will continue to have its present strength or continue to provide the support for the franchise concept. In addition, name brand recognition and franchise concept support that provides much of the basis for the successful operation of individual franchise businesses, can also mean that problems within the franchise concept or at other locations (e.g., food poisoning, crime, litigation and negative publicity) have substantial negative impact of the operations of otherwise successful individual restaurants. The Company relies to a significant degree upon its established business relationships with franchisors in such franchise concepts as a source of new loan originations. The Company has a limited number of formal agreements with franchisors. No assurance can be given that such relationships will continue. The discontinuance of the relationship with one or more franchisors could reduce the volume of new loans that the Company is able to originate, which could have a material adverse effect on the Company's business and results of operations. See "Business--Loan Originations--Lending Groups." 17 COMPETITION FACING FRANCHISEES MAY ADVERSELY AFFECT A BORROWER'S REVENUES AND PROFITS. The QSR/casual dining restaurant sector in which many of the Company's Borrowers compete is highly competitive (e.g., with respect to price, service, location, food quality and presentation), and is affected by changes in taste and eating habits of the public, local economic and national economic conditions and population and traffic patterns. Borrowers compete with a variety of locally-owned restaurants, as well as competitive regional and national chains and franchises. In addition, Borrowers may be at risk of competition from restaurants within the same franchise concepts. Moreover, new companies may easily enter the Borrowers' respective market segments. All such competition may adversely affect a Borrower's revenues and profits and the value of its enterprise and its ability to satisfy its obligations in connection with its loan. Furthermore, Borrowers face stiff competition for competent employees and high levels of employee turn-over, which also can have an adverse effect on the operations and profitability of the Borrowers and on their ability to satisfy their loan obligations. See "Business--Competition." CONCENTRATION RISKS FACED BY THE COMPANY MAY ADVERSELY AFFECT COMPANY OPERATIONS. The Company may be exposed to certain substantial concentration risks including risks of (i) franchise concept concentration, (ii) Borrower concentration and (iii) geographic concentration. The Company makes loans to Borrowers who are franchisees in a limited number of franchise concepts, the majority of which operate solely in the QSR/casual dining restaurant market. For the six months ended June 30, 1997 and the year ended December 31, 1996, QSR originations comprised approximately 73.1% and 84.5%, respectively, of total loan and lease originations, while casual dining originations represented 10.7% and 9.5%, respectively. Such concentration of systems will mean that in the event that any of the included franchise concepts suffers a material adverse change, the Borrowers in such franchise concept would be adversely affected, and there would be a concomitant adverse impact on the Borrowers' ability to repay its obligations to the Company. To date the substantial majority of the Company's loans have been made to Borrowers operating QSRs in a limited number of jurisdictions. Concentration in a limited number of jurisdictions will mean that in the event that any of the included jurisdictions suffers a material adverse change (whether as a result of deteriorating economic conditions, natural disasters or otherwise), the Borrowers in such jurisdiction would be adversely affected. In addition, to the extent that the Company makes loans to a Borrower or an affiliated group of Borrowers which constitutes a material portion of the Company's then outstanding loans, the Company could suffer material losses in the event such Borrower or affiliated group defaulted on its loans. For the six months ended June 30, 1997, the Company had made loans to one Borrower whose loans comprised 9.7% of the Company's total loan and lease originations during the period and the Company's top five Borrowers had loans comprising 33.7% of the Company's total loan and lease originations during the period. Of total loan and lease originations for the six months ended June 30, 1997, 21.3% were originated in California; no other state accounted for over 10% of originations for such period and no state accounted for over 10% of total loan and lease originations for the years ended December 31, 1996 and 1995. See "Business--Loan Originations--Lending Groups" and "--Geographic Distribution." FRANCHISE SUCCESS IS DEPENDENT IN PART ON FRANCHISE SITE LOCATION. One of the strengths of the franchise system is procedures employed in selecting site locations for franchises business units, and an important part of the value of a franchise business is the franchisee's ability to operate the franchise business at the specified location. In this regard, many franchisee agreements are "site" or "location" specific and permit only the Borrower to operate at the specified location. However, in the event of changes adversely affecting the location (e.g., changes in traffic patterns, changes in visibility, deterioration of the surrounding neighborhood), the Borrower may not be able to relocate its operations even if the Borrower has the financial resources to fund such a move. If a Borrower were unable to move, such changes could result in decreased revenue and substantially impair the Borrower's ability to satisfy its obligations under the loan, as well as the value of the business and collateral securing the loan. 18 RETAIL ENERGY CONCEPTS HAVE SPECIFIC RISKS TERM OF PETROLEUM SUPPLY CONTRACTS MAY AFFECT BORROWER PROFIT MARGINS. Many of the Company's Borrowers operating as Licensees in the retail energy sector operate under supply agreements (the "Supply Agreements") with national retail petroleum companies which may require such Borrowers to, among other things, purchase all or a portion of their requirements for petroleum products from such companies. The Supply Agreements may also contain terms which require such Borrowers to pay additional costs to such companies to cover marketing activities and additional other expenses for the percentage of branded products sold under such Company's brand in the event the Borrower fails to achieve certain target earnings set forth in the Supply Agreement (the "Target Earnings"). In addition, the Supply Agreements may require such Borrowers to make additional "margin maintenance payments" on petroleum products not purchased if such Borrowers do not purchase a minimum amount of product per year. The minimum amounts required to be purchased may escalate each year. Accordingly, if Target Earnings are not met and/or such Borrowers do not meet the minimum purchase requirements, the cost for purchasing petroleum products could become excessive and adversely affect such Borrowers' profit margin with respect to those products and consequently their ability to repay their loans. BORROWERS IN RETAIL ENERGY SECTOR SUBSTANTIALLY DEPENDENT ON SALE OF MOTOR FUEL. Gasoline sales are highly competitive. Most Borrowers in the retail energy sector compete with both independent and brand gasoline stations. Gasoline profit margins associated with the sale of motor fuel have a significant impact on such Borrowers and are affected by numerous factors outside of each Borrower's control, including the supply and demand for motor fuel in retail markets, volatility in the wholesale gasoline market and competitive pricing influences in each Borrower's local market area. Borrowers may obtain motor fuel from a number of independent suppliers in an attempt to lower their cost per gallon and establish a diverse supplier base in the event of shortages. As Borrowers generally may not inventory more than two weeks' volume requirements, any sustained shortage of motor fuel from a Borrower's suppliers could substantially reduce the volume of motor fuel sold by such Borrower. A material decrease in either the volume of motor fuel sold or the profit margin on such sales for an extended time period could have a material adverse effect on the income of Borrowers in the retail energy sector and their ability to service loans from the Company. In addition, the Company believes that the patronage of customers desiring to purchase motor fuel accounts for a significant portion of customer traffic at retail energy business units and has a favorable impact on the merchandise sales in the convenience stores, car washes and truck stops connected to service station operations. Accordingly, any reduction in motor fuel supplies and resulting reductions in motor fuel sales could adversely affect the sale of non-motor fuel items and result in decreased revenues for such Borrowers. PROPERTIES SUBJECT TO ENVIRONMENTAL REGULATIONS MAY CREATE LIABILITY FOR BORROWERS. The operation and management of retail energy businesses (whether pursuant to direct ownership, leases or management contracts) involves the use and limited storage of certain hazardous materials. Specifically, the Company's Borrowers in the retail energy sector incur ongoing costs to comply with federal, state and local environmental laws and regulations governing underground storage tank systems ("USTs") used in their operations. The Company's loans may be secured by convenience store and gas station locations with USTs and other environmental risks. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Under various federal, state, local and foreign laws, ordinances and regulations, various categories of persons, including owners, operators or managers of real property may be liable for the costs of investigation, removal and remediation of hazardous substances that are or have been released on or in their property even if such releases were by former owners or occupants. In addition, any liability of Borrowers for assessment and remediation activities in connection with releases into the environment of gasoline or other regulated substances from USTs or otherwise at such Borrowers' gasoline facilities could adversely impact the Borrowers' ability to repay their loans from the Company or the value of any pledged collateral. Due to the nature of releases, the actual costs incurred may vary and the ongoing costs of assessment and remediation activities may vary from year to year and may adversely impact such Borrowers' ability to repay their loans. As of June 30, 1997, the Company was not aware of any adverse impact on a Borrower's ability to repay a loan or any impairment of collateral arising 19 from environmental liabilities. However, no assurance can be given that environmental liabilities will not adversely impact the ability of Borrowers to repay their obligations to the Company in the future. See "--Certain Underwriting Requirements and Risks May Adversely Affect Credit Quality." Most states have funds which provide reimbursement to qualified storage tank owners/operators for assessment and remediation costs associated with petroleum releases (after the operator pays a set deductible and co-payment amount). Most funds are supported by annual tank registration fees paid by the station owners and a gasoline fee, included in the price of the gas, which is paid by consumers. As a result of the recently enacted legislation regarding USTs, there has been an increasing number of UST replacements. Consequently, some state funds have been drained of reserves. The result is a delay in disbursement until the fund can be replenished with fee collections, the effect of which may have an adverse effect on the Borrower's financial condition and ability to repay its loan. See "Business--Regulation-- Environmental Regulations Affecting Retail Energy Businesses." COMPETITION FACED BY BORROWERS IN THE RETAIL ENERGY SECTOR MAY ADVERSELY AFFECT BORROWER PROFITABILITY. The retail energy sector is highly competitive. The number and type of competitors vary by location. The Company's Borrowers in the retail energy sector presently compete with other convenience stores, large integrated gasoline service station operators, supermarket chains, neighborhood grocery stores, independent gasoline service stations, fast food operations and other similar retail outlets, some of which are well recognized national or regional retail chains. The Company's Borrowers in the retail energy sector may compete against businesses which have greater financial and other resources than those of the Borrowers. Key competitive factors in the retail energy sector include, among others, location, ease of access, store management, product selection, pricing, hours of operation, store safety, cleanliness, product promotions and marketing. As a result of purchase economies or vertical integration, certain of the Company's Borrowers in the retail energy sector may not be able to compete effectively with larger competitors which may possess greater control over product costs and may have the ability to offer a broader range of products or services. To the extent these competitors adopt marketing policies, including advertising and pricing levels, that exploit their competitive advantages, such competitors could gain market share and have an adverse effect on the profitability of the Company's Borrowers in the retail energy sector and their ability to repay their loans. GOLF LOANS HAVE SPECIFIC RISKS CONSUMER SPENDING AND TRENDS. The amount spent by consumers on discretionary activities, such as those offered by Borrowers in the golf sector, has historically been dependent upon levels of discretionary income which may be adversely affected by general economic conditions. A decrease in consumer spending on golf-associated activities could have a material adverse effect on the financial condition and results of operations of Borrowers in the golf sector and their ability to repay the Company's loans. ZONING AND ENVIRONMENTAL REGULATIONS MAY ADVERSELY AFFECT BORROWER COSTS. The construction of golf courses for third parties and the development of golf practice and instruction facilities involve compliance with land use planning, zoning and environmental regulations, including regulations applicable to the treatment, storage and disposal of hazardous and solid wastes, run-off and wetland development. Regulations governing the use and development of real estate may prevent Borrowers in the golf sector from acquiring or developing prime locations for golf facilities, substantially delay or complicate the process of developing locations acquired by such Borrowers for golf facilities or constructing golf courses on locations owned by others, or materially increase the cost thereof. Further, the operation and management of golf courses and golf practice and instruction facilities (whether pursuant to direct ownership, lease or management contract) involve the use and limited storage of certain hazardous materials such as herbicides, pesticides, fertilizers, motor oil, gasoline and paint. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Under various federal, state, local and foreign laws, 20 ordinances and regulations, various categories of persons, including owners, operators or managers of real property may be liable for the costs of investigation, removal and remediation of hazardous substances that are or have been released on or in their property even if such releases were by former owners or occupants. See "--Certain Underwriting Requirements and Risks May Adversely Affect Credit Quality." REVENUES OF BORROWERS MAY BE ADVERSELY AFFECTED BY SEASONALITY. Golf facilities generally are the most active during the second and third quarters of the year. The inherent seasonality of participation in golf and golf- related activities and the effect of weather conditions generally result in greater revenues and income during the second and third quarters as compared to the first and fourth quarters of the year. Poor weather conditions and unforseen natural events may result in reduced utilization of Borrowers' golf facilities and have an adverse effect on revenues of Borrowers in the golf sector. EQUIPMENT LOANS AND LEASES HAVE SPECIFIC RISKS INABILITY TO RECOGNIZE RESIDUAL VALUE MAY ADVERSELY AFFECT THE COMPANY'S FINANCIAL CONDITION. The Company retains a residual interest in the equipment covered by its leases. The estimated fair market value of the equipment at the end of the contract term of the lease, if any, is reflected as an asset on the Company's balance sheet for leases held to maturity and will be included as part of the gain on sale in any lease securitization transaction. The Company's results of operations depend, to some degree, upon its ability to realize these residual values. Realization of residual values depends on many factors which are outside the Company's control, including general market conditions at the time of expiration of the lease, whether there has been unusual wear and tear on, or use of, the equipment, the cost of comparable new equipment, the extent, if any, to which the equipment has become technologically or economically obsolete during the contract term and the effects of any additional or amended government regulations. If, upon the expiration of a lease, the Company sells or refinances the underlying equipment and the amount realized is less than the recorded value of the residual interest in such equipment, a loss reflecting the difference will be recognized. Any failure by the Company to realize aggregate recorded residual values could have a material adverse effect on its business and results of operations. EQUITY INVESTMENTS ARE SUBJECT TO RISK OF LOSS The Company periodically makes passive unsecured equity investments in companies operating in the sectors served by its lending and leasing business. Such investments may be made in conjunction with loans and leases or independent of any borrowing relationship. In certain cases, the Company is obligated to make additional equity investments in such companies at the option of the majority investor. Such investments involve a high degree of risk because the investment is not secured by any assets of such entities and the Company bears the risk of loss of its entire investment. Generally, the Company is unable to control the activities of these companies due to its minority ownership interest and lacks representation in the management of such companies. No assurances can be made that such entities will be profitable or that the Company will receive any return on its investments. See "Business-- Equity Investments" and "Certain Transactions--Other Matters--Equity Investments." The Company may also enter into joint venture or similar arrangements for its loan and lease activities. The Company is currently negotiating with a major investment bank to form a joint venture pursuant to which the loan and lease activities of the Company's Golf Finance Group would be exclusively conducted by a new entity which would be 50% owned and managed by each of the Company and the investment bank. The parties could by mutual agreement utilize the joint venture, if formed, to exclusively originate other types of loans and leases, which could include loans and leases in the Company's other existing sectors or in new sectors. Any income distributed by the new entity would be shared equally by the Company and the investment bank. PROFITABILITY OF THE COMPANY MAY BE ADVERSELY AFFECTED BY INTEREST RATE FLUCTUATIONS Profitability may be directly affected by fluctuations in interest rates which affect the Company's ability to earn a spread between interest received on its loans and leases held for sale and rates paid on warehouse lines of credit and repurchase facilities. The Company's profitability may be adversely affected during any period of 21 unexpected or rapid changes in interest rates. By way of example, in an inflationary economy, interest rates normally increase. A substantial and sustained increase in interest rates, whether due to inflation or otherwise, could adversely affect the Company's ability to originate loans and leases. Fluctuating interest rates also may affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sale and the interest paid by the Company for funds borrowed under the Company's warehouse lines of credit and repurchase facilities. If interest rates rise, the required discount rate used in determining the Company's retained interest in loan securitizations might also rise, thereby causing the Company to record an expense reducing the Company's gain on sale and the carrying value of retained interests in loan securitizations. HEDGING STRATEGIES MAY NOT PROTECT THE COMPANY FROM INTEREST RATE RISKS The Company is required under its warehouse lines of credit and repurchase facilities to hedge all of its fixed-rate loan balances securing such facilities. The Company's hedging strategy normally includes selling U.S. Treasury futures in such amounts and maturities as to effectively hedge the interest rate volatility of its portfolio. The Company does not maintain naked or leveraged hedge positions. While the Company believes its hedging strategies are cost-effective and provide some protection against interest rate risks, no hedging strategy can completely protect the Company from such risks. Further, the Company does not believe that hedging against the interest rate risks associated with adjustable-rate loans is cost-effective, and the Company does not utilize the hedging strategies described above with respect to its adjustable-rate loans. THE COMPANY MAY BE REQUIRED TO REPURCHASE LOANS AND LEASES SOLD OR SECURITIZED IN THE EVENT OF BREACH OF REPRESENTATIONS AND WARRANTIES In connection with the issuance of securities in offerings in which loans originated by the Company have been securitized, such securities are issued to purchasers nonrecourse to the Company; provided, however, that the purchasers of such securities will have recourse to the Company with respect to the breach of a standard representation or warranty made by the Company at the time such loans are securitized. To the extent that the Company is required to repurchase any loan it will incur those risks incurred by conventional lenders. In the ordinary course of its business, the Company is subject to claims made against it by Borrowers and certificate holders in the Company's securitizations arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of employees, officers and agents of the Company (including its appraisers), incomplete documentation and failures by the Company to comply with various laws and regulations applicable to its business. The Company believes that liability with respect to any currently asserted claims or legal actions is not likely to be material to the Company's results of operations or financial condition; however, any claims asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on the Company's results of operations and financial condition. THE INABILITY OF THE COMPANY TO MANAGE GROWTH COULD ADVERSELY AFFECT COMPANY OPERATIONS The Company's total revenues and net income have grown significantly since inception, primarily due to increased loan origination activities. While the Company intends to continue to pursue a growth strategy, its future operating results will depend largely upon its ability to expand its loan and lease origination activities. The Company plans to continue its growth of loan and lease originations through increased penetration in the sectors where the Company currently operates as well as expansion into new sectors. However, these expansion plans will require additional personnel and assets and there can be no assurance that the Company will be able to successfully expand and operate such programs profitably or that the Company will anticipate all of the changing demands that its expanding operations will have on the Company's management, information and operating systems. Any failure by the Company to hire appropriate personnel or adapt its systems could have a material adverse effect on the Company's results of operations and financial condition. 22 THE COMPANY'S OPERATIONS COULD BE ADVERSELY AFFECTED BY THE LOSS OF KEY PERSONNEL The Company's success depends to a large extent upon the expertise and continuing contributions of Wayne L. Knyal, President, Chief Executive Officer and a Director of the Company and Thomas J. Shaughnessy, Executive Vice President and Chief Credit Officer of the Company. The loss of the services of either of these individuals could have a material adverse effect on the Company's business and results of operations. The Company's future success also depends on its ability to identify, attract and retain additional qualified personnel. There can be no assurance that the Company will be successful in identifying, attracting and retaining such personnel. See "Management--Directors and Executive Officers." LIMITED HISTORY OF INDEPENDENT OPERATIONS AND NEW PRODUCTS LIMIT THE ABILITY OF THE COMPANY TO PREDICT FUTURE PERFORMANCE The Company has experienced substantial growth in loan and lease originations and total revenues since inception, and in particular since June 1995 when ICII acquired the operations of Franchise Mortgage LLC. The Company had been unprofitable until 1996 and there can be no assurance that the Company will be profitable in the future or that these rates of growth will be sustainable or indicative of future results. Prior to the Offering, the Company benefited from the financial, administrative and other resources of ICII and Greenwich Capital Financial Products, Inc., a prior owner of the operations of Franchise Mortgage LLC. Prior to this Offering, ICII had extended loans to the Company and guaranteed the Company's warehouse lines of credit, repurchase facilities and leases. ICII will not guarantee any of the Company's future financing facilities or leases. Accordingly, the Company's prospects must be evaluated in light of the risks, expenses and difficulties it will encounter as an independent business. Although the Company will have a services agreement with ICII upon the effective date of this Offering, there can be no assurance that the Company will develop the financial, management or other resources necessary to operate successfully as an independent company. In light of the Company's aforementioned growth in loan and lease originations, the historical performance of the Company's earnings may be of limited relevance in predicting future performance. Also, the loans originated by the Company and included in the Company's securitizations have been outstanding for a relatively short period of time. Consequently, the delinquency and loss experience of the Company's loans and leases to date may not be indicative of results to be experienced in the future. It is unlikely that the Company will be able to maintain delinquency and loss ratios at current levels as the portfolio becomes more seasoned. The Company has recently expanded its product offerings to include leases and has expanded its marketing efforts to include Borrowers in the retail energy and golf sectors. The Company has either limited or no experience with these new products and markets, and there can be no assurance that the Company will be able to compete in these markets successfully or that the return on the Company's investment in these new products and markets will be consistent with the Company's historical financial results. ANY FUTURE ACQUISITIONS OF OTHER SPECIALTY FINANCE COMPANIES OR ASSETS MAY HAVE ADVERSE EFFECTS ON THE COMPANY'S BUSINESS The Company may, from time to time, engage in the acquisition of other specialty finance companies or portfolios of loan and lease assets. Any acquisition made by the Company may result in potentially dilutive issuances of equity securities, the incurrence of additional debt and the amortization of expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on the Company's business and results of operations. The Company also may experience difficulties in the assimilation of the operations, services, products and personnel related to acquired companies or asset portfolios, an inability to sustain or improve the historical revenue levels of acquired companies, the diversion of management's attention from ongoing business operations and the potential loss of key employees of such acquired companies. The Company currently has no agreements with regard to potential acquisition and there can be no assurance that future acquisitions, if any, will be consummated. 23 ONE-TIME DEFERRED INCOME TAX CHARGE WILL REDUCE THE COMPANY'S EARNINGS In accordance with SFAS 109, as a result of terminating the Company's LLC status upon completion of this Offering, the Company will be required to record a one-time non-cash charge against earnings for deferred income taxes based upon the change from the Company's LLC status to C Corporation status. Management estimates that there will be a charge for the quarter ending December 31, 1997 and the year ending December 31, 1997; if such a charge were recorded at September 30, 1997, the amount would have been approximately $11.1 million. This amount is expected to increase through the closing date of this Offering. For a further discussion, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Impact of Change in Tax Status," "--Tax Considerations" and Notes 3, 4 and 14 of Notes to Financial Statements. SUBSTANTIAL COMPETITION IN THE COMMERCIAL FINANCE INDUSTRY MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO ORIGINATE OR MAINTAIN LOANS AND LEASES As a specialty commercial finance lender, the Company faces intense competition, primarily from commercial banks, thrift institutions, diversified finance companies, asset-based lenders, specialty franchise finance companies and real estate investment trusts, among others. Many of these competitors in the financial services business are substantially larger and have more capital and other resources than the Company. Competition can take many forms, including convenience in obtaining a loan or lease, customer service, marketing and distribution channels and loan and lease pricing. Furthermore, the current level of gains realized by the Company and its competitors on the sale of the type of loans and leases they originate is attracting and may continue to attract additional competitors into this market with the possible effect of lowering gains that may be realized on the Company's loan and lease sales. Competition may be affected by fluctuations in interest rates and general economic conditions. During periods of rising rates, competitors which have locked in low borrowing costs may have a competitive advantage. During periods of declining rates, competitors may solicit the Company's customers to refinance their loans and leases. During economic slowdowns or recessions, the Company's Borrowers may experience financial difficulties and may be receptive to offers by the Company's competitors. CONTROL OF THE COMPANY BY SELLING STOCKHOLDERS AND POTENTIAL CONFLICTS OF INTEREST BETWEEN THE COMPANY AND CERTAIN AFFILIATES After the Offering, the Selling Stockholders will beneficially own 67.8% of the outstanding Common Stock of the Company (or approximately 64.1% of the outstanding Common Stock if the Underwriters' over-allotment option is exercised in full). Of such shares, 44.4% will be owned by ICII and 23.4% will be owned by FLRT, Inc., a company controlled by Wayne L. Knyal, the Company's President and Chief Executive Officer. As a result, the Selling Stockholders will be able to control substantially all matters requiring approval by the stockholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. Under the Company's Bylaws, as long as ICII directly owns at least 25% of the Company's outstanding voting stock, the Unaffiliated Directors of the Company's Board of Directors (directors independent of both management and ICII) must independently approve all transactions between the Company and ICII. The disposition and voting of the shares of Common Stock of the Company held by ICII is controlled by ICII's Board of Directors consisting of H. Wayne Snavely, Kevin E. Villani, Joseph R. Tomkinson, Stephen Shugerman, G. Louis Graziadio, III, Perry A. Lerner, J. Clayborn LaForce and Robert Muehlenbeck. Messers. Snavely, Graziadio and Lerner are directors of the Company. See "Management" and "Principal and Selling Stockholders." OFFERING TO BENEFIT EXISTING STOCKHOLDERS This Offering will provide substantial benefits to existing stockholders of the Company. First, the assumed initial public offering price is substantially higher than the $0.66 per share book value on the shares held by existing stockholders. Based upon an initial public offering of 8,750,000 shares by the Company at an assumed initial public offering price of $17.00 per share, new investors will invest $148.8 million or 92.5% of the total 24 consideration paid for 32.2% of the shares of Common Stock to be outstanding after the Offering. Based upon an assumed initial public offering price of $17.00, the shares of Common Stock owned by existing stockholders would be valued at $313.7 million at the effective time of the Offering; such shares had a book value of $12.1 million at June 30, 1997. Second, each of ICII and FLRT, Inc. will receive monies as a result of the Offering. As selling stockholders, ICII and FLRT, Inc. will receive approximately $39.3 million and $14.7 million, respectively, of the net proceeds of this Offering at an assumed public offering price of $17.00 per share. Also, the Company intends to apply a portion of the net proceeds of this Offering to repay demand indebtedness owed to ICII ($10.0 million was owed to ICII as of June 30, 1997 at an interest rate of 12% per annum; amounts owed to ICII will increase by an amount currently estimated to be $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) to fund the Final LLC Distribution). See "Use of Proceeds" and "LLC Distributions." Third, the Company may be liable for taxes in respect of tax periods prior to the Reorganization. Since July 1, 1995, the Company has been treated as a partnership for federal and state income tax purposes. As a result, the income of the Company has not been subject to federal or state income taxation. The members of Franchise Mortgage LLC (ICII and FLRT, Inc.) are liable for individual federal and state income taxes on their allocated portions of the Company's taxable income. The Company's status as an LLC will be automatically terminated as a result of the Reorganization. The Company has agreed to indemnify each of ICII and FLRT, Inc. for any federal or state income taxes, including penalties and interest thereon, imposed by any taxing authority with respect to, for, or fairly attributable to the operations of Franchise Mortgage LLC for the period from July 1, 1995 through the effective date of this Offering. Notwithstanding the foregoing, each of ICII and FLRT, Inc. has agreed to indemnify the Company for all taxes, including penalties and interest thereon, resulting from any determination made by a taxing authority that Franchise Mortgage LLC should be determined for tax purposes to be an association taxable as a corporation and only to the extent that such taxes pertain to the income of Franchise Mortgage LLC as originally reported on its income tax return for the period in question and solely to the extent of any LLC distributions made by Franchise Mortgage LLC to ICII and FLRT, Inc. ANTITAKEOVER PROVISIONS MAY DETER OR LIMIT CHANGES IN MANAGEMENT AND OWNERSHIP OF THE COMPANY Certain provisions of Delaware law and the Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") of the Company may make it more difficult or expensive for a third party to acquire, or discourage a third party from attempting to acquire control of the Company. Specifically, the Company's Certificate and Bylaws will prohibit stockholder action by written consent and limit the ability of stockholders to call special meetings. Also, the Board of Directors of the Company has the power to issue "blank check" preferred stock (the "Preferred Stock") with rights senior to the Common Stock without approval by the stockholders of the Company. The Preferred Stock may be issued from time to time with such designations, rights, preferences and privileges as the Board of Directors may determine and may adversely affect the rights of the Common Stock. See "Description of Capital Stock--Certain Provisions of Delaware General Corporation Law." NO ASSURANCE OF ACTIVE TRADING MARKET FOR COMMON STOCK Prior to this Offering, there has been no public market for the Common Stock of the Company. Although the Company intends to apply for quotation of the Common Stock on the Nasdaq National Market, there can be no assurance that an active public trading market for the Common Stock will develop after the Offering or that, if developed, it will be sustained. The public offering price of the Common Stock offered hereby has been determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the price at which the Common Stock will trade after the Offering. See "Underwriting." Consequently, there can be no assurance that the market price for the Common Stock will not fall below the initial public offering price. POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK The market price of the Common Stock may experience fluctuations that are unrelated to the Company's operating performance. In particular, the price of the Common Stock may be affected by general market price movements as well as developments specifically related to the commercial finance industry such as, among other 25 things, interest rate movements. In addition, the Company's operating income on a quarterly basis is significantly dependent upon the successful completion of the Company's loan securitizations and whole loan sales in the market, and the Company's inability to complete significant loan sale transactions in a particular quarter may have a material adverse impact on the Company's results of operations for that quarter and could, therefore, negatively impact the price of the Common Stock. The Company may increase its capital by making additional private or public offerings of its Common Stock, securities convertible into its Common Stock or debt securities. The effect of such offerings, the timing of which cannot be predicted, may be the dilution of the book value or earnings per share of the Common Stock outstanding, if the Company issues or plans to issue additional shares at a price below the then net tangible book value per share of the Company's Common Stock. Such an event may result in the reduction of the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF THE COMPANY'S COMMON STOCK The sales of substantial amounts of the Company's Common Stock in the public market or the prospect of such sales could materially and adversely affect the market price of the Common Stock. Upon completion of this Offering, the Company will have outstanding 27,200,000 shares of Common Stock. The 8,750,000 shares of Common Stock offered hereby will be immediately eligible for sale in the public market without restriction beginning on the date of this Prospectus. The remaining 18,450,000 shares of Common Stock are restricted in nature and are saleable to the extent permitted for "affiliates" pursuant to Rule 144 under the Securities Act. The Company and the Selling Stockholders have agreed that they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, sell, transfer, or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date.See "Shares Eligible for Future Sale" and "Underwriting." Additionally, it is expected that stock options for 1,200,000 shares of Common Stock will be granted to certain employees, officers and directors of the Company on the date of this Offering at a per share exercise price equal to the initial public offering price, not more than 20% of which, except in the event of a change of control of the Company, will be exercisable on that date which is one year from the date of this Offering. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 Shares. The Company intends to register under the Securities Act shares reserved for issuance pursuant to the Stock Option Plan. The Company has entered into a registration rights agreement (the "ICII Registration Rights Agreement") pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. has certain piggyback registration rights with respect to a demand registration statement initiated by ICII concerning shares of the Company's Common Stock held by ICII; provided however that for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, or in the event that Mr. Knyal's employment is terminated by the Company without cause or by Mr. Knyal for good reason (as defined in his employment agreement), FLRT, Inc. shall have registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. See "Management--Executive Compensation--Employment Agreement." 26 IMMEDIATE AND SUBSTANTIAL DILUTION The anticipated initial public offering price is substantially higher than the book value per outstanding share of the Common Stock. Purchasers of the Common Stock will experience immediate and substantial dilution in net tangible book value of $13.65 per share (based upon an assumed initial public offering price of $17.00 per share) per share of Common Stock from the initial public offering price per share of Common Stock. See "Dilution." ABSENCE OF DIVIDENDS Following the completion of the Offering, the Company intends to retain earnings to finance the growth and development of its business. Accordingly, the Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. 27 THE REORGANIZATION The Company's predecessor, FLRT, Inc. (formerly Franchise Mortgage Acceptance Corporation), was incorporated by Wayne L. Knyal as a California corporation in April 1991 and was wholly owned by him at that time. FLRT, Inc. and certain individuals formed a limited partnership for the purpose of originating and securitizing franchise loans. As the general partner of such limited partnership, FLRT, Inc. owned the sole rights to service such loans (the "FLRT Servicing Contracts"). In March 1993, Mr. Knyal entered into a joint venture with Greenwich Capital Financial Products, Inc. ("Greenwich") pursuant to which Mr. Knyal became the president of the Franchise Mortgage Acceptance Company division (the "FMAC Division") of Greenwich. Between March 1993 and June 1995, the Company originated and securitized franchise loans through the FMAC Division. However, FLRT, Inc. retained all rights to the FLRT Servicing Contracts. On June 30, 1995, ICII acquired from Greenwich certain assets of the FMAC Division, including all of Greenwich's rights under certain servicing contracts entered into by the FMAC Division (the "FMAC Servicing Contracts") and a $410,000 obligation owed by Mr. Knyal to Greenwich (see "Certain Transactions"). The FMAC Servicing Contracts pertain to the servicing of franchise loans that were previously securitized by Greenwich through the FMAC Division and other franchise loans owned by Greenwich and not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Mr. Knyal for the formation of Franchise Mortgage LLC. In connection with the acquisition, Franchise Mortgage LLC or its affiliates assumed certain liabilities related to the FMAC Servicing Contracts and Greenwich agreed to act as Franchise Mortgage LLC's exclusive agent in connection with the securitization of franchise loans for a period of 24 months. Franchise Mortgage LLC was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66.7% ownership interest in Franchise Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33.3% ownership interest in Franchise Mortgage LLC, Knyal caused FLRT, Inc., to contribute to Franchise Mortgage LLC all of its rights under the FLRT Servicing Contracts. Immediately prior to this Offering, Franchise Mortgage LLC will merge into Franchise Mortgage Acceptance Company, a Delaware corporation which was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC (the "Reorganization"). Although Franchise Mortgage Acceptance Company has been organized, it has not commenced operations and has no assets, liabilities or contingent liabilities. As a result of the Reorganization, the historical financial statements of Franchise Mortgage LLC will become those of Franchise Mortgage Acceptance Company; for this reason, separate financial statements of Franchise Mortgage Acceptance Company are not presented herein. As a result of the Reorganization, immediately prior to this Offering ICII will own 66.7% and FLRT, Inc. will own 33.3%, respectively, of the outstanding shares of Common Stock of Franchise Mortgage Acceptance Company. Mr. Knyal currently beneficially owns 85% of the Common Stock of the Company held by FLRT, Inc. Since July 1, 1995, the Company has been treated as a partnership for federal and state income tax purposes. As a result, the income of the Company has not been subject to federal or state income taxation. The members of Franchise Mortgage LLC (ICII and FLRT, Inc.) are liable for individual federal and state income taxes on their allocated portions of the Company's taxable income. The Company's status as an LLC will be automatically terminated as a result of the Reorganization. The Company has agreed to indemnify each of ICII and FLRT, Inc. for any federal or state income taxes, including penalties and interest thereon, imposed by any taxing authority with respect to, for, or fairly attributable to the operations of Franchise Mortgage LLC for the period from July 1, 1995 through the effective date of this Offering. Notwithstanding the foregoing, each of ICII and FLRT, Inc. has agreed to indemnify the Company for all taxes, including penalties and interest thereon, resulting from any determination made by a taxing authority that Franchise Mortgage LLC should be determined for tax purposes to be an association taxable as a corporation and only to the extent that such taxes pertain to the income of Franchise Mortgage LLC as originally reported on its income tax return for the period in question and solely to the extent of any LLC distributions made by Franchise Mortgage LLC to ICII and FLRT, Inc. 28 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 5,312,500 shares of Common Stock offered by the Company (after deducting the estimated underwriting discount and offering expenses payable by the Company), are estimated to be $83.5 million. The Company intends to apply the net proceeds from this Offering (i) to repay demand indebtedness owed to ICII ($10.0 million was owed to ICII as of June 30, 1997 at an interest rate of 12% per annum; amounts owed to ICII will increase by an amount currently estimated to be $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) to fund the Final LLC Distribution), (ii) to fund future loan and lease originations and equity investments and (iii) for general corporate purposes. Prior to the Reorganization, the Company's excess liquidity needs were funded by ICII. Excess liquidity needs of the Company have primarily included the haircut on loan originations and investments in certain equity ownership interests. Prior to their eventual use, the net proceeds will be invested in high quality, short-term investment instruments such as short-term corporate investment grade or United States Government interest-bearing securities. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. LLC DISTRIBUTIONS Since July 1, 1995, the Company has been treated as a partnership for federal and state income tax purposes. As a result, the income of the Company has not been subject to federal and state income taxation. The members of Franchise Mortgage LLC (ICII and FLRT, Inc.) are liable for individual federal and state income taxes on their allocated portions of the Company's taxable income. The Company's status as an LLC will be automatically terminated as a result of this Offering. For the six months ended June 30, 1997 and the six months ended December 31, 1995, the Company distributed approximately $6.3 million and $3.8 million, respectively, to its members which distributions were funded with cash on hand and borrowings. This amount represents a portion of the Company's earnings through June 30, 1997. The Company will make the Final LLC Distribution currently estimated to be $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) immediately prior to the completion of this Offering, such payment will be funded with a short term loan from ICII repayable with a portion of the net proceeds of this Offering. See "Use of Proceeds." Purchasers of Common Stock in the Offering will not receive any portion of the Final LLC Distribution. Following termination of its status as an LLC, the Company will be subject to federal and state corporate income taxation. See "Capitalization" and Notes 3, 4 and 14 of Notes to Financial Statements. DIVIDEND POLICY Except as described herein under "LLC Distributions," the Company has never paid any cash dividends on its Common Stock. The Company intends to retain all of its future earnings to finance its operations and does not anticipate paying cash dividends in the foreseeable future. Any decision made by the Company's Board of Directors to declare dividends in the future will depend upon the Company's future earnings, capital requirements, financial condition and other factors deemed relevant by the Company's Directors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 29 DILUTION The pro forma net tangible book value of the Company's Common Stock at June 30, 1997 was approximately $7.5 million or $0.34 per share. Pro forma net tangible book value per share represents total tangible assets reduced by the amount of total liabilities, divided by the number of shares of Common Stock outstanding, after giving effect to (i) the Reorganization, (ii) the Final LLC Distribution of $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) and repayment thereof with a portion of the net proceeds of this Offering (see "LLC Distributions") and (iii) the recording by the Company of deferred income taxes as if the Company were treated as a C Corporation at June 30, 1997, and the reclassification of members' capital to additional paid-in capital in connection therewith. After giving effect to the sale by the Company of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $17.00 per share (after deducting the estimated underwriting discount and offering expenses), the pro forma as adjusted net tangible book value of the Company at June 30, 1997 would have been $91.0 million or $3.35 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $3.01 per share to existing stockholders and an immediate dilution of $13.65 per share to new investors purchasing shares in this Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.................. $17.00 Pro forma net tangible book value per share as of June 30, 1997.......................................................... $0.34 Increase per share attributable to new investors............... 3.01 ----- Pro forma as adjusted net tangible book value per share after this Offering................................................... 3.35 ------ Dilution per share to new investors.............................. $13.65 ======
The following table summarizes, on a pro forma basis as of June 30, 1997, after giving effect to the adjustments set forth above, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share of Common Stock paid by the existing stockholders and by the new investors in this Offering:
SHARES OWNED AFTER THE OFFERING TOTAL CONSIDERATION ------------------ -------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing stockholders..... 18,450,000 67.8% $ 12,080,000 7.5% $0.66 New investors............. 8,750,000 32.2 148,750,000 92.5 17.00 ---------- ----- ------------ ----- Total................... 27,200,000 100.0% $160,830,000 100.0% ========== ===== ============ =====
30 CAPITALIZATION The following table sets forth the capitalization of the Company (i) on an actual basis as of June 30, 1997 (when the Company was an LLC), (ii) on a pro forma basis to reflect (A) the Reorganization, (B) the Final LLC Distribution of $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) immediately prior to the completion of this Offering, such amount to be funded with a short term loan from ICII (see "LLC Distributions") and (C) the recording by the Company of $7.0 million of deferred income taxes as if the Company were treated as a C Corporation at June 30, 1997 and the reclassification of members' capital to additional paid-in capital in connection therewith and (iii) on a pro forma as adjusted basis to give effect to the issuance and sale of the shares of Common Stock offered by the Company at an assumed initial public offering price of $17.00 per share (after deducting the estimated underwriting discount and offering expenses payable by the Company) and the anticipated applications of the net proceeds therefrom. This table should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere in this Prospectus.
AT JUNE 30, 1997 -------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED(1) -------- -------- -------------- (DOLLARS IN THOUSANDS) Borrowings.................................... $195,922 $195,922 $195,922 Payable to ICII............................... 9,997 12,997 -- -------- -------- -------- Total borrowings............................ 205,919 208,919 195,922 Members' equity(2)............................ 22,098 -- -- Stockholders' equity: Preferred Stock, $.001 par value; 10,000,000 shares authorized; none issued and outstanding actual, pro forma and pro forma as adjusted................................ -- -- -- Common Stock, $.001 par value; 100,000,000 shares authorized(3); no shares issued and outstanding actual; 21,887,500 shares issued and outstanding, pro forma; 27,200,000 shares issued and outstanding, pro forma as adjusted...................... -- 22 27 Additional paid-in capital.................. -- 12,058 95,589 -------- -------- -------- Total stockholders' equity................ -- 12,080 95,616 -------- -------- -------- Total capitalization...................... $228,017 $220,999 $291,538 ======== ======== ========
- -------- (1) After deducting the estimated underwriting discount and offering expenses payable by the Company, and assuming no exercise of the Underwriters' over-allotment option. (2) Members' equity consists of approximately $5.8 million of members' capital and $16.3 million of retained earnings. (3) Excludes shares reserved for issuance pursuant to the Company's Stock Option Plan. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. Options to acquire 1,200,000 shares are expected to be granted to employees, officers and directors of the Company at the effective date of this Offering at a per share exercise price equal to the initial public offering price. See "Management--Stock Options." 31 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) The selected statement of operations data for the six months ended June 30, 1997, the year ended December 31, 1996, the six months ended June 30, 1995 and December 31, 1995, and the year ended December 31, 1994, and the selected balance sheet data as of June 30, 1997, and December 31, 1996 and 1995, have been derived from audited financial statements of the Company which, together with the notes thereto and the related report of KPMG Peat Marwick LLP, independent certified public accountants, are included in this Prospectus. The selected statement of operations data for the six months ended June 30, 1996, and the years ended December 31, 1993 and 1992, and the selected balance sheet data as of December 31, 1994, 1993 and 1992, have been derived from the unaudited financial statements of the Company not included herein, and include all adjustments, consisting solely of normal recurring accruals, which management considers necessary for a fair presentation of such financial information for those periods. Results of operations for the six months ended June 30, 1997 are not necessarily indicative of results to be expected for the year ended December 31, 1997, or a full year. Financial information for periods ended and dates prior to July 1, 1995, represent that of the Company's predecessors.
PREDECESSOR ---------------------------------- SIX MONTHS ENDED SIX MONTHS SIX MONTHS YEARS ENDED JUNE 30, YEAR ENDED ENDED ENDED DECEMBER 31, ---------------------- DECEMBER 31, DECEMBER 31, JUNE 30, ----------------------- 1997 1996 1996 1995 1995 1994 1993 1992 ------------- -------- ------------ ------------- ---------- ------- ------- ----- STATEMENT OF OPERATIONS DATA: Revenues: Gain on sales(1)....... $ 19,808 $ 12,520 $ 18,671 $ -- $ -- $ 4,052 $ 1,430 $ -- Net interest income.... 1,373 302 1,641 239 154 37 35 2 Loan servicing income.. 1,376 649 1,191 349 326 306 345 147 Other income........... -- 63 63 -- -- 68 -- -- -------- -------- -------- -------- ------- ------- ------- ----- Total revenues......... 22,557 13,534 21,566 588 480 4,463 1,810 149 -------- -------- -------- -------- ------- ------- ------- ----- Expenses: Personnel and commission............ 4,665 3,901 8,270 356 931 1,723 1,035 -- General and administrative........ 1,467 495 1,094 294 684 1,804 2,952 306 Other.................. 2,462 1,375 2,878 597 776 1,664 1,718 -- -------- -------- -------- -------- ------- ------- ------- ----- Total expenses......... 8,594 5,771 12,242 1,247 2,391 5,191 5,705 306 -------- -------- -------- -------- ------- ------- ------- ----- Net income (loss)....... $ 13,963 $ 7,763 $ 9,324 $ (659) $(1,911) $ (728) $(3,895) $(157) ======== ======== ======== ======== ======= ======= ======= ===== Pro forma earnings data(2): Net income as reported.............. $ 13,963 $ 7,763 $ 9,324 Pro forma income taxes................. 5,935 3,366 3,873 -------- -------- -------- Pro forma net income... $ 8,028 $ 4,397 $ 5,451 ======== ======== ======== Pro forma net income per share(3).......... $ 0.37 $ 0.20 $ 0.25 ======== ======== ======== Supplemental pro forma earnings data(2): Net income as reported.............. $ 13,963 Establishment of deferred tax liability......... 7,018 -------- Supplemental pro forma net income............ $ 6,945 ======== Supplemental pro forma net income per share(3).............. $ 0.32 ======== AS OF JUNE 30, 1997 AS OF DECEMBER 31, ---------------------- ------------------------------------------------------ PREDECESSOR --------------------------- PRO FORMA (4) ACTUAL 1996 1995 1994 1993 1992 ------------- -------- ------------ ------------- ---------- ------- ------- BALANCE SHEET DATA: Cash and cash equivalents ........... $ 15 $ 15 $ -- $ -- $ 102 $ 205 $ 1 Securities available for sale................... 2,581 2,581 39,349 -- 9,541 5,025 -- Loans and leases held for sale............... 208,014 208,014 98,915 181,254 -- -- -- Retained interest in loan securitizations(5)..... 7,002 7,002 6,908 -- -- -- -- Accrued interest receivable............. 1,137 1,137 560 1,108 138 39 -- Goodwill................ 4,571 4,571 4,332 4,226 -- -- -- Other assets............ 9,636 9,636 10,112 2,460 467 862 309 -------- -------- -------- -------- ------- ------- ------- Total assets........... 232,956 232,956 160,176 189,048 10,248 6,131 310 Payable to Imperial Credit Industries, Inc.................... 12,997 9,997 17,728 -- -- -- -- Overdraft............... -- -- 171 445 -- -- -- Borrowings.............. 195,922 195,922 125,240 181,632 13,548 7,160 460 Deferred income taxes... 7,018 -- -- -- -- -- -- Other liabilities....... 4,939 4,939 2,580 3,198 1,543 3,086 70 -------- -------- -------- -------- ------- ------- ------- Total liabilities...... 220,876 210,858 145,719 185,275 15,091 10,246 530 Members' equity......... -- $ 22,098 $ 14,457 $ 3,773 $(4,843) $(4,115) $(220) ======== ======== ======== ======= ======= ======= Common stock............ 22 -- Additional paid-in capital................ 12,058 -------- Total stockholders equity................ $ 12,080 ========
32
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ---------------------------------------------- JUNE 30, 1997 1996 1995 1994 1993 1992 ------------- -------- -------- -------- ------- ------- OPERATING STATISTICS: Loan originations: Total loan originations.......... $ 285,370 $456,981 $218,742 $109,166 $29,367 $26,101 Average initial principal balance per loan.................. $ 730 $ 837 $ 706 $ 635 $ 452 $ 458 Weighted average interest rate: Fixed rate loans....... 10.70% 10.29% 10.12% 10.21% 9.48% 10.94% Variable rate loans.... 9.60% 9.34% 8.40% 8.13% -- % -- % Equipment finance originations: Total equipment finance originations.......... $ 15,247 $ 1,486 $ -- $ -- $ -- $ -- Average principal balance per financing............. $ 186 $ 149 $ -- $ -- $ -- $ -- Weighted average interest rate......... 12.08% 12.14% -- % -- % -- % -- % Total loan and lease originations:.......... $ 300,617 $458,467 $218,742 $109,166 $29,367 $26,101 Loan sales: Whole loan sales....... $ 15,349 $ -- $ -- $ -- $ -- $ -- Loans sold through securitizations(1).... 158,554 325,088 147,972 105,686 28,973 -- ---------- -------- -------- -------- ------- ------- Total................. $ 173,903 $325,088 $147,972 $105,686 $28,973 $ -- Loans and leases held in servicing portfolio (at period end)(6)..... $1,049,843 $737,176 $358,579 $180,367 $81,030 $55,164 Net charge-offs as a percentage of total servicing portfolio.... -- % -- % -- % -- % -- % -- %
- -------- (1) Gain on sale for the six months ended June 30, 1997 and 1996 and the year ended December 31, 1996 includes $18.4 million, $5.8 million and $11.9 million of cash gains, of which $2.4 million, $3.6 million and $7.8 million, respectively, represented loan fees. The gain on sale of loans for the December 1995 securitization was not recognized until the first quarter of 1996. (2) From July 1, 1995 through the closing date of the Offering, the Company qualified to be treated as a partnership for federal and state income tax purposes. Pro forma earnings data reflect the Reorganization and the income tax expense that would have been recorded had the Company not been taxed as a partnership. As a result of terminating the Company's LLC status upon completion of this Offering, the Company will be required to record a one-time non-cash charge against historical earnings for deferred income taxes. This charge will occur in the quarter ending December 31, 1997 and the year ending December 31, 1997. If this charge were recorded at September 30, 1997, the amount would have been approximately $11.1 million. This amount is expected to increase through the closing date of this Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3, 4 and 14 of Notes to Financial Statements. (3) 21,887,500 outstanding shares were used in computing pro forma and supplemental pro forma earnings per share. See Note 3 of Notes to Financial Statements. (4) Pro forma balance sheet data reflects the Reorganization, the distribution by Franchise Mortgage LLC to its members of the Final LLC Distribution of $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) immediately prior to the completion of this Offering, such amount to be funded with a short term loan from ICII repayable with a portion of the net proceeds of this Offering, the recording by the Company of deferred income taxes (see footnote (2) above), and the reclassification of members' equity to additional paid-in capital in connection therewith. See "LLC Distributions," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) See Note 8 of Notes to Financial Statements. (6) Total delinquencies, which include all loans and leases 90 or more days past due as a percentage of all loans and leases held in the Company's servicing portfolio, was 0.11% as of June 30, 1997. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's financial statements and notes thereto appearing elsewhere herein. THE REORGANIZATION The Company's predecessor, FLRT, Inc. (formerly Franchise Mortgage Acceptance Corporation), was incorporated by Wayne L. Knyal as a California corporation in April 1991 and was wholly owned by him at that time. FLRT, Inc. and certain individuals formed a limited partnership for the purpose of originating and securitizing franchise loans. As the general partner of such limited partnership, FLRT, Inc. owned the sole rights to the FLRT Servicing Contracts. In March 1993, Mr. Knyal entered into a joint venture with Greenwich pursuant to which Mr. Knyal became the president of the FMAC Division. Between March 1993 and June 1995, the Company originated and securitized franchise loans through the FMAC Division. However, FLRT, Inc. retained all rights to the FLRT Servicing Contracts. On June 30, 1995, ICII acquired from Greenwich certain assets of the FMAC Division, including all of Greenwich's rights under the FMAC Servicing Contracts and a $410,000 obligation owed by Mr. Knyal to Greenwich. See "Certain Transactions." The FMAC Servicing Contracts pertain to the servicing of franchise loans that were previously securitized by Greenwich through the FMAC Division and other franchise loans owned by Greenwich and not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Mr. Knyal for the formation of Franchise Mortgage LLC. In connection with the acquisition, Franchise Mortgage LLC or its affiliates assumed certain liabilities related to the FMAC Servicing Contracts and Greenwich agreed to act as Franchise Mortgage LLC's exclusive agent in connection with the securitization of franchise loans for a period of 24 months. Franchise Mortgage LLC was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66.7% ownership interest in Franchise Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33.3% ownership interest in Franchise Mortgage LLC, Knyal caused FLRT, Inc. to contribute to Franchise Mortgage LLC all of its rights under the FLRT Servicing Contracts. Immediately prior to this Offering, Franchise Mortgage LLC will effectuate the Reorganization whereby it will merge into Franchise Mortgage Acceptance Company, a Delaware corporation which was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC. As a result of the Reorganization, ICII will own 66.7% and FLRT, Inc. will own 33.3%, respectively, of the outstanding shares of Common Stock of Franchise Mortgage Acceptance Company. Mr. Knyal currently beneficially owns 85% of the Common Stock of the Company held by FLRT, Inc. In connection with the LLC Termination Date, the Company will make the Final LLC Distribution currently estimated to be $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) to the members of Franchise Mortgage LLC. See "LLC Distributions" and Notes 3, 4 and 14 of Notes to Financial Statements. The accompanying statements of operations and cash flows for the six months ended June 30, 1995, and the year ended December 31, 1994, are those of the Company's predecessor when it was a division of Greenwich. Revenues and interest expense appearing on such statements of operations result from assets and debt of such division accounted for separately by Greenwich. Personnel and commission expense appearing on such statements of operations apply to the employees of such division, and such expense was also accounted for separately by Greenwich. All other expenses of such division were either directly assigned or allocated to the predecessor division by Greenwich based on either actual utilization or the number of such division's employees. 34 ACCOUNTING FOR GAIN ON SALE The gain on sale of loans in a securitization is computed as cash received from securitization plus the fair value of any retained interests held from a loan securitization less the book value of the loans sold (including par value of loans, plus or minus premiums, discounts and unearned loan fees) less any reserves required to be held by a securitization trust. The fair value of retained interests in loan securitizations is computed as the present value of the estimated cash flows associated with the retained interest, using an appropriate discount factor and prepayment and credit loss assumptions. LOAN AND LEASE ORIGINATIONS The following table summarizes the Company's loan and lease originations for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992.
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------ ---------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) Loan originations: Principal balance...... $285,370 $208,221 $456,981 $218,742 $109,166 $29,367 $26,101 Number of loans........ 391 281 546 310 172 65 57 Average initial principal balance per loan.................. $ 730 $ 741 $ 837 $ 706 $ 635 $ 452 $ 458 Weighted average interest rate: Fixed rate loans....... 10.70% 10.17% 10.29% 10.12% 10.21% 9.48% 10.94% Variable rate loans.... 9.60% 9.13% 9.34% 8.40% 8.13% -- % -- % Equipment finance originations: Equipment finance balance............... $ 15,247 $ 140 $ 1,486 $ -- $ -- $ -- $ -- Number of financings... 82 1 10 -- -- -- -- Average initial balance per financing ........ $ 186 $ 140 $ 149 $ -- $ -- $ -- $ -- Weighted average interest rate......... 12.08% 11.99% 12.14% -- % -- % -- % -- % Total loan and lease originations........... $300,617 $208,361 $458,467 $218,742 $109,166 $29,367 $26,101
RESULTS OF OPERATIONS Impact of Change in Tax Status Prior to the completion of this Offering, the Company qualified to be taxed as a partnership. As such, the Company was not responsible for federal or state income taxes. As a result of the change in tax status effective with the completion of this Offering, the Company will, in future periods, provide for all income taxes at statutory rates. These factors are estimated to result in an effective tax rate for periods subsequent to the Offering of approximately 42%. However, for the three-month period in which the Offering closes, the Company will record a one-time non-cash charge for the quarter ending December 31, 1997 and for the year ending December 31, 1997 for deferred income taxes based upon the change in the Company's status to a C Corporation. If such a charge were recorded at September 30, 1997, the amount would have been approximately $11.1 million. This amount is expected to increase through the closing date for this Offering. For further information see Notes 3, 4 and 14 of Notes to Financial Statements. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 The following discussion relates to a comparison of the Company's results of operations for the six months ended June 30, 1997 compared to six months ended June 30, 1996; percentage increases in the line items discussed below for the six months ended June 30, 1997 compared to the six months ended June 30, 1996 are not expected to reach similar levels in future periods. Results of operations for the six months ended June 30, 1997 are not necessarily indicative of results to be expected for the year ended December 31, 1997, or a full year. 35
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- (IN THOUSANDS) Revenues: Gain on sale of loans.............................. $19,808 $12,520 Interest income.................................... 10,767 1,257 Interest expense................................... (9,394) (955) ------- ------- Net interest income.............................. 1,373 302 Loan servicing income.............................. 1,376 649 Other income....................................... -- 63 ------- ------- Total revenues................................... 22,557 13,534 ------- ------- Expenses: Personnel and commission........................... 4,665 3,901 Professional services.............................. 1,176 602 Travel............................................. 524 202 Business promotion................................. 316 198 Occupancy.......................................... 277 122 Goodwill amortization.............................. 169 251 General and administrative......................... 1,467 495 ------- ------- Total expenses................................... 8,594 5,771 ------- ------- Net income....................................... $13,963 $ 7,763 ======= =======
Total revenues increased 66.7% to $22.6 million for the six months ended June 30, 1997 from $13.5 million for the comparable period in 1996. During the same periods, the Company's total expenses increased 48.9% to $8.6 million from $5.8 million. As a result, the Company's net income increased 79.9% to $14.0 million for the six months ended June 30, 1997 as compared to $7.8 million for the comparable period in 1996. The increase in revenues was primarily attributable to a $7.3 million increase in gain on sale of loans. For the six months ended June 30, 1997, the Company sold approximately $158.6 million of loans in a securitization for a gain on sale of $18.8 million (of which $18.4 million was cash) as compared to $272.6 million of loans sold in two securitizations for a gain on sale of $12.5 million (of which $5.8 million was cash) for the six months ended June 30, 1996. The Company also recognized a gain on sale of $1.0 million in the six months ended June 30, 1997 from a whole loan sale of approximately $15.3 million. The increased gain on sale of loans was due to several factors, including the composition of loans in the securitization, the structure of the securitization, market conditions at the time of the securitization transaction and the fact that the Company was successful in selling all classes of securitization interests. There can be no assurance that the Company can recognize comparable gains on sale in any future period. Net interest income also contributed to the increase in revenues, increasing 354.6% to $1.4 million for the six months ended June 30, 1997 as compared to $0.3 million for the same period in 1996, primarily due to the significant increase in loans and leases held for sale which resulted from increased loan and lease originations. Additionally, loan servicing income increased 112.0% to $1.4 million for the six months ended June 30, 1997 as compared to $0.7 million for the same period in 1996. This was due to an increase in loans and leases serviced which resulted from the securitization of $325.1 million in loans from June 1996 through December 1996 with servicing rights retained by the Company. Total expenses increased 48.9% to $8.6 million for the six months ended June 30, 1997 as compared to $5.8 million for the same period of the prior year primarily due to infrastructure additions needed to fund increased loan and lease originations. Personnel expenses increased 19.6% to $4.7 million, professional services increased 95.3% to $1.2 million and general and administrative expenses increased 196.4% to $1.5 million for the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. 36 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 The following discussion relates to a comparison of the Company's results of operations for the year ended December 31, 1996, compared to the year ended December 31, 1995; percentage increases in the line items discussed below for the year ended December 31, 1996 compared to the year ended December 31, 1995 are not expected to reach similar levels in future years.
PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995(1) ----------------- -------------------- (IN THOUSANDS) Revenues: Gain on sale of loans................... $ 18,671 $ -- Interest income......................... 16,130 3,050 Interest expense........................ (14,489) (2,657) -------- ------- Net interest income................... 1,641 393 Loan servicing income................... 1,191 675 Other income............................ 63 -- -------- ------- Total revenues........................ 21,566 1,068 -------- ------- Expenses: Personnel and commission................ 8,270 1,287 Professional services................... 1,093 583 Travel.................................. 614 337 Business promotion...................... 450 158 Occupancy............................... 310 149 Goodwill amortization................... 411 146 General and administrative.............. 1,094 978 -------- ------- Total expenses........................ 12,242 3,638 -------- ------- Net income (loss)..................... $ 9,324 $(2,570) ======== =======
- -------- (1) The statement of operations for the six months ended December 31, 1995 and the predecessor statement of operations for the six months ended June 30, 1995 have been combined to show a 12 month period for the purpose of comparing to the year ended December 31, 1996. Total revenues increased 1,919.3% to $21.6 million for the year ended December 31, 1996 from $1.1 million for the year ended December 31, 1995. For the same years, the Company's total expenses increased 236.5% to $12.2 million from $3.6 million. As a result, the Company's net income increased to $9.3 million for the year ended December 31, 1996 as compared to a loss of $2.6 million for 1995. The $20.5 million increase in revenues for the year ended December 31, 1996 was primarily attributable to the sale of approximately $430.3 million of loans in securitizations, resulting in an $18.7 million gain on sale (of which $11.9 million was cash). The Company securitized $105.2 million of loans for the six months ended December 31, 1995; however, for accounting purposes, the transaction was precluded from sale treatment until the first quarter of 1996 at which time the retained interests were sold to an affiliate of ICII. Net interest income also contributed to the increase in revenues, increasing 317.6% to $1.6 million for the year ended December 31, 1996 as compared to $0.4 million for the year ended December 31, 1995, due to the significant increase in loans and leases held for sale which primarily resulted from a 108.9% increase in loan originations to $457.0 million in 1996 as compared to $218.7 million in 1995. Additionally, loan servicing income increased 76.4% to $1.2 million for the year ended December 31, 1996 from $0.7 million for the year ended December 31, 1995. This was due to the increase in loans serviced which resulted from the securitization of $167.4 million in loans in June 1996 and $105.2 million in loans in 1995, with servicing rights retained by the Company. The 236.5% increase in total expenses to $12.2 million for the year ended December 31, 1996 compared to $3.6 million for the year ended December 31, 1995 primarily resulted from the growth in operations of the Company due to the dramatic increase in loan originations. Personnel expenses increased $7.0 million or 542.6%, professional services increased $0.5 million or 87.5% and travel and business promotion expenses increased $0.6 million or 114.9% for the year ended December 31, 1996 as compared to the year ended December 31, 1995. 37 Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, 1995(1) DECEMBER 31, 1994 -------------------- ----------------- (IN THOUSANDS) Revenue: Gain on sale of loans................... $ -- $4,052 Interest income......................... 3,050 1,445 Interest expense........................ (2,657) (1,408) ------- ------ Net interest income................... 393 37 Loan servicing income................... 675 306 Other income............................ -- 68 ------- ------ Total revenue......................... 1,068 4,463 ------- ------ Expense: Personnel and commission................ 1,287 1,723 Professional services................... 583 1,057 Travel.................................. 337 340 Business promotion...................... 158 170 Occupancy............................... 149 97 Goodwill amortization................... 146 -- General and administrative.............. 978 1,804 ------- ------ Total expense......................... 3,638 5,191 ------- ------ Net loss.............................. $(2,570) $ (728) ======= ======
- -------- (1) The statement of operations for the six months ended December 31, 1995 and the predecessor statement of operations for the six months ended June 30, 1995 have been combined to show a 12 month period for the purpose of comparing to the year ended December 31, 1994. Total revenues decreased 76.1% to $1.1 million for the year ended December 31, 1995 from $4.5 million for the comparable period in 1994. Over this period, the Company's total expenses decreased 29.9% to $3.6 million from $5.2 million. As a result, the Company's net loss increased by $1.8 million to $2.6 million. Revenue decreased $3.4 million from 1994 to 1995 largely as a result of a $4.1 million decline in gain on sale of loans. In December 1995, the Company securitized and sold $105.2 million in loans. The related gain on this sale of $4.5 million was deferred for accounting purposes until the first quarter of 1996. Additionally, $44.6 million of loans originated by the Company during 1995 were retained by Greenwich at the time ICII acquired the FMAC Division assets from Greenwich. Greenwich securitized and sold such loans in October 1995. Accordingly, the gain on such sale recognized by Greenwich has not been included in the Company's 1995 revenues since such loans were not owned by the Company at the time of sale. Offsetting the decrease in gain on sale of loans was an increase in net interest income of 962.2% to $0.4 million for the year ended December 31, 1995 as compared to $37,000 for the year ended December 31, 1994, primarily due to the increase in loans held for sale which resulted from a 100.4% increase in loan originations to $218.7 million in 1995 as compared to $109.2 million in 1994. Also offsetting the decrease in gain on sale of loans was an increase in loan servicing income of 120.6% to $0.7 million for the year ended December 31, 1995 as compared to $0.3 million for 1994. The 29.9% decrease in total expenses to $3.6 million for the year ended December 31, 1995 compared to $5.2 million for the year ended December 31, 1994 primarily resulted from the reduction of parent company allocated expenses for Franchise Mortgage LLC as compared to its predecessor. 38 LIQUIDITY AND CAPITAL RESOURCES The Company requires access to short-term warehouse lines of credit and repurchase facilities in order to fund loan and lease originations pending sale or securitization of such loans and leases. At June 30, 1997, the Company had the following warehouse lines of credit and repurchase facilities, each of which was guaranteed by ICII:
INTEREST COMMITMENT PRINCIPAL LENDER EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING ------ --------------- ----- -------- ---------- ----------- (DOLLARS IN THOUSANDS) Credit Suisse First Boston December 31, 1998 Libor plus 160 to 235 basis points 7.29% $300,000 $167,447 Banco Santander June 1, 1998 Libor plus 160 basis points 7.29% 50,000 16,465 Sanwa Bank(1) September 30, 1997 Eurodollar plus 200 basis points 7.50% 15,000 12,010 -------- -------- Total...................................................................................... $365,000 $195,922 ======== ========
- -------- (1) In October 1997, the expiration date of this facility was extended to June 30, 1998, the index was reduced to Eurodollars plus 160 basis points and the commitment amount was increased to $25 million. In October 1997, the Company finalized a warehouse line of credit with Morgan Stanley for a commitment amount of $200 million, bearing interest at rates ranging from Libor plus 95 to 155 basis points, depending upon the loan product type. This warehouse line of credit is expected to provide additional financing for the Company's continued growth in loan and lease originations and it is not guaranteed by ICII. The Company is currently negotiating with a major investment bank to form a joint venture pursuant to which all loan and lease activities of the Company's Golf Finance Group would be exclusively conducted by a new entity which would be 50% owned and managed by each of the Company and the investment bank. In connection therewith, the investment bank would make available to the new entity a 12 month $100.0 million warehouse line of credit bearing interest at Libor plus 100 basis points. The Company also has a master purchase and sale agreement with Southern Pacific Thrift and Loan Association, a wholly owned subsidiary of ICII ("SPTL") to originate loans for SPTL under mutual agreement, and subject to SPTL underwriting each such loan prior to sale of such loans. Under this agreement, the Company also has the ability to repurchase loans, under mutual agreement with SPTL. There is no specified commitment by either party, and each individual sale is negotiated separately as to pricing. This agreement has no expiration date. At June 30, 1997, loans originated for SPTL (and not repurchased), totaled approximately $104.3 million. The Company does not expect to originate a significant volume of loans for SPTL under this arrangement in the future. The Company's sources of operating cash flow include: (i) loan origination income and fees; (ii) net interest income on loans held for sale; (iii) cash servicing income; (iv) premiums obtained in sales of whole loans and (v) cash proceeds from loan securitization. Cash from loan origination fees, net interest income on loans held for sale and loan servicing fees, as well as available borrowings generally provide adequate liquidity to fund current operating expenses, excluding the difference between the amount funded on loans originated and the amount advanced under the Company's current warehouse facilities (the "haircut"). Prior to the Reorganization, the Company's excess liquidity needs were funded by ICII. Excess liquidity needs of the Company have primarily included the haircut on loan originations and investments in certain equity ownership interests. The Company has no significant debt service obligations, lease payments or capital expenditures which are not covered by normal operating income. The interest rate on borrowings from ICII was fixed at 12% annually. At June 30, 1997, the outstanding balance was $10.0 million. The Company will make the Final LLC Distribution currently estimated to be $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering) immediately prior to the completion of this Offering. The Final LLC Distribution will be funded with a short 39 term loan from ICII. The Company expects to repay outstanding borrowings from ICII, including amounts to fund the Final LLC Distribution, with a portion of the net proceeds of the Offering, see "Use of Proceeds." The Company's whole loan sales and loan securitizations generally result in significant amounts of cash. Prior to the Reorganization, the excess cash flow from these transactions was used to repay borrowings from ICII. For a description of the Company's securitization activities, see "Business--Financing--Securitizations and Whole Loan Sales." For the six months ended June 30, 1997, net cash provided by operating activities was $17.1 million. This excludes cash used in net loan originations of $109.3 million, which was attributable to the Company's increased loan origination volume. For the year ended December 31, 1996, net cash provided by operating activities was $5.1 million, exclusive of cash provided by net loan origination activity of $82.3 million. For the six months ended June 30, 1997, net cash provided by investing activities was $35.8 million, which was primarily attributable to the sale of securities relating to the restructuring of the Company's 1991A securitization. For the year ended December 31, 1996, net cash used in investing activities was $49.9 million, which was primarily attributable to the purchase of securities related to the restructuring of the Company's 1991A securitization. For the six months ended June 30, 1997, net cash provided by financing activities was $56.6 million, which was primarily attributable to increased amounts of warehouse line borrowings resulting from increased loan originations during the period, offset by a $6.3 million LLC distribution to its members. For the year ended December 31, 1996, net cash used in financing activities was $37.3 million, which was primarily attributable to the repayment of bonds relating to the restructuring of the Company's 1991A securitization, offset by $73.3 million in cash provided through borrowings from ICII and warehouse lines of credit and repurchase facilities. The Company anticipates that the net proceeds from the Offering, together with cash generated from operations and funds available under its credit facilities, will be sufficient to fund its operations for at least the next 12 months if the Company's future operations are consistent with management's expectations. INFLATION The Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company's operations are monetary in nature. As a result, interest rates have a greater impact on the Company's operations' performance than do the effects of general levels of inflation. Inflation affects the Company's operations primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. During periods of significantly increasing interest rates, demand for loans may be adversely affected. TAX CONSIDERATIONS As a result of terminating its LLC status upon completion of this Offering, the Company will be required to record deferred income taxes, which relate primarily to timing differences between financial and income tax reporting of gain on sale of loans that were attributable to the periods in which it qualified to be taxed as a partnership. The recording of such deferred income taxes will result in a one-time non-cash charge against earnings as an additional income tax provision equal to the amount of the deferred income tax liability. The change by the Company from an LLC to a C Corporation is expected to have a significant adverse impact on the 40 Company's reported net income for the quarter ending December 31, 1997 and the year ending December 31, 1997. As of June 30, 1997, the amount of the Company's deferred income taxes to be recorded would have been approximately $7.0 million although management believes that such amount will increase through the closing date of this Offering. See Notes 3, 4 and 14 of Notes to Financial Statements. ACCOUNTING CONSIDERATIONS The Company adopted a new accounting standard on January 1, 1997, and will adopt additional accounting and disclosure standards on either December 31, 1997, or January 1, 1998. For a description of these standards and the effect, if any, adoption has had or will have on the Company's financial statements, see Note 4 of Notes to Financial Statements. 41 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. GENERAL The Company is a specialty commercial finance company engaged in the business of originating and servicing loans and equipment leases to small businesses, with a primary focus on established national and regional franchise concepts. Since commencing business in 1991, the Company believes it has become a leading lender to national and regional quick service restaurant ("QSR") franchisees, and the Company has developed a growing presence in the casual dining sector. More recently, the Company has expanded its focus to include retail energy licensees (service stations, convenience stores, truck stops, car washes and quick lube businesses) and golf operating businesses (golf courses and golf practice facilities). The Company originates long-term fixed and variable rate loan and lease products and sells such loans and leases either through securitizations or whole loan sales to institutional purchasers on a servicing retained basis. The Company believes that its loan and lease products are attractive investments to institutional investors because of the credit profile of its Borrowers, relatively long loan and lease terms, call protection through prepayment penalties and appropriate risk- adjusted yields. The Company also periodically makes equity investments or receives contingent equity compensation as part of its core lending and leasing business. The Company originated loans and leases through 11 marketing offices in nine states at June 30, 1997. From the Company's inception through June 30, 1997, it funded over $1.2 billion in loans and leases and at June 30, 1997, had a servicing portfolio of $1.1 billion. The Company's loan and lease originations grew to $458.5 million in 1996 from $218.7 million in 1995 and to $300.6 million for the six month period ended June 30, 1997 from $208.4 million for the comparable period in 1996. At June 30, 1997, the Company's average initial loan balance was $730,000 and the percentage of its loans and leases that were 90 days or more delinquent was 0.1%. The Company's focus is to provide funding to industries that have been historically underserved by banks and other traditional sources of financing. This focus requires the Company to develop specific industry expertise in the sectors which it serves in order to provide individualized financial solutions for its Borrowers. The Company believes that its industry expertise and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. The Company's Borrowers are generally small business operators, most of whom are independent, multi-unit franchisees, with proven operating experience and a history of generating positive operating cash flows. The Company relies primarily upon its assessment of enterprise value, based in part on independent third party valuations, and historical operating cash flows to make credit determinations, as opposed to relying solely on the value of real estate and other collateral. HISTORY In 1991, the Company began making loans to franchisees of Taco Bell Corp. In 1992 and 1993, other national QSR concepts, such as Burger King, Wendy's, Pizza Hut, KFC and Hardee's, were approved. The Company's principal loan products at that time were fixed rate, 15-year, fully amortizing loans. In 1995, the Company began making loans to casual dining concepts such as TGI Friday's, Applebee's and Denny's and offering its Borrowers adjustable rate loans. Also in 1995, the Company began offering development and construction ("DEVCO") loans to its more experienced Borrowers to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. In 1996, the Company expanded its approved concepts to include strong regional restaurants such as Carl's, Jr., Church's Chicken and Golden Corral and launched its Golf Finance Group to provide financing to owners and operators of golf courses and golf practice facilities. The Equipment Finance Group also commenced activities in 1996 to provide equipment loans and leases to the sectors which the Company serves. In February 1997, the Company created its Retail Energy Finance Group to make loans to businesses that distribute retail petroleum products. 42 BUSINESS STRATEGY The Company's goal is to become a leading national small business lender in each of its target markets. The Company's growth and operating strategy is based on the following key elements: Growth in Existing Sectors. The Company plans to replicate its success in the restaurant sector in other business sectors that it has entered more recently, such as retail energy and golf, through focused product development, customer service and support. The Company forms specialized teams for each sector to assess customer needs, generate customer loyalty and enhance service and support. Management believes that its industry leadership position, relationships with major Borrowers, franchisors and vendors, and expertise within sectors will assist the Company in increasing its market share. Controlled Expansion into New Sectors. Management believes that substantial opportunities exist to extend the Company's expertise into other business sectors. The Company believes that its experience in lending to restaurant franchisees has allowed it to develop a template for efficiently originating and servicing loans and leases in other industry sectors. The Company's philosophy is to provide complete business solutions to identified industries by developing strategies and financial products which are based on industry characteristics and each Borrower's specific needs. The Company carefully reviews industry data, seeking business sectors with a combination of large funding requirements, proven cash flow generating capabilities, standardized operations, a scarcity of long-term, fixed rate funding sources and characteristics attractive to secondary market investors. Maintenance of Credit Quality. The Company's delinquency and loss experience has been extremely low, due in part to lending to experienced operators, its detailed industry knowledge, active oversight of its existing servicing portfolio, strict underwriting criteria and the Company's ability to locate qualified replacement Franchisees/Borrowers to assume delinquent loans. At June 30, 1997, the Company had only two loans, representing 0.1% of all loans and leases held in the Company's servicing portfolio as of such date, 90 days or more delinquent and, from its inception in April 1991 through June 30, 1997 had experienced no net charge offs. Efficient Secondary Market Execution. The Company is committed to maintaining effective secondary market execution on loans and leases that it originates and sells. The Company believes that the favorable execution it has experienced to date is primarily the result of the attractive terms and the credit quality of the loans and leases that it originates. Of the $37.5 million in gain on sale from securitizations recognized by the Company since January 1, 1996, $30.3 million was comprised of cash received by the Company at the time of securitization and not the present value of anticipated cash flows on retained interests. As a result, the Company has reduced its exposure to the risks associated with holding large amounts of such retained interests on its balance sheet. From the beginning of 1996 through June 30, 1997, the Company completed three securitizations and a whole loan sale totaling $483.6 million and $15.3 million, respectively. In all such transactions, the Company has retained the right to service the sold or securitized loans. Diversification of Revenue Sources. Management is committed to developing a diversified revenue base to reduce revenue volatility and enhance profitability. The Company continually monitors and adjusts its loan and lease products and securitization structures to improve the stability of its cash flows. Revenue sources include loan and lease origination points and fees, interest income earned prior to the sale of the loans and leases, whole loan and lease sale profits, securitization profits, loan and lease servicing fees and equity investment returns. INDUSTRY BACKGROUND Franchising A franchise is a business operating pursuant to a franchise agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by a franchisor and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services. Although the term franchise is typically associated with fast food restaurants, a multitude of 43 franchise businesses exist, offering a variety of products and services such as hotels and motels, automotive parts, and cleaning services. Most franchise concepts offer franchisees training and diverse levels of ongoing support and oversight. Business format franchisees provide franchisees with a comprehensive operating system, whereas product distribution arrangements primarily license a trademark and/or logo. According to the International Franchise Association, franchises comprise one out of every 12 businesses in the United States. The Franchise Trade Association has estimated that by the year 2000 over 50% of retail sales, or approximately $1 trillion, will be generated by franchises. The Food Service Sector According to the Chain Store Guide (the "Guide"), using National Restaurant Association (the "NRA") data, in 1996 the food service industry employed more than nine million people and had estimated sales of $307.6 billion. According to the Guide, full service restaurants, QSRs, commercial cafeterias, social caterers and ice-cream and frozen yogurt stands ("Eating Places") represented an estimated $207.8 billion, or 67.6%, of such food service sales in 1996 and are expected to grow by 4.5% to $217.2 billion in 1997. The QSR segment of Eating Places are those restaurants that offer fast food or take-out, without table service. Most QSR establishments offer food products that lend themselves to quick service, such as pizza, chicken, hamburgers and similar food items. Full service restaurants typically represent casual and fine dining restaurants that accept major credit cards, offer table service and provide full liquor service. The QSR segment represented an estimated $98.4 billion, or 47.3%, of all Eating Places sales in 1996, and is expected to grow by 5.2% to $103.5 billion in 1997. The full service segment represented an estimated $100.3 billion, or 48.2%, of all Eating Places sales in 1996, and is expected to grow by 4.1% to $104.4 billion in 1997. Development and maturation of the QSR segment of the food service industry has led to a consolidation of restaurant operators. Increased competition has decreased profit margins which has contributed to the emergence of increasingly large and professionally managed restaurant operating companies. Large operators typically have greater economies of scale and better management systems which allow them to compete more effectively. As size and diversification become increasingly important, many franchise restaurant operators are becoming affiliated with multiple restaurant systems. The Company believes that the maturation of the fast food segment is likely to result in greater stability for this industry segment. Chain restaurant consolidation has also created lending opportunities for the Company arising from the demand by restaurant operators for acquisition financing. The Retail Energy Sector The United States retail petroleum sector is composed of service stations, convenience stores, and other related retail establishments which provide branded and independent fuel for motor vehicle consumption. According to the National Petroleum News ("NPN"), retail petroleum sector sales for the year ended December 31, 1995 approximated $300 billion or 4% of gross domestic product. According to NPN's latest count, the service station sector included approximately 188,000 units. The Company believes that these units are generally well located as a result of the early origins of these units relative to convenience stores and other retail merchants. According to NPN, at December 31, 1996, there were approximately 94,000 domestic convenience stores of which approximately 73% distributed fuel. According to the NPN, convenience store industry sales grew 5.4% in 1996 as gasoline volume, fast food sales and merchandise sales per customer increased due to retailers' focus on customer service needs. According to the NPN, gasoline demand grew 1.8% in 1996 to 123.2 billion gallons and is projected to increase 1.5% in 1997. The strength in demand reflects United States economic growth, the relaxation of speed limits, the increase in the total United States vehicle fuel consumption and the growing popularity of sport utility vehicles and minivans. The Company believes the retail energy sector is currently underserved by traditional lenders. Increasing sales and profit margins for gasoline retailers, the perceived diminished risk of lender liability for environmental clean-up costs and heightened profitability in multi-profit service stations/convenience store combinations should increase demand for financing. In addition, the Company believes that service station consolidation has also created lending opportunities arising out of the demand for acquisition financing. 44 The Golf Sector According to The National Golf Foundation ("NGF"), golf course development activity reached an eight year high in 1995. In 1995, 468 new golf courses opened representing the largest number of initial course openings in one year. Also, according to NGF, golf course construction set a record during 1995 with 850 courses under construction, 442 of which were completed in 1996. Additionally, the NGF believes that, there were 808 courses in the planning stages in 1996. Of the courses under construction in 1996, as many as 450 courses were scheduled to open in 1997. NGF defines a golf facility as a facility with at least one nine-hole course and that may include different types of courses, such as regulation-length courses, executive-length courses, and par-3 length courses. In 1996, there were a total of 30,044 golf facilities in the United States including 15,703 golf courses of which 70% were classified as public access. In the United States, golf courses handled approximately 477 million rounds in 1996. The number of rounds played has increased by 6.5% since 1975. Currently, 26% of golfers are over 50 years of age, with 48% between the ages of 18 and 39. NGF statistics show that golfers in their 50's play three times as much as golfers between the ages of 18 and 39. The number of rounds played should significantly increase as the baby-boomer segment of the population heads toward retirement age. In addition, for the past 10 years, the game has added approximately two million beginners a year, with the 18-29 age group producing the largest single sub-segment. The Company believes that the golf sector has the following similar characteristics to other sectors that the Company currently lends to: positive cash flow from operations, golf course and facility ownership is broad and diverse geographically, and the industry is underserved by traditional lenders. Increased golf usage has driven demand for loans for renovation and construction, while increased dollars spent at golf courses has driven demand for loans for golf course and facilities acquisitions. LOAN ORIGINATIONS Type of Loan Products The Company offers permanent loans, DEVCO loans (including acquisition loans) and equipment loans and leases to those sectors in which it operates. Permanent loans. Substantially all of the Company's permanent loans are self-amortizing long-term fixed or adjustable rate loans provided for purposes other than development and construction of business units. Permanent loans have a maximum term and amortization of up to 15 years. Fixed rate loans are tied to the U.S. Treasury rates plus a spread while adjustable rate loans are tied to the London interbank offered rate ("LIBOR") plus a spread and generally reprice on a monthly basis. As a cash flow lender, the Company maintains flexibility to tailor a loan program to fit the specific needs of its Borrowers. The terms of the loans vary in part based on the collateral pledged. The Company focuses on the cash flow of the subject business, the continuing ability of the Borrower to operate the business unit in a cash positive manner and the Borrower's ability to repay the loan since neither the real property mortgage nor the franchise or license agreement is generally assignable to secure the loan. In determining enterprise value, in addition to a Borrower's credit profile, the Company focuses on the following factors: . Business Profitability. The Company seeks to lend to Borrowers whose subject business operations provide adequate cash flow to support loan payments. . Strength of Business Concept. The Company emphasizes loans to Borrowers whose subject business has significant national or regional market penetration. . Operating Experience. The Company emphasizes loans to Borrowers having ownership of multiple business units with strong industry backgrounds. . Site Considerations. The Company focuses on a business' location, physical condition and environmental characteristics. 45 Location. The Company lends to Borrowers with business units located in high traffic areas that it believes exhibit strong retail property fundamentals. Physical Condition. The Company loans to Borrowers investing in well- maintained existing properties or in newly constructed properties. Each group uses third party appraisal professionals who conduct physical site inspections of each subject property. Environmental. The Company engages outside professionals to independently conduct Phase I environmental assessments for new financings. Phase II environmental assessment reports are also prepared, if recommended by the Phase I assessments. The Company will not finance a business if a Phase II report indicates significant environmental concerns. . Collateral. Loans are partially secured by taking a first lien on all available furniture, fixtures and equipment. Where the available collateral includes a building on a ground lease, the Company requires an assignment of the lease in addition to a security interest on the building and on the furniture, fixtures and equipment. If the collateral includes owned real estate, the Company also obtains a first mortgage on the property. Borrowers with additional collateral are generally afforded better credit terms. Depending on the collateral provided, loan to value ratios, up front fees and interest rates are adjusted to properly reflect credit risk. Development and Construction Loans. DEVCO loans are offered to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. DEVCO loans are an interest-only short-term product. Fixed rate DEVCO loans are tied to U.S. Treasury rates, while adjustable rate DEVCO loans are tied to LIBOR. The loans generally include up front points and exit fees. DEVCO loans generally have an 18 month maturity which is comprised of two terms. The Borrower must receive a Certificate of Occupancy ("CO") within 12 months of the date of the loan. If a CO is received, the term of the loan is extended for six months to complete the construction or acquisition phase. If a CO is not received after 12 months, the loan is called. After 18 months the Borrower can apply for a permanent loan which will be re-underwritten. The Company believes that DEVCO loans create a pipeline for the Company's permanent loans. As a result of fee incentives built into the DEVCO products, Borrowers generally look to convert into permanent loans on the maturity date. DEVCO loans are secured by the real property mortgage or leasehold interest as well as all available furniture, fixtures and equipment. When used as a construction or development loan, a DEVCO loan provides a seasoning period to allow the Borrower to construct a business unit before converting to a permanent loan. When used as an acquisition or conversion loan, the interest only period of a DEVCO loan gives the Borrower the opportunity to improve business unit performance and achieve a higher cash flow before locking into long-term financing. Equipment Loans and Leases. The Company provides equipment financing to experienced owners and operators in those sectors in which the Company operates. Equipment loans are fixed rate products tied to U.S. Treasury rates. These loans have a maximum term of up to 10 years. In addition, the Company offers standard equipment leases. Substantially all of the leases originated by the Company are "direct financing" leases in that they transfer substantially all of the benefits and risks of equipment ownership to the lessee. Because the Company's leases are classified as direct financing leases, the Company records total estimated unguaranteed residual value and initial direct costs as the gross investment in the lease. The difference between the gross investment in the lease and the cost of the leased equipment is defined as "unearned income." Interest income is recognized over the term of the lease by amortizing the unearned income and deferred initial direct costs using the interest method. 46 Lending Groups The Company's focus at inception was to provide secured financing to franchisees of Taco Bell Corp. After establishing an infrastructure and credit expertise, the Company began expanding its QSR concepts, loaning to casual dining concepts and moving into other related lending sectors such as retail energy, golf and equipment finance. The Company carefully reviews industry data seeking sectors with a combination of large capital requirements, proven cash flow generating capabilities, standardized operations, a scarcity of long term funding sources and characteristics attractive to secondary market investors. This business formula provides the template to identify, test and determine the potential value of entering into new sectors. The Company's lending groups currently include Restaurant Finance, Retail Energy Finance, Golf Finance and Equipment Finance. Each of these groups includes a core group of professionals who are experts in the sector and can target selected Borrowers in such sector. See "Risk Factors--Concentration on Restaurant, Retail Energy and Golf Sectors May Expose the Company to Concept Failures, Industry Cycles, Environmental Liabilities and Other Industry Specific Risks." Restaurant Finance Group. The Restaurant Finance Group was organized in 1991 and originally focused on providing loans to national and regional franchise concepts such as Taco Bell, Burger King, Hardee's, KFC, Wendy's and Pizza Hut. In 1995, the Company began making loans to casual dining concepts such as TGIF, Applebee's, and Denny's and other successful casual dining concepts. In 1996, the Company expanded the approved concepts to include strong regional restaurants such as Carl's, Jr., Church's Chicken and Golden Corral. As of June 30, 1997, the Restaurant Finance Group originated loans through a network of eight offices in seven states. For the six month period ended June 30, 1997 this group originated $252.0 million of restaurant loans, including loans to Borrowers that represent franchise concepts such as Taco Bell, Burger King, KFC and Wendy's. From the date of its formation through September 30, 1997, the Restaurant Finance Group provided approximately $1.2 billion in financing. The Restaurant Finance Group, which is headquartered in Denver, Colorado, includes marketing, processing, underwriting, credit, closing and administrative professionals with extensive experience in QSR and casual dining restaurant finance. The marketing professionals generate loans on a national basis which are processed and underwritten at the Company's headquarters or in one of the Company's five regional offices located in Greenwich, Atlanta, Dallas, Newport Beach and Los Angeles. Credit committee approval is obtained in these regional offices unless the transaction exceeds regional credit authority in which case approval must be obtained from the Company's Senior Credit Committee. See "--Underwriting." Franchisees utilize restaurant loans for a variety of purposes, including the acquisition, development and construction of new franchise units, to refinance existing franchise debt, to provide business expansion and remodeling proceeds and for working capital. Loans offered are fixed and adjustable loans typically ranging in size from $200,000 to $1.2 million with terms of up to 15 years. Generally, the Company's restaurant finance borrowers own three or more units, have three or more years of ownership in the concept, or have an equivalent ownership tenure in a different major fast food or casual dining concept. 47 The following table sets forth the Company's QSR and casual dining loan originations for the periods indicated by franchise concept.
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 -------------------------------- -------------------------------- -------------------------------- NUMBER PRINCIPAL % OF NUMBER PRINCIPAL % OF NUMBER PRINCIPAL % OF OF LOANS AMOUNT TOTAL OF LOANS AMOUNT TOTAL OF LOANS AMOUNT TOTAL ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) QSRs: Taco Bell........... 111 $102,314 40.6% 228 $163,011 37.7% 54 $ 44,614 20.4% Burger King......... 36 33,586 13.3 112 111,443 25.8 92 61,329 28.0 Church's Chicken.... 86 29,374 11.7 -- -- -- -- -- -- Wendy's............. 32 22,622 9.0 42 35,639 8.2 26 18,319 8.4 KFC................. 41 18,447 7.3 22 14,511 3.4 59 30,400 13.9 Hardee's............ -- -- -- 57 40,586 9.4 40 34,964 16.0 Other QSR........... 23 13,422 5.3 43 22,267 5.1 -- -- -- --- -------- ----- --- -------- ----- --- -------- ----- Total QSR........... 329 219,765 87.2 504 387,457 89.6 271 189,626 86.7 Casual Dining: Applebee's.......... 11 14,528 5.8 -- -- -- -- -- -- Golden Corral....... 4 6,232 2.5 5 14,450 3.3 -- -- -- TGI Friday's........ 6 5,110 2.0 3 7,870 1.8 1 2,550 1.2 Pizza Hut........... -- -- -- 16 8,093 1.9 38 26,566 12.1 Other Casual Dining............. 8 6,385 2.5 11 13,220 3.1 -- -- -- --- -------- ----- --- -------- ----- --- -------- ----- Total Casual Dining............. 29 32,255 12.8 35 43,633 10.1 39 29,116 13.3 Other Restaurant..... -- -- -- 2 1,440 0.3 -- -- -- --- -------- ----- --- -------- ----- --- -------- ----- Total............... 358 $252,020 100.0% 541 $432,530 100.0% 310 $218,742 100.0% === ======== ===== === ======== ===== === ======== =====
Retail Energy Finance Group. The Retail Energy Finance Group was organized in February 1997 to provide loans to national and regional businesses that distribute retail petroleum products such as service stations, convenience stores, truck stops, car washes and quick lube stores. Customers to date have included major national operators of retail petroleum businesses as well as major national chains such as Texaco, Chevron and Arco who seek to develop a sponsored loan program for their dealers and sellers. As of June 30, 1997, the Retail Energy Finance Group originated loans through a network of seven offices in five states. For the six months ended June 30, 1997, this group originated $23.5 million of energy loans including loans to Borrowers that represent petroleum companies such as Texaco, Shell, BP and Exxon. From the date of its formation through September 30, 1997, the Energy Finance Group provided approximately $94.4 million in financing. The Retail Energy Finance Group, which is headquartered in Morristown, New Jersey, consists of 32 financial professionals and includes personnel similar to the Restaurant Finance Group as well as industry professionals hired from major oil companies and energy related commercial lending roles who evaluate each customer's specific needs and suggest personalized financial solutions. Similar to the Restaurant Finance Group, energy loans are originated on a national basis and underwritten at the Company's headquarters or in one of five regional offices. Retail energy business operators use loans for existing station acquisitions, the purchase of real estate associated with currently leased facilities, funding for replacement or upgrading of underground storage tanks and development to transform a gasoline station/convenience store into a multi-profit center facility which may include a car wash, quick lube shop, co-branded fast food express unit or slot machines in states such as Nevada where gaming is permitted. Generally, the Company's Borrowers include business owners with five to 50 established locations. Loans typically range in size from $500,000 to $2.5 million. These loans are fixed and adjustable rate loans having a term of up to 20 years. The Company requires Borrowers to provide at least one additional revenue source aside from gasoline sales, such as a car wash or fast food, convenience items or quick lube center in order to diversify the revenue stream. 48 Golf Finance Group. The Golf Finance Group is part of the Company's Diversified Products Group, which focuses on potential expansion into other sectors which are not related to the restaurant or retail energy sectors. The Golf Finance Group was organized in 1996 to provide loans to experienced owners and operators of golf courses and golf facilities, such as driving ranges and practice facilities. For the six months ended June 30, 1997, this group originated $9.9 million of golf loans. The Golf Finance Group includes professionals with extensive commercial lending experience. The loan origination process is conducted by experienced golf facility lenders who solicit qualified owners nationwide. The group is supported by loan processing, underwriting and closing departments which work with Borrowers throughout the process. The Golf Finance Group operates out of four offices in four states. Loans are used for a variety of purposes, including debt refinance, golf course or facility acquisitions, expansions, renovations and improvements, purchase of new equipment, new golf course or facility development, purchase of underlying real estate and working capital. Loans typically range in size from $1.0 million to $5.0 million with a maximum term of up to 20 years. Since the Company generally lends against existing cash flow, all non-acquisition golf courses and facilities must have a minimum operating history of 12 months under ownership by the Borrower. The Company is currently negotiating with a major investment bank to form a joint venture whereby all loan and lease activities of the Golf Finance Group would be exclusively conducted by a new entity which would be 50% owned and managed by each of the Company and the investment bank. See "Prospectus Summary--Recent Developments." Equipment Finance Group. The Equipment Finance Group was organized in 1996 to provide equipment financing to experienced owners and operators in those sectors in which the Company operates. For the six months ended June 30, 1997 the group originated $15.2 million of equipment loans and leases. Equipment loans and leases are originated either through the Company's direct sales or telemarketing groups, third party originators or in connection with loans offered in each sector in which the Company operates. The Company's equipment loans and leases typically range in size from $200,000 to $400,000. The Company believes the activities of this group complement those of groups in its other sectors and provides a more complete financing solution for its Borrowers. Other Activities. The Diversified Products Group focuses on potential expansion into other sectors which are not related to the Restaurant Finance or Retail Energy Finance Groups such as golf finance, funeral service finance and other areas which the Company believes could be served by its financing activities. The Company recently commenced initial marketing efforts in the funeral service finance area. 49 The following table sets forth the Company's loan and lease origination activity by sector for the periods indicated:
SIX MONTH PERIOD ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 ------------------------------------------- ------------------------------------------- WEIGHTED % OF WEIGHTED % OF AVERAGE PRINCIPAL PRINCIPAL AVERAGE PRINCIPAL PRINCIPAL LENDING SECTOR NUMBER OF INTEREST AMOUNT AMOUNT NUMBER OF INTEREST AMOUNT AMOUNT AND TYPE OF ORIGINATION ORIGINATIONS RATE ORIGINATED ORIGINATED ORIGINATIONS RATE ORIGINATED ORIGINATED - ----------------------- ------------ -------- ---------- ---------- ------------ -------- ---------- ---------- (DOLLARS IN THOUSANDS) Restaurant Loans: Fixed-rate loans........... 302 10.62% $198,365 66.0% 292 10.24% $218,765 47.7% Variable-rate loans............ 56 9.59 53,655 17.9 249 9.31 213,765 46.6 --- ----- -------- ----- --- ----- -------- ----- Total (2)........ 358 10.40 252,020 83.9 541 9.78 432,530 94.3 --- ----- -------- ----- --- ----- -------- ----- Retail Energy Loans: Fixed-rate loans............ 23 10.76 19,500 6.5 -- -- -- -- Variable-rate loans............ 6 9.69 4,000 1.3 -- -- -- -- --- ----- -------- ----- --- ----- -------- ----- Total (3)........ 29 10.58 23,500 7.8 -- -- -- -- --- ----- -------- ----- --- ----- -------- ----- Golf Loans: Fixed-rate loans............ 4 12.09 9,850 3.2 2 10.95 14,200 3.1 Variable-rate loans............ -- -- -- -- 3 9.74 10,251 2.3 --- ----- -------- ----- --- ----- -------- ----- Total (3)........ 4 12.09 9,850 3.2 5 10.44 24,451 5.4 --- ----- -------- ----- --- ----- -------- ----- Equipment Finance: Fixed-rate loans and leases....... 82 12.08 15,247 5.1 10 12.14 1,486 0.3 --- ----- -------- ----- --- ----- -------- ----- Total loan and lease originations..... 473 10.56% $300,617 100.0% 556 9.83% $458,467 100.0% === ===== ======== ===== === ===== ======== ===== YEAR ENDED DECEMBER 31, 1995(1) ------------------------------------------- WEIGHTED % OF AVERATE PRINCIPAL PRINCIPAL LENDING SECTOR NUMBER OF INTEREST AMOUNT AMOUNT AND TYPE OF ORIGINATION ORIGINATIONS RATE ORIGINATED ORIGINATED - ------------------------ ------------ -------- ---------- ---------- Restaurant Loans: Fixed-rate loans........... 202 10.12% $143,515 65.6% Variable-rate loans............ 108 8.40 75,227 34.4 --- ----- -------- ----- Total (2)........ 310 9.53 218,742 100.0 --- ----- -------- ----- Retail Energy Loans: Fixed-rate loans............ -- -- -- -- Variable-rate loans............ -- -- -- -- --- ----- -------- ----- Total (3)........ -- -- -- -- --- ----- -------- ----- Golf Loans: Fixed-rate loans............ -- -- -- -- Variable-rate loans............ -- -- -- -- --- ----- -------- ----- Total (3)........ -- -- -- -- --- ----- -------- ----- Equipment Finance: Fixed-rate loans and leases....... -- -- -- -- --- ----- -------- ----- Total loan and lease originations..... 310 9.53% $218,742 100.0% === ===== ======== =====
- ---- (1) Loan and lease origination activity for the six months ended December 31, 1995 and for the six months ended June 30, 1995 have been combined to show a 12 month period for the purpose of comparing to the year ended December 31, 1996. (2) For the six months ended June 30, 1997, 78.7% and 21.3% of the Company restaurant loans consisted of permanent and DEVCO loans, respectively; such percentages were 75.4% and 24.6% at December 31, 1996 and 97.3% and 2.7% at December 31, 1995. (3) For the six months ended June 30, 1997 and for the years ended December 31, 1996 and 1995, all of the Company's retail energy loans and golf loans were permanent loans. 50 Geographic Distribution--The following table sets forth by state the number of loans and leases originated by the Company for the periods presented.
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 ---------------------------------- ---------------------------------- ---------------------------------- PRINCIPAL PRINCIPAL PRINCIPAL NUMBER OF AMOUNT % OF TOTAL NUMBER OF AMOUNT % OF TOTAL NUMBER OF AMOUNT % OF TOTAL ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ------------ ---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- (DOLLARS IN THOUSANDS) California...... 103 $ 64,038 21.3% 42 $ 33,209 7.2% 23 $ 13,172 6.0% Michigan........ 33 24,370 8.1 7 4,848 1.1 9 7,414 3.4 Texas........... 26 23,829 7.9 41 29,189 6.4 15 13,471 6.2 Louisiana....... 15 15,784 5.3 5 4,243 0.9 -- -- -- North Carolina.. 19 14,641 4.9 21 23,106 5.0 22 13,444 6.1 Nevada.......... 11 11,895 4.0 18 11,284 2.5 -- -- -- New Jersey...... 16 12,205 4.1 29 30,746 6.7 14 10,906 5.0 Virginia........ 17 11,144 3.7 16 35,744 7.8 25 18,859 8.6 Ohio............ 21 9,960 3.3 10 6,501 1.4 9 8,192 3.7 South Carolina.. 9 8,867 2.9 20 16,927 3.7 8 5,460 2.5 Utah............ 8 9,038 3.0 5 7,482 1.6 -- -- -- Illinois........ 27 8,366 2.8 10 5,855 1.3 6 3,686 1.7 Colorado........ 8 7,268 2.4 6 3,155 0.7 10 6,066 2.8 Alabama......... 12 6,677 2.2 20 18,479 4.0 26 18,435 8.4 Pennsylvania.... 8 6,385 2.1 58 35,196 7.7 15 7,852 3.6 Florida......... 13 6,279 2.1 7 3,854 0.8 20 12,779 5.8 New York........ 4 3,640 1.2 21 13,499 2.9 12 9,588 4.4 Maryland........ 4 2,661 0.9 21 25,019 5.5 3 1,621 0.7 Connecticut..... 3 1,316 0.4 36 34,620 7.6 16 8,956 4.1 Other States.... 116 52,254 17.4 163 115,511 25.2 77 58,841 27.0 --- -------- ----- --- -------- ----- --- -------- ----- Totals: 473 $300,617 100.0% 556 $458,467 100.0% 310 $218,742 100.0% === ======== ===== === ======== ===== === ======== =====
EQUITY INVESTMENTS The Company periodically makes passive unsecured equity investments in companies operating in the sectors served by its lending and leasing businesses. Such investments may be made in conjunction with loans and leases or independent of any borrowing relationship. The Company's equity investments, which are generally made through subsidiary limited liability companies, have taken the form of common stock equivalents, contingent equity interests such as warrants, and combinations thereof. At June 30, 1997, the Company had investments in entities operating 267 units, including Taco Bell, Church's Chicken, KFC, Hardee's and Hot 'N Now franchisees. In certain cases, concurrent equity investments have been made directly by the Selling Stockholders and certain of the Company's officers and directors. The Company analyzes potential equity opportunities independently of credit analysis done in connection with its lending business, taking advantage of its industry expertise and extensive database of operating information. In general, the Company has structured its investments so that operating control is retained by experienced business operators while the Company maintains control over certain key corporate decisions that may affect its investments over time. To date, all of the Company's equity investments have involved actual or contingent minority (less than 50%) equity ownership. In certain cases, the Company is obligated to make additional equity investments at the option of the majority investor. Many of the Company's investments include "put" and "call" options at specified values to facilitate the Company's investment exit strategy. At June 30, 1997, the Company had made five common stock equivalent equity investments aggregating $4.4 million and was obligated to make up to an additional $5.6 million in equity investments under existing arrangements. Of these equity transactions, three were made in 1996 in connection with loans made by the Company in the initial aggregate amount of $73.8 million, and two were made in 1997 in connection with loans made by the Company in the initial aggregate amount of $28.6 million. See "Risk Factors--Equity Investments are Subject to Risk of Loss" and "Certain Transactions--Other Matters--Equity Investments." 51 The Company may also enter into joint venture or similar arrangements for its loan and lease activities. The Company is currently negotiating with a major investment bank to form a joint venture pursuant to which the loan and lease activities of the Company's Golf Finance Group would be exclusively conducted by a new entity which would be 50% owned and managed by each of the Company and the investment bank. The parties could by mutual agreement utilize the joint venture, if formed, to exclusively originate other types of loans and leases, which could include loans and leases in the Company's other existing sectors or in new sectors. Any income distributed by the new entity would be shared equally by the Company and the investment bank. MARKETING The Company originates the majority of its loans through the efforts of its Marketing Vice Presidents ("MVPs"), comprised of experienced, credit trained professionals located in the Company's regional and district offices in Alabama, California, Colorado, Connecticut, Georgia, Nebraska, New Jersey, Texas and Washington. Each of the Restaurant, Retail Energy, Golf and Equipment Finance Groups has dedicated marketing departments, specifically targeting customers by sectors. In addition to its direct marketing activities, the Company maintains a telemarketing center in Columbus, Nebraska. The telemarketing center is used to perform basic telemarketing functions for each of the various lending groups, as well as to coordinate cross-marketing requests and opportunities. Applicants are identified through in-person solicitation, targeted mailings, phone solicitations, participation at conventions, institutional direct- response advertising and through existing Borrower relationships. MVPs meet with prospective Borrowers to determine the amount and appropriateness of the requested loan or lease proceeds as well as to make a preliminary determination of the Borrowers' creditworthiness. Qualifying prospects are presented with a proposal generated through the Company's proprietary underwriting software. Only after the prospective Borrower understands the loan or lease product is a loan or lease application(s) taken. The Company believes that this procedure accounts for the low denial rate the Company has experienced. Since this model was originally developed in 1994, the Company has funded over 90% of the applications submitted by its MVPs. Additionally, the Company estimates it funds approximately 45% of all potential Borrowers it interviews. The Company maintains multiple prospect and Borrower databases. The information varies from a simple name and address list to one that includes Borrower cash flow margins by sector, concept, geography, demographic information and other variables. The Company uses relational database software to store variables important to the credit process. Additionally, the Company has created an in-house research department which provides analysis on various franchise concepts and industry sectors. The Company has an extensive library of Borrower financial statements and uses the information for proprietary studies, which assist management in focusing on various industries. UNDERWRITING Each of the Company's lending groups operates under a set of underwriting guidelines that represents prudent credit standards designed to meet uniform standards for securitization purposes. Each lending group has a credit manager responsible for these guidelines who is a member of the Senior Credit Committee (the "SCC"). Loans above specified limits are submitted to the SCC. The Chief Credit Officer is the chairman of the SCC and has ultimate responsibility for the credit standards and guidelines for each of the Company's lending groups. Underwriting Guidelines are consistent across each of Company's lending groups. Below is a discussion of the methodology which has been used for the Restaurant Finance Group. Similar guidelines are being used by the Company's Retail Energy and Golf Finance Groups. See "Risk Factors--Certain Underwriting Requirements and Risks May Adversely Affect Credit Quality." Under the Company's current restaurant finance underwriting guidelines, each loan is originated after a review of the following criteria: (i) the applicant's ability to repay the loan, (ii) the adequacy of the cash flow of both the franchise unit and the Borrower and (iii) the real and tangible personal property that serves as collateral 52 for such loan. The Company has created an underwriting model which incorporates historical operating results of the borrower and compares them to industry statistics for the applicable franchise concept. The model helps outline the loan proposal to fit the approval guidelines. Loan officers input data provided by potential borrowers into the underwriting model and determine as to whether or not a loan would qualify under the Company's underwriting guidelines before submission to the credit group. This pre-screening process allows for documentation once a loan is accepted for underwriting. The Company's loan originations typically range in size from $200,000 to $1.2 million for each franchise location. The majority of Borrowers are multiple unit operators. For all loans, the Borrower completes an environmental questionnaire and the Company obtains a report from a third party service which identifies environmental risks in the vicinity. Certificates of occupancy are requested on all units. Additionally, Uniform Commercial Code searches are conducted for all Borrowers before and after origination of a loan. The Company prefers Borrowers to pay off all existing loans and equipment leases with the Company's loan proceeds. For cases in which encumbrances will survive the funding of the loan, the Company reviews all such notes, pledge and security agreements, and loan documents. Although the franchise agreement is not assigned to secure the loan, the continued ability of the Borrower to operate the franchise is essential to ensure the Borrower's ability to repay the franchisee loan. The Company reviews a copy of the executed franchise agreement to verify (i) that the Borrower is the franchisee or has been granted an assignment of franchisee rights from the franchisor, (ii) that the duration of the franchise term is as reported by the Borrower and (iii) that the renewal section of the agreement provides for renewals of the franchise term, particularly when the franchise term does not exceed the loan term. In the event a loan term exceeds the term of a Borrower's franchise agreement, the loan documentation provides that it is an event of default (entitling the Company to accelerate the loan at a premium) if the franchise agreement is not renewed. If a franchise agreement is not renewed, the Company can permit a Borrower to provide substitute collateral satisfying the Company's underwriting guidelines. Additionally, a certificate of good standing is required from the franchisor. The Company reviews the organizational documents of Borrowers which are business entities and reviews the personal net worth of Borrowers who are individuals. Business credit reports are obtained for all Borrowers. Personal credit reports are obtained for majority owners of all Borrowers. For Borrowers organized as sole proprietorships (other than multi-unit borrowers) and in certain other cases, personal guarantees are required from the principals. All former bankruptcies must be discharged and the time since discharge must be at least five years except in extraordinary circumstances. Three years of historical operating statements, if available, are required of all Borrowers. The Company analyzes the revenue and expense numbers to determine the ability of the unit to support the repayment of a prospective loan. The underwriting guidelines include three levels of analysis on each loan request, each of which must be satisfied to qualify for the Company's loan program. The first two are fixed charge coverage ratio tests at both the consolidated Borrower level (minimum of 1.25x) and at the individual unit level (minimum 1.15x). The fixed charge coverage ratio is the ratio of EBITDA (adjusted earnings before interest, tax, depreciation and amortization) plus rent over annual principal plus interest plus rent. This formula puts real estate mortgage loans and enterprise only loans on a comparable basis. The third analysis is the loan to value at the unit level. The "business value" of a franchise unit is derived from a formula based upon the franchise concept and the revenues and cash flow generated by the franchise unit through its operations, which in turn is dependent upon and derived from a Borrower's franchise agreement with the franchisor. In the case of enterprise loans, the maximum loan-to-business value is generally 65%. A loan secured by real property (fee or leasehold) is subject to a maximum loan to value of approximately 70%. Exceptions to these maximum loan-to-business values may be made in certain circumstances and with respect to single-unit Borrowers more stringent loan-to-business value standards are required. The Company hires independent third parties to perform a valuation of the subject franchise unit and as applicable, realty interests of the specific franchised restaurants and specialty retail locations. The appraisals are based on the premise that the value of a unit is related to revenues and EBITDA. Value-to-revenue ratios are 53 used to estimate the market value of a unit site. An example of a factor in the selection of applicable value ratios is unit EBITDA margins, especially margins for the most recent 12 months. To determine realty interest valuation, appraisers utilize realty comparables, market based data in estimating market rentals and estimates of modeled cost and depreciation of any subject building. Retail energy lending involves certain additional underwriting issues. In the case of loans and leases to operators of service stations, convenience stores, truck stops, car washes and quick lube stores, the Company must also concern itself with: (i) risks associated with USTs and other environmental matters; (ii) protections afforded borrowers via the Petroleum Marketers Practices Act and how these protections relate to senior lenders; (iii) profit margin volatility inherent in the petroleum marketing; and (iv) the relative value of location (side of street, relation to traffic lights), competition and the value of the trademark in the service area. In the case of golf lending, the Company also focuses on other issues such as: (i) the cost and availability of secondary water supplies; (ii) the length of the season of play; (iii) existing and planned competition; (iv) the number of active golfers in the serving area; (v) environmental risks with regards to chemical storage and the application of the chemicals and fertilizers; (vi) expense ratios for more complex (more expensive) courses, e.g. special mowing techniques, over-seeding during hot weather and (vii) tee and green insurance. FINANCING The Company has an ongoing need to finance its lending activities, which is expected to increase as the volume of loan and lease originations increases. The Company's primary operating cash requirements will include the funding of (i) loans and leases pending their sale, (ii) fees and expenses incurred in connection with its securitization program, (iii) overcollateralization or reserve account requirements in connection with loans pooled and sold, (iv) interest, fees and expenses associated with the Company's warehouse credit and repurchase facilities with certain financial institutions, (v) federal and state income tax payments and (vi) ongoing administrative and other operating expenses. The Company currently funds these cash requirements primarily through securitizations, whole loan and lease sales and borrowings from Banco Santander, Sanwa Bank and Credit Suisse First Boston. See "Risk Factors-- Substantial Need for Liquidity to Fund Lending Activities." Securitizations and Whole Loan Sales The Company regularly offers its loans for sale through securitizations and whole loan sales to financial institutions and institutional investors. The Company plans to optimize its liquidity and profitability by continuously evaluating various combinations of whole loan sales and securitization structures. The Company plans to effect quarterly securitizations, and to structure such transactions to take advantage of prevailing interest rates and market conditions for senior subordinated and I/O securities. Securitizations. Under the Company's current securitization structure, the Company sells a pool of loans on a non-recourse basis to a single purpose trust. The trust issues securities in the form of notes which are denominated in multiple branches throughout the credit rating spectrum from the highest investment grade rating of "AAA" descending to a non-investment grade rating of "B." In addition, the Company structures an I/O in its financings that is generally rated AAA. In past securitizations, the Company has sold all rated interests while retaining a relatively small retained interest. With respect to certain of the aforementioned securitizations, the Company arranged for the related trusts to purchase credit enhancements for the senior certificates in the related trusts in the form of insurance policies provided by one AAA/AAA rated monoline insurance company and, as a result, the senior certificates in each trust received a rating of "AAA" from Standard & Poor's Ratings Services and "AAA" from Moody's Investors Service, Inc. The Company may continue to arrange for credit enhancements on future securitizations. 54 The following table lists securitization transactions involving loans originated by the Company and securitized by the Company or Greenwich, as indicated, through June 30, 1997. Prior to July 1, 1995, the Company's securitizations were treated as financings for financial reporting purposes.
ORIGINAL OUTSTANDING ISSUANCE PRINCIPAL FRANCHISE LOANS PRINCIPAL AMOUNT AT CUMULATIVE LOAN RECEIVABLES TRUST DATE ISSUED AMOUNT JUNE 30, 1997 LOSSES SELLER ----------------- ----------------- --------- ------------- ---------- ------ (IN MILLIONS) 1991-A.. September 1, 1991 $61.8 $ 15.3 $-- Company 1993-B.. December 17, 1993 29.0 20.4 -- Greenwich 1994-A.. (1) 105.7 75.6 -- Greenwich 1995-A.. October 1, 1995 42.7 39.9 -- Greenwich 1995-B.. December 2, 1995(2) 105.2 97.6 -- Company(2) 1996-A.. June 28, 1996 167.4 161.1 -- Company 1996-B.. December 1, 1996 157.7(3) 154.5 -- Company 1997-A.. June 1, 1997 158.6 158.6 -- Company
- -------- (1) 1994-A was issued in three series: May 31, 1994, August 17, 1994 and December 19, 1994. (2) The gain on sale of loans for this transaction was not recognized until the first quarter of 1996. (3) Original issuance principal amount was $227.7 million which included $70.0 million in loans sold by an affiliate of Credit Suisse First Boston. Whole Loan Sales. Depending on market conditions, the Company also executes whole loan sales in which the Company disposes of its entire economic interest in the loans on a non-recourse basis (excluding servicing rights) for cash. Whole loan sale gains/losses are recognized at the time of sale and there are generally no residuals. Prior to June 30, 1997, the Company engaged in one whole loan sale with aggregate principal balance of $15.3 million. The Company seeks to maximize its premium on whole loan sale revenues by closely monitoring institutional purchasers' requirements and focusing on originating or purchasing the types of loans that meet those requirements and for which institutional purchasers tend to pay higher premiums. Whole loan sales are made on a non-recourse basis pursuant to a purchase agreement containing customary representations and warranties by the Company regarding the underwriting criteria applied by the Company and the origination process. The Company, therefore, may be required to repurchase or substitute loans in the event of a breach of its representations and warranties. In addition, the Company may commit to repurchase or substitute a loan if a payment default occurs within the first month following the date the loan is funded, unless other arrangements are made between the Company and the purchaser. The Company may also be required in some cases to repurchase or substitute a loan if the loan documentation is alleged to contain fraudulent misrepresentations made by the borrower. The Company may be required either to repurchase or to replace loans which do not conform to the representations and warranties made by the Company in the pooling and servicing agreements entered into when the loans are pooled and sold through securitizations. Warehouse Lines of Credit and Repurchase Facilities The Company is dependent upon its ability to access warehouse lines of credit and repurchase facilities, in addition to its ability to continue to securitize or sell loans in the secondary market, in order to fund new originations. The Company has warehouse lines of credit and repurchase facilities under which it had available an aggregate of approximately $365 million in financing at June 30, 1997. 55 The following constitutes the Company's warehouse lines of credit and repurchase facilities available at June 30, 1997, all of which are guaranteed by ICII:
INTEREST COMMITMENT PRINCIPAL LENDER EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING ------ --------------- ----- -------- ---------- ----------- (DOLLARS IN THOUSANDS) Credit Suisse First Boston December 31, 1998 Libor plus 160 to 235 basis points 7.29% $300,000 $167,447 Banco Santander June 1, 1998 Libor plus 160 basis points 7.29% 50,000 16,465 Sanwa Bank(1) September 30, 1997 Eurodollars plus 200 basis points 7.50% 15,000 12,010 -------- -------- Total............................................................................ $365,000 $195,922 ======== ========
- -------- (1) In October 1997, the expiration date of this facility was extended to June 30, 1998, the index was reduced to Eurodollars plus 160 basis points and the commitment amount was increased to $25 million. In October 1997, the Company finalized a warehouse line of credit with Morgan Stanley for a commitment amount of $200 million, bearing interest at rates ranging from Libor plus 95 to 155 basis points, depending upon the loan product type. This warehouse line of credit is expected to provide additional financing for the Company's continued growth in loan and lease originations and it is not guaranteed by ICII. The Company is currently negotiating with a major investment bank to form a joint venture pursuant to which all loan and lease activities of the Company's Golf Finance Group would be exclusively conducted by a new entity which would be 50% owned and managed by each of the Company and the investment bank. In connection therewith, the investment bank would make available to the new entity a 12 month $100.0 million warehouse line of credit bearing interest at Libor plus 100 basis points. LOAN AND LEASE SERVICING AND CREDIT QUALITY The Company's Servicing Department is responsible for loan and lease accounting, compliance monitoring and, as necessary, collections. As of June 30, 1997, the Company serviced approximately 1,573 loans and leases, representing approximately $1.1 billion in principal balances. Of this amount, $151.2 million were subserviced by the Company under a subservicing arrangement with SPTL, the owner of the servicing rights. See "Certain Transactions." The Company's servicing operations are located in Greenwich, Connecticut. The loan and lease servicing function includes monthly invoicing, payment collections, computing investor payments and processing investor remittances. The primary method for Borrower payments is through automatic clearing house ("ACH") direct debiting. Compliance monitoring procedures include a semi-annual review of each Borrower's compliance with stated covenants, including fixed charge coverage ratios. In the event a Borrower fails to comply with such covenants, the Borrower is placed on the Company's "Credit Watch List." Loans and leases on the Credit Watch List are subject to increased scrutiny and monitoring by the Company's servicing personnel. If a payment has not been received by the due date, the loan or lease is considered in default, and the Company aggressively pursues collections procedures, including collection calls and site visits. At June 30, 1997, the Company had only two loans, representing 0.1% of all loans and leases held in the Company's servicing portfolio as of such date, more than 90 days delinquent and, from its inception in April 1991 through June 30, 1997, had experienced no net charge offs. During the first month of a delinquency lasting ten days or more, the Company contacts the Borrower to determine the reason for the default and the likelihood and timing of any payment. The Company performs a credit investigation and obtains updated financial statements from the Borrower and current Dun & Bradstreet and personal credit reports. The Borrower's bank and major trade creditors are typically contacted to provide first-hand verification of the financial status of the Borrower. The Company may also retain counsel in the state in which the Borrower is located, if it is determined that the Borrower or a related entity is in bankruptcy or there is a reason to believe voluntary or involuntary bankruptcy will be declared. Within 15-45 days of the delinquency, an officer of the Company will meet in person with the delinquent borrower, the nature of the Borrower's financial difficulty will be re-examined and the likelihood of repayment 56 will be re-evaluated. The Company will physically inspect the Borrower's business unit, and industry consultants or other Borrowers are contacted to evaluate the delinquent business unit. After 60 days of delinquency, the franchisor will be notified in writing of the default, and the delinquent Borrower will be informed of this action. The loan or lease will be accelerated at this time, and the Borrower sent a written notice demanding payment of the full amount due in respect of the loan or lease. The Borrower may also be reminded that any other loans that the Borrower may have from other sources are likely to be in default. If it appears unlikely that the Borrower will cure the default, the Company may decide to negotiate with the Borrower to induce the Borrower to offer the business unit for sale to other Borrowers of the franchisor or licensee of the concept. In this way the loans and leases could be assumed. The Company was able to locate qualified replacement franchisee/Borrowers in the two cases where it was necessary through its industry relationships, and believes that it may be able to do so again in the future, if required. At a minimum, payments would resume, or, if possible, there could be recovery of past-due principal, interest and amounts advanced by the servicer. As a result of this policy, the Company has been able to avoid loan losses to date. As of June 30, 1997, two loans aggregating $1.2 million, or 0.11% of the Company's $1.1 billion servicing portfolio, were 90 or more days delinquent. However, some of the loans in the Company's servicing portfolio have been outstanding for a relatively short period of time. Consequently, the Company's experience to date may not be indicative of results to be experienced in the future. See "Risk Factors--Limited History of Independent Operations and New Products Limit the Ability of the Company to Predict Future Performance." INTEREST RATE RISK MANAGEMENT The Company's profits depend, in part, on the difference, or "spread," between the effective rate of interest received by the Company on the loans it originates or purchases and the interest rates payable by the Company under its warehouse financing facilities or for securities issued in its securitizations. The spread can be adversely affected because of interest rate increases during the period from the date the loans are originated or purchased until the closing of the sale or securitization of such loans. The Company is required by its warehouse lending facilities to hedge all of its fixed-rate principal loan balance securing such facilities. The Company's hedging strategy normally includes selling U.S. Treasury futures in such amounts and maturities as to effectively hedge the interest rate volatility of its portfolio. The Company does not maintain naked or leveraged hedge positions. In addition, the Company from time to time may use various other hedging strategies to provide a level of protection against interest rate risks on its fixed-rate loans. These strategies may include forward sales of loans or loan- backed securities, interest rate caps and floors and buying and selling of futures and options on futures. The Company's management determines the nature and quantity of hedging transactions based on various factors, including market conditions and the expected volume of loan originations and purchases. While the Company believes its hedging strategies are cost-effective and provide some protection against interest rate risks, no hedging strategy can completely protect the Company from such risks. Further, the Company does not believe that hedging against the interest rate risks associated with adjustable-rate loans is cost-effective, and does not utilize the hedging strategies described above with respect to its adjustable-rate loans. See "Risk Factors--Profitability of the Company May be Adversely Affected by Interest Rate Fluctuations" and "--Hedging Strategies May Not Protect the Company from Interest Rate Risks." COMPETITION The Company faces intense competition in the business of originating and selling loans and leases. Traditional competitors in the financial services business include commercial banks, thrift institutions, diversified finance companies, asset-based lenders, specialty franchise finance companies and real estate investment trusts. Many of these competitors in the commercial finance business are substantially larger and have considerably greater financial, technical and marketing resources than the Company. In addition, many financial service organizations have formed national networks for loan and lease originations substantially similar to the Company's loan and lease programs. Competition can take many forms including convenience in obtaining a 57 loan or lease, customer service, marketing and distribution channels, amount and term of the loan, and interest or credit ratings. In addition, the current level of gains realized by the Company and its competitors on the sale of loans and leases could attract additional competitors into this market with the possible effect of lowering gains on future loan and lease sales due to increased loan and lease origination competition. The Company believes that its industry expertise and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. REGULATION Lending Laws Certain aspects of the Company's businesses are subject to regulation and supervision at both the federal and state level. Regulated matters include loan origination, credit activities, maximum interest rates and finance and other charges, disclosure to customers, the collection, foreclosure, repossession and claims handling procedures utilized by the Company, multiple qualification and licensing requirements for doing business in various jurisdictions and other trade practices. Future Laws The laws, rules and regulations applicable to the Company are subject to modifications and change. There can be no assurance that rules and regulations, or other such laws, rules or regulations will not be adopted in the future which could make compliance more difficult or expensive, restrict the Company's ability to originate or sell loans, the amount of interest and other charges earned on loans originated or sold by the Company, or otherwise adversely affect the business or prospects of the Company. Environmental Liability Generally Contamination of real property by hazardous substances may give rise to a lien on that property to assure payment of the cost of clean-up or, in certain circumstances subject the lender to liability. Such contamination may also reduce the value of the business property. Under the laws of some states and under CERCLA, a lender may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the property if the lender engages in certain activities. See "Risk Factors--Certain Underwriting Risks May Adversely Affect the Credit Quality of the Company's Portfolio of Loans and Leases--Environmental Concerns." Environmental Laws Affecting Borrowers in Specific Sectors Environmental Regulations Affecting Franchises. The operation and management of franchise businesses (whether pursuant to direct ownership, lease or management contract) may involve the use and limited storage of certain hazardous materials. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Environmental Regulations Affecting Retail Energy Businesses. The operation and management of retail energy businesses (whether pursuant to direct ownership, lease or management contract) involves the use and limited storage of certain hazardous materials. Specifically, the Company's Borrowers in the retail energy sector incur ongoing costs to comply with federal, state and local environmental laws and regulations governing USTs used in their operations. The Company's loans may be secured by convenience store and gas station locations with USTs and other environmental risks. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Under various federal, state, local and foreign laws, ordinances and regulations, various categories of persons, including owners, operators or managers of real property may be liable for the costs of 58 investigation, removal and remediation of hazardous substances that are or have been released on or in their property even if such releases were by former owners or occupants. In addition, any liability to Borrowers for assessment and remediation activities in connection with releases into the environment of gasoline or other regulated substances from USTs or otherwise at such Borrowers' gasoline facilities could adversely impact the Borrowers' ability to repay their loans from the Company or the value of any pledged collateral. Due to the nature of releases, the actual costs incurred may vary and the ongoing costs of assessment and remediation activities may vary from year to year and may adversely impact such Borrowers' ability to repay their loans. Most states have funds which provide reimbursement to qualified storage tank owners/operators for assessment and remediation costs associated with petroleum releases (after the operator pays a set deductible and co-payment amount). Most funds are supported by annual tank registration fees paid by the station owners and a gasoline fee, included in the price of the gas, which is paid by consumers. There has been an increasing number of UST replacements in recent years. Consequently, some state funds have been drained of reserves. The result is a delay in disbursement until the fund can be replenished with fee collections, the effect of which may have an adverse effect on the borrowers' financial condition and ability to repay its loan. Environmental Regulations Affecting Golf Courses and Facilities. The operation and management of golf courses and golf practice and instruction facilities (whether pursuant to direct ownership, lease or management contract) involve the use and limited storage of certain hazardous materials such as herbicides, pesticides, fertilizers, motor oil, gasoline and paint. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. EMPLOYEES At June 30, 1997, the Company employed 124 persons. None of the Company's employees is subject to a collective bargaining agreement. The Company believes that its relations with its employees are satisfactory. PROPERTIES The Company's executive and administrative offices are located at 2049 Century Park East, Suite 350, Los Angeles, California and 5 Greenwich Office Park, Greenwich, Connecticut and consist of an aggregate of approximately 17,700 square feet. The lease on the premises located in Los Angeles expires in March 2002 and the current annual rent is approximately $145,900. The lease on the premises located in Greenwich expires in September 2003 and the current annual rent is approximately $255,700. The Company also leases space for its other offices. These facilities aggregate approximately 17,300 square feet, with an annual aggregate base rental of approximately $321,400. The terms of these leases vary as to duration and rent escalation provisions. In general, the leases expire between 1997 and 2002 and provide for rent escalations tied to either increases in the lessor's operating expenses or fluctuations in the consumer price index in the relevant geographical area. LEGAL PROCEEDINGS The Company occasionally becomes involved in litigation arising from the normal course of business. Management believes that any liability with respect to pending legal actions, individually or in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations. The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. Franchise Mortgage LLC has not been named as a defendant in this lawsuit. Counsel to the predecessor entity and Mr. Knyal believe that the claim is without merit and intend to defend it vigorously. ICII and FLRT, Inc. have agreed to indemnify the Company against any and all liability that the Company and its stockholders (other than ICII and FLRT, Inc.) may incur as a result of this lawsuit. 59 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position with the Company of each person who is a director or executive officer of the Company.
NAME AGE POSITION ---- --- -------- Wayne L. "Buz" Knyal............. 51 President, Chief Executive Officer and Director Thomas J. Shaughnessy............ 39 Executive Vice President and Chief Credit Officer John W. Rinaldi.................. 49 Executive Vice President, Loan Portfolio Management and President, Equipment Finance Group Thomas Kaplan.................... 32 Executive Vice President, Capital Markets Raedelle A. Walker............... 42 Executive Vice President and Chief Financial Officer H. Wayne Snavely(1).............. 56 Chairman of the Board Ronald V. Davis(2)............... 50 Director G. Louis Graziadio, III(1)....... 47 Director Perry A. Lerner(2)............... 54 Director Richard J. Loughlin(1)........... 63 Director John E. Martin(1)................ 52 Director Michael L. Matkins(2)............ 51 Director
- -------- (1) Member of Compensation Committee (2) Member of Audit Committee WAYNE L. "BUZ" KNYAL has been the President, Chief Executive Officer and a Director of Franchise Mortgage Acceptance Company since its inception and has been the President, Chief Executive Officer and a Manager of Franchise Mortgage LLC since its inception in June 1995. Prior to founding the Company's predecessor in 1991, Mr. Knyal founded and owned CBI Insurance Services, Inc. and concurrently served as President of CBI Mortgage Company, a residential mortgage banker. From 1968 to 1980, Mr. Knyal was an Executive Vice President of Krupp/Taylor Advertising and served clients in the fast food industry. Mr. Knyal is a Director of New Riders, Inc., a restaurant company. THOMAS J. SHAUGHNESSY has been the Executive Vice President, Chief Credit Officer of Franchise Mortgage Acceptance Company since its inception. Mr. Shaughnessy has held the same title at Franchise Mortgage LLC since July 1997 and was Senior Vice President, Chief Credit Officer of Franchise Mortgage LLC from June 1995 through June 1997. From May 1994 through June 1995, Mr. Shaughnessy held executive positions with the Company's predecessor when it was a division of Greenwich. From 1992 to May 1994, Mr. Shaughnessy was the Credit Portfolio Manager for the Franchise Finance Group at AT&T Capital Corporation in Denver, Colorado. JOHN W. RINALDI has been the Executive Vice President, Loan Portfolio Management and President, Equipment Finance Group of Franchise Mortgage Acceptance Company since its inception. Mr. Rinaldi has held the same title at Franchise Mortgage LLC since July 1997 and was Senior Vice President, Operations of Franchise Mortgage LLC since July 1995 through June 1997. From 1993 to July 1995, Mr. Rinaldi was the Executive Vice President of Federated Financial Reserve Corporation, a national lessor. Mr. Rinaldi was the Senior Vice President and Chief Operating Officer of the Commercial Equipment Finance Group of Bell Atlantic Corporation's financial services subsidiary, Bell Atlantic TriCon from 1984 to 1993. From 1968 to 1983, Mr. Rinaldi held various credit, operations and marketing positions with TriContinental Leasing and its parent, Yegen Associates. 60 THOMAS KAPLAN has been the Executive Vice President, Capital Markets of Franchise Mortgage Acceptance Company since October 1997. Mr. Kaplan was a Senior Vice President in the Asset-Backed Finance group at Greenwich Capital Markets ("Greenwich Capital") from September 1995 to October 1997, where he was responsible for developing and maintaining investment banking relationships with issuers of asset-backed and mortgage-backed securities and whole loans. Mr. Kaplan had primary responsibility for Greenwich Capital's investment banking relationship with Franchise Mortgage LLC, and acted as financial advisor in connection with each of Franchise Mortgage LLC's securitizations until June 1997. From 1990 to 1995, Mr. Kaplan was a Director at Credit Suisse First Boston, where he was a trader for the firm's subordinate mortgage- and asset-backed securities and asset-backed whole loan positions. RAEDELLE A. WALKER has been Executive Vice President and Chief Financial Officer of Franchise Mortgage Acceptance Company since its inception and has held the same title at Franchise Mortgage LLC since February 1997. From 1995 until joining Franchise Mortgage LLC, Ms. Walker served as the Chief Financial Officer of SPTL, a wholly owned subsidiary of ICII. From 1985 to 1995, Ms. Walker served as a Senior Manager with KPMG Peat Marwick LLP, providing accounting and consulting services to clients in the firm's financial services practice. Ms. Walker is a Certified Public Accountant. H. WAYNE SNAVELY has been the Chairman of the Board of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. He has been Chairman of the Board and Chief Executive Officer of ICII since December 1991 and President of ICII since February 1996. From 1986 to February 1992, Mr. Snavely served as Executive Vice President of Imperial Bancorp and Imperial Bank with direct management responsibility for the following bank subsidiaries and division: Imperial Bank Mortgage, SPTL, Imperial Trust Company, Wm. Mason & Company, Imperial Ventures, Inc. and The Lewis Horwitz Organization. From 1983 through 1986, Mr. Snavely was employed as Chief Financial Officer of Imperial Bancorp and Imperial Bank. Mr. Snavely served as a Director of Imperial Bank from 1975 to 1983 and currently serves as a Director. Mr. Snavely is Chairman of the Board of Southern Pacific Funding Corporation, Imperial Credit Mortgage Holdings, Inc. and Imperial Financial Group, Inc., a subsidiary of Imperial Bank. RONALD V. DAVIS has been a Director of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. Mr. Davis is the Chairman of the Board of Davis Capital LLC, a private equity investment company. From 1980 to 1994, Mr. Davis was the President and Chief Executive Officer of the Perrier Group of America, Inc. ("PGA"). Mr. Davis twice held the presidency of the International Bottled Water Association, serving 1,000 members worldwide and in 1994, the industry inducted him into the Beverage World Bottled Water Hall of Fame. Mr. Davis is also a Director of Celestial Seasonings and Staff Leasing, Inc. G. LOUIS GRAZIADIO, III has been a director of Franchise Mortgage Acceptance Company since its inception. Mr. Graziadio is the Chairman of the Board and Chief Executive Officer of Ginarra Holdings, Inc. (as well as its predecessor and affiliated companies) since 1979. Ginarra Holdings, Inc. is a privately held California corporation engaged in a wide range of investment activities. Mr. Graziadio has been actively involved, since 1972, in real estate development, construction and home building. Mr. Graziadio is Co-Chairman of Imperial Financial Group, Inc. and a Director of the following companies: ICII, Imperial Bancorp, Imperial Trust Company, an indirect subsidiary of Imperial Bancorp, Lynx Golf, Inc., a golf club manufacturer and Vista 2000, Inc. PERRY A. LERNER has been a Director of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. He has been a principal in the investment firm of Crown Capital Group, Inc. since 1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 through 1996, having been a partner with the firm from 1984 through 1996. Mr. Lerner was an Attorney-Advisor of the International Tax Counsel of the United States Treasury Department from 1973 to 1976. Mr. Lerner is a Director of ICII, Imperial Financial Group, Inc. and Vista 2000, Inc. 61 RICHARD J. LOUGHLIN has been a Director of Franchise Mortgage Acceptance Company since its inception. Mr. Loughlin co-founded Century 21 Real Estate of Northern California, Inc. in 1973 and served as President and Regional Director until 1981, when he was appointed President and Chief Executive Officer of Century 21 Real Estate Corporation. He held that position until November of 1995 when he retired and was appointed President Emeritus to serve as a consultant and spokesperson. Mr. Loughlin is a Director of Inspectech Corporation and the National Association of Realtors. Loughlin's prior affiliations include Chairman of Western Relocation Management, Inc., Chairman of the Real Estate National Networks, Director of the National Easter Seal Society, Director of the Housing Roundtable, and member of the Policy Advisory Board of the Center for Real Estate and Urban Economics for the University of California at Berkeley. Mr. Loughlin is a co-owner of the National Football League's Carolina Panthers. JOHN E. MARTIN has been a Director of Franchise Mortgage Acceptance Company since its inception. Mr. Martin has been the Chairman and Chief Executive Officer of New Riders, Inc., since June 1997. Mr. Martin was the Chairman and Chief Executive Officer of PepsiCo Casual Dining from October 1996 to June 1997. From August 1983 through October 1996 he was the Chairman and Chief Executive Officer of Taco Bell Corp. In 1996, Mr. Martin was named the third most successful restaurant executive in the Spenser Stuart/Cornell Study. He received the first Innovator Award from the Multi-Unit Foodservice Operators association in 1994; the Silver Plate Award from the International Foodservice Manufacturers Association in 1993 for his innovative leadership in the quick- service industry; the National Association of Corporate Real Estate Executives named him as the 1992 CEO of the Year; and Restaurants and Institutions Magazine named him Executive of the Year in 1991. Mr. Martin is a member of the Educational Foundation of the National Restaurant Association's board of trustees, and is a founding member of the Chief Executive Round Table at the University of California, Irvine. Mr. Martin is a Director of The Good Guys, Inc. and Williams-Sonoma, Inc. MICHAEL L. MATKINS has been a Director of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. Mr. Matkins is a founding partner with the law firm of Allen, Matkins, Leck, Gamble & Mallory LLP. Mr. Matkins has advised institutional investors, lenders, property owners and developers in all aspects of purchase, sale, financing, leasing and construction of real estate properties ranging from office and retail to recreational and mixed-use projects for more than 20 years. He has also represented institutional investors in the restructuring of investments in real property as well as institutional developers in acquiring, entitling and developing master-planned communities. Mr. Matkins is a member of the Urban Land Institute and Chair of the Los Angeles District Urban Development Council. Directors are elected annually to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Directors will not be able to stand for reelection unless they have attended at least 75% of Board meetings and committee meetings, as applicable. The Company plans to pay its non-employee directors an annual fee of $12,000, payable quarterly, $1,000 for each board meeting or committee meeting attended and to reimburse them for reasonable expenses incurred in attending meetings. Concurrently with this Offering, the Company will grant options to purchase 30,000 shares of Common Stock under its Stock Option Plan to each of its non-employee directors. See "--Stock Options." No family relationships exist between any of the executive officers or directors of the Company. The Company's Board of Directors has an Audit Committee and a Compensation Committee. The Audit Committee is comprised of Messrs. Lerner, Matkins and Davis and is responsible for making recommendations concerning the engagement of independent certified public accountants, approving professional services provided by the independent certified public accountants and reviewing the adequacy of the Company's internal accounting controls. The Compensation Committee is comprised of Messrs. Graziadio, Martin and Loughlin and is responsible for recommending to the Board of Directors all officer salaries, management incentive programs and bonus payments. 62 OTHER KEY EMPLOYEES Clinton V. Barrow Marketing Vice President, Restaurant Finance Group Edward A. Boyle Senior Vice President, Managing Director, Diversified Products Group Kevin T. Burke Senior Vice President, Capital Markets Melissa G. Dant, Esq. Vice President, Operations, Corporate Counsel, Retail Energy Group Kent "Carty" M. Davis Marketing Vice President, Restaurant Finance Group Michael A. DeMita, III Senior Vice President, Managing Director, Diversified Products Group Brian V. Farren Senior Vice President, National Sales Manager, Restaurant Finance Group Bonita Glover Marketing Vice President, Restaurant Finance Group Donald W. Hakes President, Retail Energy Group Larry Howard Marketing Vice President, Restaurant Finance Group Christopher Kelleher Senior Vice President, Operations Manager, Retail Energy Group Pierrette A. Newman, Esq. Senior Vice President, Operations, Corporate Counsel, Restaurant Finance Group Thomas J. Schuldt President, Restaurant Finance Group David Schwartzman Senior Vice President, Credit Manager, Restaurant Finance Group Courtney S. Stephens Marketing Vice President, Restaurant Finance Group Mary Ann Zic Vice President, Director of Research, Corporate
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to this Offering, the Company did not have a compensation committee. Messrs. Snavely and Knyal participated in deliberations concerning compensation of executive officers during 1996. Messrs. Graziadio and Lerner served on the Compensation Committee of ICII in 1996, and currently serve on such committee. During 1996, Mr. Snavely served on the Compensation Committee of ICII; beginning January 1, 1997 Mr. Snavely resigned from ICII's Compensation Committee. None of the other executive officers of the Company has served on the board of directors or on the compensation committee of any other entity which had officers who served on the Company's Board of Directors or on the Company's Compensation Committee. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information concerning the annual and long- term compensation earned by the Company's Chief Executive Officer and each of the other executive officers whose annual salary and bonus during 1996 exceeded $100,000 (the "Named Executive Officers").
ANNUAL COMPENSATION ------------------------------ NAME AND ALL OTHER PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION --------------------- -------- -------- ------------ Wayne L. Knyal(2)............................... $100,000 $150,000 $47,709(3) President, Chief Executive Officer and Director Thomas J. Shaughnessy(4)........................ 100,000 110,000 -- Executive Vice President and Chief Credit Officer John W. Rinaldi(4).............................. 125,000 125,000 11,709(5) Vice President, Loan Portfolio Management and President, Equipment Finance Group
- -------- (1) Raedelle A. Walker joined the Company in February 1997 and serves as Executive Vice President and Chief Financial Officer at an annual salary of $160,000. Thomas Kaplan joined the Company in October 1997 and serves as Executive Vice President, Capital Markets at an annual salary of $225,000. (2) Does not include distributions received by FLRT, Inc. as a member of Franchise Mortgage LLC. (3) Represents a car allowance of $6,000, reimbursement of living expenses of $36,000 and a $5,709 contribution by the Company under ICII's 401(k) Plan. (4) Messrs. Shaughnessy's and Rinaldi's base salaries for 1997 are $135,000 and $150,000, respectively. (5) Represents a car allowance of $6,000 and a $5,709 contribution by the Company under ICII's 401(k) Plan. 63 Employment Agreement In November 1997, the Company and Mr. Knyal entered into a five-year employment agreement terminating on October 31, 2002 pursuant to which Mr. Knyal agreed to act as the President and Chief Executive Officer of the Company for an annual base salary of $400,000, an annual bonus of not less than $82,000 and not to exceed $682,000, and customary benefits. Commencing January 1998, an amount of $82,000 per year would be deducted from the bonus payable to Mr. Knyal in order to repay certain amounts owed by Mr. Knyal to the Company, pursuant to the terms of a promissory note. See "Certain Transactions--Loans to Executive Officers and Directors." If Mr. Knyal's employment is terminated by the Company without cause or by Mr. Knyal for good reason (meaning the Company's uncured breach of any material term of the agreement, the removal of Mr. Knyal as Chief Executive Officer (other than for cause) or any diminution by the Company of Mr. Knyal's powers, duties or authority), Mr. Knyal would be paid his annual salary and provided with all customary benefits through October 31, 2002. In addition, in such event, FLRT, Inc. would have registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. See "Certain Transactions--Arrangements with ICII and its Affiliates--ICII Registration Rights Agreement." STOCK OPTIONS 1997 Stock Option Plan The Company's Board of Directors has adopted (and immediately prior to the effective date of this Offering its stockholders will approve) the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which provides for the grant of qualified incentive stock options ("ISOs") that meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), stock options not so qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights awards ("Awards"). The Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the Stock Option Plan may not be less than 100% (or 110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the Stock Option Plan will be the effective date of the Offering. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. The number of shares reserved for issuance under the Stock Option Plan is subject to anti-dilution provisions for stock splits, stock dividends and similar events. If an option granted under the Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the Stock Option Plan. Under the Stock Option Plan, the Company may make loans available to stock option holders, subject to the Committee's approval, in connection with the exercise of stock options granted under the Stock Option Plan. If shares of Common Stock are pledged as collateral for such indebtedness, such shares may be returned to the Company in satisfaction of such indebtedness. If so returned, such shares shall again be available for issuance in connection with future stock options and Awards under the Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the Stock Option Plan ten years after the effective date of the Offering. Options granted under the Stock Option Plan will become exercisable according to the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to 64 determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO, and when and in what increments shares covered by the option may be purchased. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of the Company or any subsidiary. The exercise price of any option granted under the Stock Option Plan is payable in full (1) in cash, (2) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOS, restricted stock subject to an Award under the Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to the optionholder, (4) by a full recourse promissory note executed by the optionholder or (5) by any combination of the foregoing. The terms of any promissory note may be changed from time to time by the Board of Directors to comply with applicable Service or Commission regulations or other relevant pronouncements. The Board of Directors may from time to time revise or amend the Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the Stock Option Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the Stock Option Plan, materially increase the benefits accruing to participants under the Stock Option Plan or extend the maximum option term under the Stock Option Plan. The following table sets forth the stock options to be granted to executive officers under the Stock Option Plan:
INDIVIDUAL GRANTS -------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF PERCENTAGE RATES OF STOCK SHARES OF OPTIONS PRICE APPRECIATION UNDERLYING TO BE EXERCISE FOR OPTION TERM(1) OPTIONS GRANTED TO PRICE EXPIRATION ------------------- NAME GRANTED(2) EMPLOYEES(3) ($/SH)(4) DATE(5) 5%($) 10%($) ---- ---------- ------------ --------- ---------- -------- ---------- Thomas J. Shaughnessy... 80,000 7.1% $17.00 2007 $855,297 $2,167,490 John W. Rinaldi......... 50,000 4.5 17.00 2007 534,560 1,354,681 Thomas Kaplan........... 50,000 4.5 17.00 2007 534,560 1,354,681 Raedelle A. Walker...... 50,000 4.5 17.00 2007 534,560 1,354,681
- -------- (1) Amounts reflect assumed risks of appreciation set forth in the Commission's executive compensation disclosure requirements. (2) Such stock options vest 20% on each anniversary date from the date of grant. (3) Based on options to acquire 1,200,000 shares expected to be granted under the Stock Option Plan on the effective date of this Offering. (4) The exercise price for all options will equal the initial public offering price. (5) Such stock options expire 10 years from the date of grant or earlier upon termination of employment. On the effective date of this Offering, it is expected that the Company will grant to certain other employees and directors options to acquire 970,000 shares of Common Stock at a per share exercise price equal to the initial public offering price, vesting 20% on each anniversary from the date of grant. ICII Options Granted to Executive Officers and Key Employees In April 1996, ICII granted incentive stock options to purchase 25,000 shares of ICII common stock to each of Messrs. Shaughnessy and Rinaldi and incentive stock options to purchase 10,000 shares of ICII common stock to Mr. Farren. In December 1995 and July 1996, ICII granted Raedelle A. Walker incentive stock options to purchase an aggregate of 15,000 shares of ICII common stock. The exercise price of all such options was the fair market value of ICII common stock at the time of the grants. 65 401(K) PLAN On the effective date of this Offering, the Company will commence participation in the ICII contributory retirement plan ("401(k) Plan") for all full time employees with at least six months of service, which is designed to be tax deferred in accordance with the provisions of Section 401(k) of the Code. The 401(k) Plan provides that each participant may contribute from 2% to 14% of his or her salary, and the Company will contribute to the participant's plan account at the end of each plan year 50% of the first 4% of salary contributed by a participant. Under the 401(k) Plan, employees may elect to enroll on the first day of any month, provided that they have been employed for at least six months. Subject to the rules for maintaining the tax status of the 401(k) Plan, an additional Company contribution may be made at the Company's discretion. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company matching funds would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. Company matching contributions will be made as of December 31st each year. LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION The Company's Certificate of Incorporation provides that, except to the extent prohibited by the Delaware General Corporation Law (the "DGCL"), its directors shall not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as directors of the Company. Under Delaware law, the directors have fiduciary duties to the Company that are not eliminated by this provision of the Certificate of Incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under Delaware law for breach of the director's duty of loyalty to the Company for acts or omissions that are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect the director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. In addition, the Company intends to maintain liability insurance for its officers and directors. Section 145 of the DGCL permits the Company to, and the Certificate of Incorporation provides that the Company may, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the Company, or is or was serving, or has agreed to serve, at the request of the Company, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. Such right of indemnification shall inure to such individuals whether or not the claim asserted is based on matters that antedate the adoption of the Certificate of Incorporation. Such right of indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs and personal representatives of such a person. The indemnification provided by the Certificate of Incorporation shall not be deemed exclusive of any other rights that may be provided now or in the future under any provision currently in effect or hereafter adopted by the Certificate of Incorporation, by any agreement, by vote of stockholders, by resolution of directors, by provision of law or otherwise. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors of the Company pursuant to the foregoing provision, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 66 Section 102(b)(7) of the DGCL permits a corporation to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL relating to unlawful dividends, stock purchases or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. Section 102(b)(7) of the DGCL is designed, among other things, to encourage qualified individuals to serve as directors of Delaware corporations. The Company believes this provision will assist it in securing the services of qualified directors who are not employees of the Company. This provision has no effect on the availability of equitable remedies, such as injunction or rescission. If equitable remedies are found not to be available to stockholders in any particular case, stockholders may not have any effective remedy against actions taken by directors that constitute negligence or gross negligence. 67 CERTAIN TRANSACTIONS THE REORGANIZATION Immediately prior to the closing of this Offering, Franchise Mortgage LLC will merge into Franchise Mortgage Acceptance Company, a Delaware corporation. Upon the closing of this Offering, ICII and FLRT, Inc. will own 12,091,667 and 6,358,333, or 44.4% and 23.4%, respectively, of the total outstanding shares of the Company's Common Stock, respectively. See "The Reorganization." ARRANGEMENTS WITH ICII AND ITS AFFILIATES The Company and ICII have entered into agreements for the purpose of defining their ongoing relationships. The agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's-length negotiations between independent parties. It is the intention of the Company and ICII that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. However, there can be no assurance that each of such agreements, or the transactions provided for therein, have been effected on terms at least as favorable to the Company as could have been obtained from unaffiliated parties. Additional or modified arrangements and transactions may be entered into by the Company, ICII, and their respective subsidiaries, after completion of this Offering. Any such future arrangements and transactions will be determined through negotiation between the Company and ICII, and it is possible that conflicts of interest will be involved. All transactions by and between the Company and ICII must be approved by a majority of the disinterested directors of the Company. The following is a summary of certain arrangements and transactions between the Company and ICII. Services Agreement The Company and ICII will enter into a services agreement effective as of the effective date of this Offering (the "Services Agreement") under which ICII will continue to provide human resource administration, securitization capability and certain accounting functions to the Company. ICII will charge fees for each of the above services which it will provide under the Services Agreement at a rate equal to $100 per month per employee employed by the Company at the end of each month. The Services Agreement will have an initial term that ends one year from the date of this Offering and is renewable annually thereafter. The Company may terminate the Services Agreement, in whole or in part, upon one month's written notice. As part of the services to be provided under the Services Agreement, ICII will provide the Company with insurance coverage and self insurance programs, including health insurance. The charge to the Company for insurance coverage will be based upon a pro rata portion of the costs to ICII of the various policies. ICII's total insurance expense is allocated among ICII and its subsidiaries based on the number of employees at each entity. The expense is annualized and charged to each entity monthly. Management believes that the terms of the Services Agreement are as favorable to the Company as could be obtained from independent third parties. ICII Registration Rights Agreement The Company has entered into the ICII Registration Rights Agreement pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. has certain piggyback registration rights with respect to a demand registration statement initiated by ICII concerning shares of the Company's Common Stock held by ICII; provided however than for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, or in the event that Mr. Knyal's employment is terminated by the Company without cause or by Mr. Knyal for good reason (as defined in his employment agreement), FLRT, Inc. shall have registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. 68 Transactions Involving SPTL At December 31, 1995, the Company had a net receivable of principal and interest on loans from SPTL, ICII's wholly owned subsidiary, of $579,000. In July 1995, the Company sold approximately $3.8 million of servicing rights to SPTL, resulting in a gain of $31,000. The Company also had a receivable from ICII of $924,000 bearing interest at 10.4% as of December 31, 1995 and a payable of $526,000 relating to ICII's residual interest in the Franchise Loan Receivables Trust 1995-B. The Company provides subservicing on a contractual basis for servicing rights on certain loans originated by the Company's predecessor and sold to SPTL. At June 30, 1997, December 31, 1996 and 1995, there was approximately $151 million, $183 million and $262 million, respectively, of loans outstanding underlying this subservicing arrangement. The Company receives approximately 13 basis points for providing such services. The Company purchased $55.3 million in loans at a $6.0 million premium from SPTL on December 29, 1995. These loans had originally been purchased by SPTL from Greenwich on November 30, 1995. The Company purchased $15.5 million in loans at par value from SPTL on June 26, 1997. These loans were purchased by SPTL from the Company in 1996 and 1997. The Company also has a master purchase and sale agreement with SPTL to originate loans for SPTL under mutual agreement, and subject to SPTL underwriting each such loan prior to sale of such loans. Under this agreement, the Company also has the ability to repurchase loans, under mutual agreement with SPTL. There is no specified commitment by either party, and each individual sale is negotiated separately as to pricing. This agreement has no expiration date. At June 30, 1997, loans originated for SPTL (and not repurchased), totaled approximately $104.3 million. The Company does not expect to originate a significant volume of loans for SPTL under this arrangement in the future. Borrowings and Guarantees At June 30, 1997 and December 31, 1996, the Company had borrowings from ICII outstanding of $10.0 million and $17.7 million, respectively. The Company paid interest at 12% on the outstanding balances. The Company will make the Final LLC Distribution currently estimated to be $3.0 million (this amount may increase depending on the level of Franchise Mortgage LLC's taxable income immediately prior to the completion of this Offering)immediately prior to the completion of this Offering. Such payment will be funded with a short term loan from ICII repayable with a portion of the net proceeds of this Offering. See "Use of Proceeds." The Company, among other subsidiaries of ICII, has jointly and severally and fully and unconditionally guaranteed ICII's $200 million 9.875% senior notes due January 15, 2007 and $70 million liquidation amount of remarketed par securities. Such guarantees will terminate upon the deconsolidation of the Company in the financial statements of ICII, which will be effective upon the closing of this Offering. In consideration of ICII's guarantee of the Company's warehouse lines of credit, repurchase facilities and leases outstanding at September 30, 1997, the Company pays to ICII monthly a fee equal to 15 basis points on the Company's outstanding borrowings covered by such guarantee. For the six months ended June 30, 1997 and the year ended December 31, 1996, the amount of such guarantee fees was $218,000 and $0, respectively. See "Business--Financing-- Warehouse Lines of Credit and Repurchase Facilities." ICII will not guarantee any of the Company's future warehouse lines of credit and repurchase facilities. ICII guaranteed the Company's lease obligations for its executive and administrative offices located in Los Angeles, California and Greenwich, Connecticut. The parties to the leases are currently negotiating a release of such guarantees. ICII will not guarantee any of the Company's future leases. 69 Since July 1, 1995, the Company has been treated as a partnership for federal and state income tax purposes. As a result, the income of the Company has not been subject to federal or state income taxation. The members of Franchise Mortgage LLC (ICII and FLRT, Inc.) are liable for individual federal and state income taxes on their allocated portions of the Company's taxable income. The Company's status as an LLC will be automatically terminated as a result of the Reorganization. The Company has agreed to indemnify each of ICII and FLRT, Inc. for any federal or state income taxes, including penalties and interest thereon, imposed by any taxing authority with respect to, for, or fairly attributable to the operations of Franchise Mortgage LLC for the period from July 1, 1995 through the effective date of this Offering. Notwithstanding the foregoing, each of ICII and FLRT, Inc. has agreed to indemnify the Company for all taxes, including penalties and interest thereon, resulting from any determination made by a taxing authority that Franchise Mortgage LLC should be determined for tax purposes to be an association taxable as a corporation and only to the extent that such taxes pertain to the income of Franchise Mortgage LLC as originally reported on its income tax return for the period in question and solely to the extent of any LLC distributions made by Franchise Mortgage LLC to ICII and FLRT, Inc. ICII Options Granted to Executive Officers and Key Employees In April 1996, ICII granted incentive stock options to purchase 25,000 shares of ICII common stock to each of Messrs. Shaughnessy and Rinaldi and incentive stock options to purchase 10,000 shares of ICII common stock to Mr. Farren. In December 1995 and July 1996, ICII granted Raedelle A. Walker incentive stock options to purchase an aggregate of 15,000 shares of ICII common stock. The exercise price of all such options was the fair market value of ICII common stock at the time of the grants. OTHER MATTERS In the ordinary course of business, the Company has conducted transactions with certain of its officers and directors and with affiliated companies and entities. All such transactions are conducted at "arm's length" in accordance with the Company's policies. Equity Investments Franchise Equity Fund L.L.C. Franchise Mortgage LLC, ICII and Mr. Knyal are parties to an Operating Agreement, dated April 1, 1996, pursuant to which such parties organized Franchise Equity Fund L.L.C., a Delaware limited liability company ("FEF LLC"), for the purpose of making equity investments in franchisees of PepsiCo related businesses. Franchise Mortgage LLC owns a 99% membership interest in, and is the manager of FEF LLC. ICII and Mr. Knyal own 0.67% and 0.33% membership interests, respectively, in FEF LLC. In June 1996, FEF LLC, Mr. Knyal and certain other investors entered into an agreement to organize five limited partnerships in New Jersey and Pennsylvania (the "Summerwood Partnerships") for the purpose of acquiring and operating 68 Taco Bell and KFC units. FEF LLC made a loan of $2.0 million to the Summerwood Partnerships in exchange for warrants to purchase a 40% limited partner interest in each of the Summerwood Partnerships. In December 1996, FEF LLC exercised the warrants in full, the $2.0 million loan was converted into capital contributions and FEF LLC acquired a 40% limited partner interest in each of the Summerwood Partnerships. Under certain circumstances, the general partner of the Summerwood Partnerships may require FEF LLC to make additional loans or capital contributions to the Summerwood Partnerships in the aggregate amount of $2.0 million until the third anniversary of the acquisition. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. In addition, pursuant to the terms of the agreement, Mr. Knyal is required to personally guarantee any obligations of the Summerwood Partnerships that the limited partners of such partnerships are required to personally guarantee. In connection with the acquisition, Franchise Mortgage LLC made 58 loans to the Summerwood Partnerships in the initial aggregate amount of $40.6 million. The loans bear interest at annual rates ranging from 9.19% to 10.8% and are due on dates ranging from July 2003 to July 2011. At June 30, 1997, the outstanding balance of such loans was $39.3 million. 70 In November 1996, FEF LLC and certain other investors organized Restaurant Management of Carolina, L.P., a Delaware limited partnership ("Restaurant Management LP"), for the purpose of acquiring and operating 37 Taco Bell units. FEF LLC made an initial capital contribution of $3.0 million ($2.0 million of which has been repaid to FEF LLC) to, and owns a 32.5% limited partner interest in, Restaurant Management LP. Under certain circumstances, the general partner may require FEF LLC to make additional capital contributions to Restaurant Management LP in the aggregate amount of $2.0 million until the third anniversary of the acquisition. The purchase price for the units was funded in part through 27 loans from Franchise Mortgage LLC in the initial aggregate amount of $23.2 million. The loans bear interest at annual rates ranging from 9.19%% to 10.0% and are due on dates ranging from June 1998 to December 2011. At June 30, 1997, the outstanding balance of such loans was $22.9 million. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. In addition, in March and August 1996, prior to the acquisition, Franchise Mortgage LLC made 15 loans to certain affiliates of Restaurant Management LP in the initial aggregate amount of $9.9 million. The loans bear interest at annual rates ranging from 10.25% to 10.45%. At June 30, 1997, the outstanding balance of such loans was $9.6 million. In December 1996, FEF LLC and certain other investors organized Family Eats Limited Partnership, a Delaware limited partnership ("Family Eats LP"), for the purpose of acquiring and operating 19 Taco Bell units. FEF LLC made a capital contribution of $1.45 million to, and owns a 49% limited partner interest in, Family Eats LP. Under certain circumstances, the general partner may require FEF LLC to make additional capital contributions to Family Eats LP in the aggregate amount of $1.55 million until the third anniversary of the acquisition. The purchase price for the units was funded in part through 18 loans from Franchise Mortgage LLC in the initial aggregate amount of $10.1 million. The loans bear interest at annual rates ranging from 9.69% to 10.25% and are due on dates ranging from July 1998 to October 2012. At June 30, 1997, the outstanding balance of such loans was $10.0 million. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. CVB, L.L.C. Franchise Mortgage LLC, ICII and Mr. Knyal are parties to an Operating Agreement, dated February 6, 1997, pursuant to which such parties organized CVB, L.L.C., a Delaware limited liability company ("CVB LLC"), for the purpose of making equity investments in franchisees of Church's Chicken units. Franchise Mortgage LLC owns a 99% membership interest in, and is the manager of, CVB LLC. ICII and Knyal own 0.67% and 0.33% membership interests, respectively, in CVB LLC. In April 1997, CVB LLC and another investor organized Atlanta Franchise Development Company, LLC, a Delaware limited liability company ("Atlanta Franchise LLC"), for the purpose of acquiring and operating 100 Church's Chicken units. CVB LLC made a nominal capital contribution to, and owns a 40% membership interest in, Atlanta Franchise LLC. The purchase price for the units was funded in part through 72 loans from Franchise Mortgage LLC in the initial aggregate amount of $25.1 million. The loans bear interest at an annual rate of 11.72% and are due in April 2012. At June 30, 1997, the outstanding balance of such loans was $24.7 million. The other investor has certain rights to purchase CVB LLC's membership interest after the fifth anniversary of the acquisition, and CVB LLC has certain rights to sell its membership interest to Atlanta Franchise LLC after the seventh anniversary of the acquisition. HNN Equity, L.L.C. Franchise Mortgage LLC and ICII are parties to an Operating Agreement, dated March 27, 1997, pursuant to which such parties organized HNN Equity, L.L.C., a Delaware limited liability company ("HNN Equity LLC"), for the purpose of making an equity investment in Hot N Now, L.L.C., a Delaware limited liability company ("Hot 'N Now LLC"). Franchise Mortgage LLC and ICII each own a 50% membership interest in, and share joint management of, HNN Equity LLC. In April 1997, HNN Equity LLC and Davis/HNN, L.L.C. ("Davis/HNN LLC"), a limited liability company principally owned by Ronald V. Davis, a director of the Company, organized Hot 'N Now LLC under the laws of the state of Delaware for the purpose of acquiring all franchisor and tradename rights to a QSR concept named "Hot 'N Now" as well as acquiring and operating 36 Not 'N Now units. HNN Equity LLC owns a 40% membership interest in Hot 'N Now LLC. 71 Davis/HNN LLC owns a 60% membership interest in, and is the manager of, Hot 'N Now LLC. The purchase price for the Units was $2.0 million and was funded through a capital contribution of $1.5 million by Davis/HNN LLC and a loan of $600,000 from Davis/HNN LLC. The loan bears interest at an annual rate of 8% and is payable out of distributable cash from the operations of Hot 'N Now LLC. Mr. Davis is the Chief Executive Officer of Hot 'N Now LLC and Davis/HNN LLC is entitled to an annual base fee of $60,000 per year in its capacity as manager of Hot 'N Now LLC. The manager may require the members to make additional capital contributions to Hot 'N Now LLC to satisfy the obligations of Hot 'N Now LLC to make rent payments under real estate leases for 19 units. Such obligations are also guaranteed by ICII. PRG Equity, L.L.C. On April 14, 1997 Franchise Mortgage LLC organized PRG Equity, L.L.C., a Delaware limited liability company ("PRG Equity LLC"), for the purpose of making an equity investment in Pate Restaurant Enterprises, Ltd., a Florida limited partnership which owns and operates seven Hardee's units ("Pate Restaurant LP"). Franchise Mortgage LLC owns all of the membership interests in and manages PRG Equity LLC. In April 1997, Franchise Mortgage LLC made seven loans to Pate Restaurant LP in the initial aggregate amount of $3.5 million. In connection with such loans, PRG Equity LLC acquired a 40% limited partner interest in Pate Restaurant LP. The loans bear interest at annual rates ranging from 9.94% to 10.79% and are due on dates ranging from November 1998 to May 2012. At June 30, 1997, the outstanding balance of such loans was $3.4 million. The other investors in Pate Restaurant LP have certain rights to purchase PRG Equity LLC's limited partner interest after the seventh anniversary of the acquisition, and PRG Equity LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. See "Risk Factors--Concentration on Restaurant, Retail Energy and Golf Sectors May Expose the Company to Concept Failures, Industry Cycles, Environmental Liabilities and Other Industry Specific Risks." The Company is currently negotiating with a major investment bank to form a joint venture pursuant to which all loan and lease activities of the Company's Golf Finance Group would be exclusively conducted by a new entity which would be 50% owned and managed by each of the Company and the investment bank. See "Prospectus Summary--Recent Developments." Certain Loans On July 15, 1997 the Company loaned Kevin T. Burke $170,000 for the purposes of assisting Mr. Burke to buy a home. The loan is evidenced by a promissory note executed by Mr. Burke in favor of the Company that bears interest at an annual rate of 8% and is payable in one installment on April 15, 1998. In connection with the purchase by Franchise Mortgage LLC of certain of the assets and liabilities of the Division from Greenwich in June 1995, Franchise Mortgage LLC assumed as a receivable a $410,000 unsecured non-interest bearing note made by Mr. Knyal in favor of Greenwich. The note was restructured in August 1997 to be payable in five annual installments of $82,000 commencing January 1, 1998 out of that bonus due to Mr. Knyal under his new employment agreement. See "Management--Executive Compensation--Employment Agreements." 72 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of October 10, 1997, giving pro forma effect to the Reorganization, and pro forma as adjusted to reflect the sale of 5,312,500 shares by the Company and 3,437,500 shares by the Selling Stockholders, by (i) each director of the Company, (ii) each of the Named Executive Officers, (iii) each person known to the Company to be beneficial owner of more than 5% of the Common Stock and (iv) all directors and executive officers of the Company as a group.
COMMON STOCK OWNED PRIOR TO COMMON STOCK TO BE OFFERING(1) OWNED AFTER THE OFFERING ------------------ --------------------------- NUMBER OF NUMBER OF SHARES NUMBER OF SHARES PERCENT BEING OFFERED SHARES PERCENT ---------- ------- ---------------- --------------- ----------- Imperial Credit Industries, Inc.(2).... 14,591,667 66.7% 2,500,000 12,091,667 44.4% FLRT, Inc.(3)(4)........ 7,295,833 33.3 937,500 6,358,333 23.4 Wayne L. Knyal(4)....... 6,201,458 28.3 796,875 5,404,583 19.9 Thomas J. Shaughnessy(3)......... -- -- -- -- John W. Rinaldi(3)...... -- -- -- -- Thomas Kaplan(3)........ -- -- -- -- Raedelle Walker(3)...... -- -- -- -- H. Wayne Snavely(2)..... -- -- -- -- G. Louis Graziadio, III(2)................. -- -- -- -- Perry A. Lerner(2)...... -- -- -- -- Michael L. Matkins(3)... -- -- -- -- Ronald V. Davis(3)...... -- -- -- -- John E. Martin(3)....... -- -- -- -- Richard J. Loughlin(3).. -- -- -- -- All Directors and Officers as a Group (12 persons)(4)........ 6,201,458 28.3% 796,875 5,404,583 19.9%
- -------- (1) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned. (2) Imperial Credit Industries, Inc. and each of such persons may be reached at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505. (3) FLRT, Inc. and each of such persons may be reached through the Company at 2049 Century Park East, Suite 350, Los Angeles, California 90067. (4) Wayne L. Knyal is deemed to beneficially own 85% of the shares of the Company's Common Stock held by FLRT, Inc. 73 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. After giving effect to this Offering, there will be 27,200,000 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote per share on matters to be voted upon by the stockholders. There are no cumulative voting rights. Holders of Common Stock are entitled to receive ratable dividends when, as and if declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution or winding up of the Company, holders of Common Stock share ratably in the assets of the Company available for distribution to its stockholders, subject to the preferential rights of any then-outstanding shares of Preferred Stock. No shares of Preferred Stock will be outstanding immediately following the consummation of this Offering. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. All shares of Common Stock outstanding upon the effective date of this Prospectus, and the shares offered hereby will, upon issuance and sale, be fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without further action by the stockholders of the Company, to issue up to 10,000,000 shares of Preferred Stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions thereof including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting, conversion and other rights which could adversely affect the voting power and other rights of the holders of Common Stock. Preferred Stock could thus be issued quickly with terms calculated to delay or prevent a change in control of the Company or to make removal of management more difficult. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of the Company without any further action by the stockholders including, but not limited to, a tender offer to purchase Common Stock at a premium over then current market prices. The Company has no present plan to issue any shares of Preferred Stock. CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW Generally, Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a broad range of "business combinations" with an "interested stockholder" (defined generally as a person owning 15% of more of a corporation's outstanding voting stock) for three years following the date such person became an interested stockholder unless (i) before the person becomes an interested stockholder, the transaction resulting in such person becoming an interested stockholder or the business combination is approved by the board of directors of the corporation, (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock of the corporation (excluding shares owned by directors who are also officers of the corporation or shares held by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender offer or exchange offer), or (iii) on or after such date on which such person became an interested stockholder the business combination is approved by the board of directors and authorized at an annual or special meeting, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock excluding shares owned by the interested stockholders. The restrictions of Section 203 do not apply, among other reasons, if a corporation, by action of its stockholders, adopts an amendment to its certificate of incorporation or bylaws expressly electing not to be governed by Section 203, provided that, in addition to any other vote required by law, such amendment to the certificate of incorporation or bylaws must be approved by the affirmative vote of a majority of the shares entitled to vote. Moreover, an amendment so adopted is not effective until twelve months after its adoption and does not apply to any business combination between the corporation and any person who became an interested stockholder of such corporation on or prior to such adoption. The Certificate of Incorporation and Bylaws do not currently contain any provisions electing not to be governed by Section 203 of the DGCL. 74 Section 203 of the DGCL may discourage persons from making a tender offer for or acquisitions of substantial amounts of the Common Stock. This could have the effect of inhibiting changes in management and may also prevent temporary fluctuations in the Common Stock that often result from takeover attempts. Section 211 of the DGCL allows a corporation to designate in its certificate of incorporation or bylaws who may call a special meeting of the stockholders. The Certificate of Incorporation will designate that only members of the Company's Board of Directors may call a special meeting of the stockholders. Section 228 of the DGCL allows any action that is required to be or may be taken at a special or annual meeting of the stockholders of a corporation to be taken without a meeting with the written consent of holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, provided that the certificate of incorporation of such corporation does not contain a provision to the contrary. The Certificate of Incorporation will contain such a provision, and therefore stockholders holding a majority of the voting power of the Common Stock will not be able to approve corporate actions requiring stockholder approval without holding a meeting of stockholders. REGISTRATION RIGHTS The Company has entered into the ICII Registration Rights Agreement pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any registration statement concerning shares of the Company's Common Stock held by ICII; provided however that for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, or in the event that Mr. Knyal's employment is terminated by the Company without cause or by Mr. Knyal for good reason (as defined in his employment agreement), FLRT, Inc. shall have registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer Corp., Glendale, California. 75 SHARES ELIGIBLE FOR FUTURE SALE After this Offering, the Company will have outstanding 27,200,000 shares of Common Stock. Of the outstanding shares, the 8,750,000 shares to be sold in this Offering will be freely tradeable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 18,450,000 shares of Common Stock outstanding upon completion of this Offering (assuming no exercise of the Underwriters' over-allotment option) are "restricted securities" as that term is defined in Rule 144, all of which will be eligible for sale under Rule 144 upon completion of this Offering, subject to the lock-up described below. As described below, Rule 144 permits resales of restricted securities subject to certain restrictions. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who beneficially owned shares for at least one year, including any person who may be deemed an "affiliate" of the Company (as the term "affiliate" is defined under the Securities Act), would be entitled to sell within any three month period a number of such shares that does not exceed the greater of 1% of the shares of the Company's Common Stock then outstanding (272,000 shares immediately after this Offering) or the average weekly trading volume in the Company's Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. A person who is not deemed to have been an "affiliate" of the Company any time during the three months immediately preceding a sale and who has beneficially owned shares for at least two years would be entitled to sell such shares under Rule 144 without regard to the volume limitation described above. The Company and the Selling Stockholders have agreed that they will not, without the prior written consent of Montgomery Securities (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, directly or indirectly, sell offer, contract or grant any option to sell, make any short sale, pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock currently owned either of record or beneficially by them or announce the intention to do any of the foregoing, for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date. NationsBanc Montgomery Securities, Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock up agreements. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the consent of Montgomery Securities, issue, offer, sell or grant options to purchase or otherwise dispose of any equity securities or securities convertible into or exchangeable for equity securities except for (i) the issuance of shares of Common stock offered hereby and (ii) the grant of options to purchase shares of Common Stock pursuant to the Stock Option Plan and shares of Common Stock issued pursuant to the exercise of such options, provided that such options shall not vest, or the Company shall obtain the written consent of the grantee not to transfer such shares, until the end of such 180-day period. See "Underwriting." The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. Options to purchase 1,200,000 shares are expected to be granted to employees, officers and directors of the Company on the effective date of this Offering. The Company intends to file a Registration Statement on Form S-8 covering the shares that have been reserved for issuance under the Stock Option Plan, thus permitting the resale of such shares in the public market. The Company has entered into the ICII Registration Rights Agreement pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any registration statement concerning shares of the Company's Common Stock held by ICII; provided however that for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, or in the event that Mr. Knyal's employment is terminated by the Company without cause or by Mr. Knyal for good reason (as defined in his employment agreement), FLRT, Inc. shall have registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. 76 UNDERWRITING The Underwriters named below represented by NationsBanc Montgomery Securities, Inc., Credit Suisse First Boston and PaineWebber Incorporated (the "Representatives") have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discounts set forth on the cover page of this Prospectus:
UNDERWRITER NUMBER OF SHARES ----------- ---------------- NationsBanc Montgomery Securities, Inc......................... Credit Suisse First Boston..................................... PaineWebber Incorporated....................................... --------- Total........................................................ 8,750,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such shares if any are purchased. The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After this Offering, the offering price and other selling terms may be changed by the Representatives. The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company and the Selling Stockholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 1,312,500 additional shares of Common Stock to cover over-allotments, if any, at the offering price less the underwriting discount set forth on the cover page of this Prospectus. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities, including liabilities under the Act, or will contribute to payments that the Underwriters may be required to make in respect thereof. The Company and the Selling Stockholders have agreed that they will not, without the prior written consent of Montgomery Securities (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, directly or indirectly, sell offer, contract or grant any option to sell, make any short sale, pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock currently owned either of record or beneficially by them or announce the intention to do any of the foregoing, for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date. NationsBanc Montgomery Securities, Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock up agreements. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the consent of NationsBanc Montgomery Securities, Inc., issue, offer, sell or grant options to purchase or otherwise dispose of any equity securities or securities convertible into or exchangeable for equity securities except for (i) the issuance of shares of Common stock offered hereby and (ii) the grant of options to purchase shares of Common Stock pursuant to the Stock Option Plan and shares of Common Stock issued pursuant to the exercise of such options, provided that such options shall not vest, or the Company shall obtain the written consent of the grantee not to transfer such shares, until the end of such 180-day period. See "Management--Stock Options" and "Shares Eligible for Future Sale." 77 Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations among the Company, the Selling Stockholders and the Representatives. Among the factors to be considered in such negotiations are the history of, and prospects for, the Company and the industry in which it competes, an assessment of the Company management, its past and present operations and financial performance, the prospects for further earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the Offering, the market prices of and demand for publicly traded common stocks of comparable companies in recent periods and other factors deemed relevant. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in this Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this Offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with this Offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representative in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. NationsBanc Montgomery Securities, Inc. and PaineWebber Incorporated have in the past performed investment banking and advisory services for ICII and certain of its other affiliates. Credit Suisse First Boston acted as private placement agent for the Company's most recent securitization transaction in June 1997. In addition, Credit Suisse First Boston makes available a $300 million repurchase facility to the Company. See "Business--Financing-- Warehouse Lines of Credit and Repurchase Facilities." The Representatives have informed the Company that the Underwriters do not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. 78 LEGAL MATTERS Certain matters relating to this offering are being passed upon for the Company and the Selling Stockholders by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly Hills, California. Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California. EXPERTS The financial statements of Franchise Mortgage Acceptance Company LLC as of June 30, 1997 and December 31, 1996, and 1995, and for the six-months ended June 30, 1997, June 30, 1995 and December 31, 1995, and the years ended December 31, 1996 and 1994, have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 79 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report................................................ F-2 Balance Sheets.............................................................. F-3 Statements of Operations.................................................... F-4 Statements of Changes in Members' Equity.................................... F-5 Statements of Cash Flows.................................................... F-6 Notes to Financial Statements............................................... F-7
Schedules are omitted because they are either inapplicable or the required information is included in the financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Managers Franchise Mortgage Acceptance Company LLC: We have audited the accompanying balance sheets of Franchise Mortgage Acceptance Company LLC as of June 30, 1997, and December 31, 1996 and 1995, and the related statements of operations, changes in members' equity and cash flows for the six months ended June 30, 1997 and December 31, 1995, and the year ended December 31, 1996, and the six months ended June 30, 1995, and the year ended December 31, 1994 (Predecessor periods). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Franchise Mortgage Acceptance Company LLC as of June 30, 1997, and December 31, 1996 and 1995, and the results of its operations and its cash flows for the six-months ended June 30, 1997 and December 31, 1995, and the year ended December 31, 1996, and the six months ended June 30, 1995, and the year ended December 31, 1994 (Predecessor periods), in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California August 25, 1997 F-2 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC BALANCE SHEETS (IN THOUSANDS)
PRO FORMA DECEMBER 31, JUNE 30, 1997 JUNE 30, ----------------- (NOTE 3) 1997 1996 1995 ------------- -------- -------- -------- (UNAUDITED) ASSETS Cash................................. $ 15 $ 15 $ -- $ -- Restricted cash...................... -- -- -- 526 Interest bearing deposits............ 2,667 2,667 2,594 -- Securities available for sale........ 2,581 2,581 39,349 -- Loans and leases held for sale....... 208,014 208,014 98,915 181,254 Retained interest in loan securitizations..................... 7,002 7,002 6,908 -- Premises and equipment, net.......... 1,433 1,433 1,162 235 Goodwill............................. 4,571 4,571 4,332 4,226 Receivable from Southern Pacific Thrift & Loan....................... -- -- -- 579 Receivable from Imperial Credit Industries, Inc..................... -- -- -- 924 Accrued interest receivable.......... 1,137 1,137 560 1,108 Other assets......................... 5,536 5,536 6,356 196 -------- -------- -------- -------- Total assets..................... $232,956 $232,956 $160,176 $189,048 ======== ======== ======== ======== LIABILITIES AND MEMBERS' EQUITY Book overdraft....................... $ -- $ -- $ 171 $ 445 Payable to Imperial Credit Industries, Inc..................... 12,997 9,997 17,728 -- Borrowings........................... 195,922 195,922 125,240 69,637 Bonds................................ -- -- -- 111,995 Deferred income taxes................ 7,018 -- -- -- Accrued interest payable............. 878 878 148 1,062 Other liabilities.................... 4,061 4,061 2,432 2,136 -------- -------- -------- -------- Total liabilities................ 220,876 210,858 145,719 185,275 -------- -------- -------- -------- Commitments and contingencies (Note 19) Members' equity: Members' capital................... -- 5,792 5,792 4,432 Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued and outstanding actual or pro forma......................... -- -- -- -- Common stock, $.001 par value; 100,000,000 shares authorized; no shares issued and outstanding actual; 21,887,500 shares issued and outstanding pro forma......... 22 -- -- -- Additional paid in capital......... 12,058 -- -- -- Retained earnings (accumulated deficit).......................... -- 16,306 8,665 (659) -------- -------- -------- -------- Total members' equity.............. 12,080 22,098 14,457 3,773 -------- -------- -------- -------- Total liabilities and members' equity............................ $232,956 $232,956 $160,176 $189,048 ======== ======== ======== ========
See accompanying notes to financial statements. F-3 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF OPERATIONS (IN THOUSANDS)
PREDECESSOR ----------------------- SIX MONTHS SIX MONTHS SIX MONTHS ENDED SIX MONTHS YEAR ENDED ENDED ENDED YEAR ENDED JUNE 30, ENDED JUNE DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, 1997 30, 1996 1996 1995 1995 1994 ---------- ----------- ------------ ------------ ---------- ------------ (UNAUDITED) Revenue: Gain on sale of loans................ $19,808 $12,520 $18,671 $ -- $ -- $4,052 ------- ------- ------- ------ ------- ------ Interest income....... 10,767 1,257 16,130 1,929 1,121 1,445 Interest expense...... 9,394 955 14,489 1,690 967 1,408 ------- ------- ------- ------ ------- ------ Net interest income............. 1,373 302 1,641 239 154 37 ------- ------- ------- ------ ------- ------ Loan servicing income............... 1,376 649 1,191 349 326 306 Other income.......... -- 63 63 -- -- 68 ------- ------- ------- ------ ------- ------ Total other income.. 1,376 712 1,254 349 326 374 ------- ------- ------- ------ ------- ------ Total revenues...... 22,557 13,534 21,566 588 480 4,463 ------- ------- ------- ------ ------- ------ Expense: Personnel and commission........... 4,665 3,901 8,270 356 931 1,723 Professional services............. 1,176 602 1,093 106 477 1,057 Travel................ 524 202 614 155 182 340 Business promotion.... 316 198 450 96 62 170 Occupancy............. 277 122 310 94 55 97 Goodwill amortization......... 169 251 411 146 -- -- General and administrative....... 1,467 495 1,094 294 684 1,804 ------- ------- ------- ------ ------- ------ Total expense....... 8,594 5,771 12,242 1,247 2,391 5,191 ------- ------- ------- ------ ------- ------ Net income (loss)... $13,963 $ 7,763 $ 9,324 $ (659) $(1,911) $ (728) ======= ======= ======= ====== ======= ====== Pro forma earnings data (unaudited): Net income as reported............. $13,963 $ 7,763 $ 9,324 Pro forma income taxes................ 5,935 3,366 3,873 ------- ------- ------- Pro forma net income.. $ 8,028 $ 4,397 $ 5,451 ======= ======= ======= Pro forma net income per share............ $ 0.37 $ 0.20 $ 0.25 ======= ======= ======= Supplemental pro forma earnings data (unaudited): Net income as reported............. $13,963 Establishment of deferred tax liability............ 7,018 ------- Supplemental pro forma net income........... $ 6,945 ======= Supplemental pro forma net income per share................ $ 0.32 =======
See accompanying notes to financial statements. F-4 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997, DECEMBER 31, 1995 AND JUNE 30, 1995, AND THE YEARS ENDED DECEMBER 31, 1996 AND 1994 (IN THOUSANDS)
ACCUMULATED TOTAL MEMBERS' (DEFICIT) RETAINED MEMBERS' PREDECESSOR CAPITAL EARNINGS EQUITY - ----------- -------- ------------------ -------- Balance, January 1, 1994................. $ -- $(2,069) $(2,069) Net Loss................................. -- (728) (728) ------- ------- ------- Balance, December 31, 1994............... $ -- (2,797) (2,797) Net Loss................................. -- (1,911) (1,911) ------- ------- ------- Balance, June 30, 1995................... $ -- $(4,708) $(4,708) ======= ======= ======= THE COMPANY - ----------- Members' contribution--ICII.............. $ 7,592 $ -- $ 7,592 Members' contribution--Knyal............. 645 -- 645 Return of capital--ICII.................. (3,805) -- (3,805) Net loss................................. -- (659) (659) ------- ------- ------- Balance, December 31, 1995............... $ 4,432 $ (659) $ 3,773 Net income............................... -- 9,324 9,324 Members' Contribution--ICII.............. 1,360 -- 1,360 ------- ------- ------- Balance, December 31, 1996............... $ 5,792 $ 8,665 $14,457 Tax Distribution--ICII................... -- (4,215) (4,215) Tax Distribution--Knyal.................. -- (2,107) (2,107) Net income............................... -- 13,963 13,963 ------- ------- ------- Balance, June 30, 1997................... $ 5,792 $16,306 $22,098 ======= ======= =======
See accompanying notes to financial statements. F-5 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR ---------------------- SIX SIX MONTHS SIX MONTHS MONTHS ENDED SIX MONTHS YEAR ENDED ENDED ENDED YEAR ENDED JUNE 30, ENDED JUNE DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, 1997 30, 1996 1996 1995 1995 1994 ---------- ----------- ------------ ------------ -------- ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss)....... $ 13,963 $ 7,763 $ 9,324 $ (659) $ (1,911) $ (728) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization........... 388 289 2,883 153 16 -- Loans originated........ (300,617) (208,361) (458,467) (130,314) -- -- Gain on sale of loans... (19,808) (12,520) (18,671) -- -- -- Loans sold to (purchased from) affiliates....... 17,772 205,281 222,462 (196,631) -- -- Proceeds from loan sales and securitizations.... 193,349 173,176 337,015 145,691 -- -- Decrease (increase) in accrued interest receivable............. (577) 952 548 (1,108) (524) (99) Increase in securities owned.................. -- -- -- -- (45,778) (5,107) Gain on sale of servicing rights....... -- -- -- (31) -- Net change in other liabilities............ 2,359 (829) (618) 3,198 828 (197) Net change in other assets................. 931 (1,497) (7,027) (2,214) 1,044 341 --------- --------- --------- --------- -------- ------- Net cash provided (used) by operating activities............. (92,240) 164,254 87,449 (181,915) (46,325) (5,790) --------- --------- --------- --------- -------- ------- Cash flows from investing activities: Purchases of premises and equipment.......... (490) (638) (1,190) (162) 52 -- Increase in interest bearing deposits....... (73) (2,525) (2,594) -- -- -- Purchase of securities available for sale..... -- (9,691) (41,704) -- -- (15) Sale of securities available for sale..... 36,768 -- -- -- -- -- Purchase of other investments............ (408) -- (4,383) -- -- -- Sale of servicing rights................. -- -- -- 3,805 -- -- --------- --------- --------- --------- -------- ------- Net cash provided (used) by investing activities............. 35,797 (12,854) (49,871) 3,643 52 (15) --------- --------- --------- --------- -------- ------- Cash flows from financing activities: Issuance of bonds....... -- -- -- 111,995 -- -- Repayment of bonds...... -- (111,995) (111,995) -- -- -- Net change in borrowings from ICII.............. (7,731) 7,009 17,728 -- -- 3,500 Increase in borrowings.. 70,682 (46,402) 55,603 69,637 46,391 2,275 Member (distributions) contributions.......... (6,322) 144 1,360 (3,805) -- -- --------- --------- --------- --------- -------- ------- Net cash provided (used) by financing activities............. 56,629 (151,244) (37,304) 177,827 46,391 5,775 --------- --------- --------- --------- -------- ------- Net change in cash...... 186 156 274 (445) 118 (30) Cash (book overdraft) at beginning of period.... (171) (445) (445) -- 102 132 --------- --------- --------- --------- -------- ------- Cash (book overdraft) at end of period.......... $ 15 $ (289) $ (171) $ (445) $ 220 $ 102 ========= ========= ========= ========= ======== =======
See accompanying notes to financial statements. F-6 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, DECEMBER 31, 1996 AND 1995 (1) ORGANIZATION On June 30, 1995, Imperial Credit Industries, Inc. ("ICII") acquired from Greenwich Capital Financial Products, Inc. (Greenwich) certain assets of Greenwich's Franchise Mortgage Acceptance Company division (the FMAC Division), including all of Greenwich's rights under certain servicing contracts entered into by the FMAC Division (the Servicing Contracts) and a $410,000 obligation owed by Wayne L. Knyal (Knyal) to Greenwich. The Servicing Contracts pertain to the servicing of franchise loans that were previously securitized by Greenwich through the FMAC Division and other franchise loans owned by Greenwich and not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Knyal, the former president of the FMAC Division, for the formation of a California limited liability company named Franchise Mortgage Acceptance Company LLC (the Company). In connection with the acquisition, the Company or its affiliates assumed certain liabilities related to the Servicing Contracts and Greenwich agreed to act as the Company's exclusive agent in connection with the securitization of franchise loans for a period of 24 months. The Company was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66 2/3% ownership interest in the Company, ICII was obligated to contribute to the Company $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33 1/3% ownership interest in the Company, Knyal caused his wholly owned company, FLRT, Inc., to contribute to the Company all of its rights under a servicing contract pertaining to franchise loans that were previously securitized by FLRT, Inc. On August 30, 1995, ICII completed the acquisition of certain net assets of the FMAC Division for a net purchase price of $7.6 million which included $3.8 million in contingent consideration based on loan originations after the date of acquisition up to a maximum principal amount of such loans equal to $250.0 million. The acquisition was recorded using the purchase method of accounting. Under this method of accounting, the purchase price was allocated to the respective assets acquired (primarily purchased servicing rights) with a fair value of $3.2 million at the date of the purchase transaction. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill of $4.4 million. The Company has filed a registration statement relating to its initial public offering of common stock. At the completion of such offering the Company will no longer be treated as a partnership for income tax purposes and its income will become fully taxable. See Notes 3, 4 and 14. Immediately prior to the public offering, the Company will merge into Franchise Mortgage Acceptance Company. Franchise Mortgage Acceptance Company was incorporated in August, 1997; it has not commenced operations and has no assets, liabilities, or contingent liabilities. For accounting purposes, the merger will be effected at historical cost and the historical financial statements of the Company will become those of Franchise Mortgage Acceptance Company. (2) BASIS OF PRESENTATION The financial statements have been prepared in conformity with generally accepted accounting principles. 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 dates of the balance sheet and revenues and expenses for the periods presented. Significant balance sheet accounts which could be materially affected by such estimates include securities available for sale and retained interest in loan securitizations. Actual results could differ significantly from those estimates. The accompanying statements of operations and cash flows for the six months ended June 30, 1995, and the year ended December 31, 1994, are those of the Company's predecessor, the FMAC Division. Revenues and interest expense appearing on such statements of operations result from assets and debt of the FMAC Division F-7 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) which were accounted for separately by Greenwich. Personnel and commission expense appearing on such statements of operations apply to the employees of the FMAC Division, and such expense was also accounted for separately by Greenwich. All other expenses of the FMAC Division were either directly assigned or allocated to the FMAC Division by Greenwich based on either actual utilization or the number of FMAC Division employees. Management believes that the method used to allocate the expenses of Greenwich to the FMAC Division was reasonable and that the Company's expenses on a stand alone basis as if the Company had operated during the predecessor period as an entity unaffiliated with Greenwich are not materially different from those expenses presented. (3) PRO FORMA INFORMATION (a) Pro Forma Income Taxes (unaudited) As discussed in Note 14, the Company has been treated as a partnership for federal and state income tax purposes. Upon completion of the initial public offering discussed in Note 1, the Company will no longer be treated as a partnership for income tax purposes and its income will be subject to federal and state income taxes. The accompanying statements of operations for the six months ended June 30, 1997, and the year ended December 31, 1996, present unaudited pro forma income taxes and net income reflecting the estimated income tax expense of the Company as if it had been subject to normal federal and state income taxes for such periods. Unaudited pro forma income tax expense for the six months ended June 30, 1997, and the year ended December 31, 1996, included the following components:
1997 1996 ------- ------- (IN THOUSANDS) Federal................... $ 4,310 $ 2,812 State..................... 1,625 1,061 ------- ------- Total pro forma income tax expense............ $ 5,935 $ 3,873 ======= =======
The differences between unaudited pro forma income tax expense at the statutory federal income tax rate of 34% and the unaudited pro forma income tax expense shown in the accompanying statements of operations for the six months ended June 30, 1997, and the year ended December 31, 1996, are as follows:
1997 1996 ------- ------- (IN THOUSANDS) Pro forma income tax expense at statutory rate.......... $ 4,747 $ 3,170 State tax net of federal benefit........................ 1,073 700 Elimination of valuation allowance on net operating loss carry forward.......................................... -- (215) Other................................................... 115 218 ------- ------- Total................................................. $ 5,935 $ 3,873 ======= =======
If the Company had not been treated as a partnership for tax purposes on June 30, 1997, a deferred income tax liability of approximately $7,018,000 would have been recorded as a charge to earnings and a corresponding decrease in retained earnings. The accompanying unaudited pro forma balance sheet as of June 30, 1997, and the unaudited supplemental pro forma earnings data for the six months ended June 30, 1997, reflect the effect on retained earnings and net income of establishing on June 30, 1997, the deferred tax liability. At June 30, 1997, the components of the unaudited pro forma deferred income tax liability were as follows:
JUNE 30, 1997 ------------- (IN THOUSANDS) Gain on sale of loans deferred for income tax purpose...... $7,134 Basis difference in retained interest in loan securitizations........................................... (783) Deferred loan fees......................................... 667 ------ Total unaudited pro forma deferred income tax liability.. $7,018 ======
F-8 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (b) Pro Forma Balance Sheet Information (unaudited) The pro forma information presented in the accompanying balance sheet as of June 30, 1997 reflects (i) the distribution of $3.0 million by the Company to members of its previously taxed and undistributed retained earnings, which amount is expected to be distributed at the closing date of the proposed initial public offering, subject to certain limitations (for purposes of the pro forma presentation, the distribution funds were obtained through short- term borrowings from ICII), (ii) an increase in the Company's deferred income tax liability of $7,018,000 as if the Company was not treated as a partnership for tax purposes on June 30, 1997 (Note 14), (iii) the reclassification of Members' capital and retained earnings as paid-in capital and common stock and (iv) 21,887,500 shares issued and outstanding. (c) Pro Forma Earnings Per Share data (unaudited) The pro forma and supplemental pro forma earnings per share data is based upon 21,887,500 shares outstanding, such shares being those outstanding immediately after termination of the Company's partnership status for income tax purposes and prior to the initial public offering referred to in Note 1. Stock options which are expected to be issued upon the completion of the initial public offering referred to in Note 1 do not add incrementally to shares outstanding because the option price per share is equal to the initial public offering price. (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid investments with maturities of three months or less at date of acquisition to be cash equivalents. Restricted cash includes cash pledged as a reserve account for the FLRT 1995-B securitization. INVESTMENT SECURITIES The Company classifies investments as held-to-maturity, trading, and/or available for sale. Held-to-maturity investments are reported at amortized cost, trading securities are reported at fair value, with unrealized gains and losses included in operations, and available for sale securities are reported at fair value with unrealized gains and losses included as a separate component of Members' equity. Discount and premium on such securities are amortized to income using the interest method over the life of the securities. Realized gains and losses on securities available for sale are included in earnings at the time of sale using the specific identification method for determining the cost of securities sold. LOANS AND LEASES HELD FOR SALE Loans and leases held for sale are carried at the lower of aggregate cost or market. RETAINED INTEREST IN LOAN SECURITIZATIONS The Company may create retained interest in loan securitizations as a result of the sale of loans into securitization trusts. Retained interest in loan securitizations is classified as available for sale and carried at estimated fair value with the unrealized gain or loss thereon included as a separate component of equity. Each loan securitization has specific credit enhancement requirements in the form of overcollateralization which must be met before the Company receives cash flows due. As the securitized assets generate excess cash flows, they are initially used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass-through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan securitizations. After the overcollateralization requirement and the other requirements specified in the pooling F-9 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) and servicing agreement have been met, the Company begins to receive the excess cash flows and a portion of the retained interest on a monthly basis. Retained interest in loan securitizations are amortized using the interest method. To the extent that actual future performance results are less than the Company's original performance estimates, the Company's retained interest in loan securitizations will be written down through a charge to operations in that period. LOAN SALES AND RELATED GAIN OR LOSS Loans are sold through either securitizations or whole loan sales with servicing retained by the Company. Securitizations typically require credit enhancements in the form of cash reserves or overcollateralization that are reflected as retained interest in loan securitizations on the balance sheet. Sales are recognized when the transaction settles and the risks and rewards of ownership are determined to have been passed to the purchaser. Gain is recognized to the extent that the selling prices exceed the carrying value of the loans sold based on the estimated relative fair values of the assets transferred, assets obtained and liabilities incurred. The assets obtained in a sale include, generally, retained interest in loan securitizations, loan servicing assets, and call options. Liabilities incurred in a sale include, generally, recourse obligations, put options, and servicing liabilities. In the securitizations completed to date, the Company retained call options giving it the right to repurchase loans sold when the outstanding amount of such loans is 1% to 10% or less of the original amount sold, depending on the terms of the related securitization. As these call options are equivalent to a cleanup call, the Company has ascribed no value to them. The Company has not established servicing assets or liabilities, although the Company retained the servicing rights on the loans sold, because management has determined that revenues from contractually specified servicing fees (30 basis points) and other ancillary sources are just adequate to compensate the Company for its servicing responsibilities. Recourse obligations are included in the retained interests through discounting. The securitizations completed to date had no put option features. In determining the estimated fair values of the retained interest in loan securitizations, the Company estimates the cash flows therefrom and discounts such cash flows at interest rates determined by management (ranging from 11% to 19%) to be rates market participants would use in similar circumstances. Quoted market prices are not available as no active market exists for retained interest in loan securitizations. In estimating the cash flows, the Company considers default and prepayment rates. To date, the default rate used by the Company has been zero because the Company has incurred no credit losses. Management does, however, continually review the credit loss assumption and makes changes thereto based on portfolio trends and risks associated with new products. Generally, the Company has used zero prepayment rates because a prepayment penalty contained in lending documents has deterred borrower prepayments significantly. LOAN ORIGINATION FEES Origination fees received on franchise loans held for sale, net of direct costs related to the origination of the loans, are deferred as an adjustment to the carrying value of loans held for sale. At the time of sale of the related loans, such deferred fees are taken into income and included with the gain or loss on sale of loans. SERVICING FEES Servicing fees are earned on the cash flow streams from various pools of securitized loans serviced for others. Servicing fees are recognized as income when received. At June 30, 1997, December 31, 1996 and 1995, the Company serviced loans of $834.1 million, $593.7 million and $207.7 million, respectively, for affiliates and others. PREMISES AND EQUIPMENT, NET Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual F-10 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) assets (three to seven years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. INCOME TAXES Under current Federal and applicable state limited liability company laws and regulations, limited liability companies are treated as partnerships for tax reporting purposes and, accordingly, are not subject to income taxes. Therefore, no provision for income taxes has been made in the Company's financial statements. For tax purposes, income or losses are included in the tax returns of the members. Upon completion of the proposed initial public offering, the Company's LLC status will terminate and the Company's income will be fully taxable. See Note 3. GOODWILL Goodwill is amortized on a straight-line basis over its estimated useful life of 15 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. HEDGING PROGRAM The Company regularly securitizes and sells fixed-and variable-rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling United States Treasury future contracts. Unrealized and realized gains and losses on such positions are deferred as an adjustment to the carrying value of loans and leases held for sale and included in income as gain or loss on sale of loans when the related loans are sold. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted on January 1, 1997, Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are assessed for impairment based on their fair value. The implementation of SFAS 125 did not have a material impact on the Company's financial condition or results of operations. Under the provisions of SFAS 125, securitization interests retained by the Company as a result of securitization transactions will be held as either available for sale or trading. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing and presenting earnings per share ("EPS") as previously prescribed by Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in F-11 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) earnings. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, and earlier application is not permitted. Management has determined that the implementation of SFAS 128 will not have a material impact on the Company's financial condition or results of operations. Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS 129 consolidates existing reporting standards for disclosing information about an entity's capital structure. SFAS 129 also supersedes specific requirements found in previously issued accounting statements. SFAS 129 must be adopted for financial statements for periods ending after December 15, 1997. The impact on the Company of adopting SFAS 129 is not expected to be material. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management is in the process of determining what effect, if any, adoption will have on the Company's financial condition and results of operations. The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," ("SFAS 131") in June 1997. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Management has not yet determined what effect, if any, adoption will have on the Company's financial condition and results of operations. (5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Noncash transactions for the six months ended December 31, 1995, included the contribution of all of the assets acquired by ICII from Greenwich including $80,000 of premises and equipment, $11,000 of prepaid expenses and approximately $3.1 million of servicing rights. In addition, servicing rights totaling $645,000 were contributed by Knyal for his interest in the Company. Cash paid for the six months ended December 31, 1995, for interest totaled $1.4 million, including approximately $1.0 million paid to Southern Pacific Thrift and Loan ("SPTL"), an affiliate of the Company. During 1996, ICII contributed $1.4 million to the Company by decreasing the balances of the outstanding payable to ICII by the amount of the contribution. Cash paid for interest for the six months ended June 30, 1997 and the year ended December 31, 1996 was $6.2 million and $15.6 million, respectively, including approximately $0 million and $10.0 million, respectively, paid to SPTL. (6) SECURITIES AVAILABLE FOR SALE On June 20, 1996, the Company purchased two interest-only strips related to franchise loan securitizations completed by Greenwich Capital for a total price of $2,947,292 to yield approximately 15%. The carrying values of these securities was $2,581,183 and $2,778,110 at June 30, 1997 and December 31, 1996, respectively. For the year ended December 31, 1996, and the six months ended June 30, 1997, discount accretion and cash received was $217,415 and $386,597, respectively, and $204,389 and $401,316, respectively. As there is no active market for these securities, management estimated their fair values by discounting estimated cash flows from these securities at an interest rate determined by management to be the rate market participants would use in similar circumstances. F-12 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) On August 18, 1996, the Company purchased securitization certificates that had been issued by Greenwich Capital through the FMAC Division in 1991 for a total price of $38,756,339, which included a premium of $1,479,929. The certificates paid principal and interest and have final maturities in 2002 and 2003. Premium amortized and cash received during the year ended December 31, 1996, totaled $181,990 and $2,003,769, respectively. The carrying value of the certificates was $36,570,580 at December 31, 1996, and they were sold during 1997. (7) LOANS AND LEASES HELD FOR SALE At June 30, 1997, December 31, 1996 and 1995, loans and leases held for sale consisted of the following:
1997 1996 1995 -------- ------- -------- (IN THOUSANDS) Loans......................................... $188,825 $94,490 $174,879 Equipment loans and leases.................... 21,184 4,385 -- Premium on franchise loans.................... -- -- 5,946 Net deferred loan fees........................ (1,324) (750) (203) Unearned lease income......................... (3,270) (497) -- Margin and deferred net losses on futures contracts used to hedge loans held for sale.. 2,599 1,287 632 -------- ------- -------- Loans and leases held for sale.............. $208,014 $98,915 $181,254 ======== ======= ========
The Company's loans and leases are primarily comprised of loans to experienced franchisees of nationally recognized restaurant concepts. A substantial portion of its debtors' ability to honor their contracts is dependent upon the cash flows generated by the franchise restaurant units themselves. The loans and leases generally are collateralized by the business property, and the real estate on which the franchises are located. Loans and leases held for sale were pledged as collateral for the borrowings and bonds of the Company. As of June 30, 1997, there were two loans on nonaccrual totaling $1.2 million included in loans and leases held for sale. There were no restructured or impaired loans. As of December 31, 1996, 1995 and 1994 there were no nonaccrual, restructured or impaired loans. (8) RETAINED INTEREST IN LOAN SECURITIZATIONS Activity in retained interest in loan securitizations was as follows for the six-months ended June 30, 1997, and the year ended December 31, 1996:
1997 1996 ------ ------ (IN THOUSANDS) Balance, beginning of period............................... $6,908 $ -- Additions.................................................. 326 6,744 Accretion.................................................. 501 503 Cash received.............................................. (733) (339) ------ ------ Balance, end of period..................................... $7,002 $6,908 ====== ======
F-13 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The components of retained interest in loan securitizations were as follows at the dates indicated:
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ (IN THOUSANDS) Overcollateralization amounts........................ $5,283 $5,208 Cash reserve deposit--restricted..................... 1,259 1,566 Residual interests................................... 460 134 ------ ------ $7,002 $6,908 ====== ======
(9) ACQUISITION During April 1997, the Company acquired certain net assets of the Enterprise Financial Group for a purchase price of $408,000. The acquisition was recorded using the purchase method of accounting. Under this method of accounting the purchase price was allocated to the respective assets acquired. The excess of the purchase price over the fair value of the net assets acquired has been recorded as goodwill of approximately $408,000. (10) PREMISES AND EQUIPMENT, NET Premises and equipment consisted of the following at June 30, 1997, December 31, 1996 and 1995:
1997 1996 1995 ------ ------ ---- (IN THOUSANDS) Furniture, fixtures and equipment.................... $1,374 $ 968 $242 Leasehold improvements............................... 59 78 -- Construction in progress............................. 270 240 -- Less accumulated depreciation and amortization..... (270) (124) (7) ------ ------ ---- Ending balance....................................... $1,433 $1,162 $235 ====== ====== ====
(11) HEDGING As of June 30, 1997 and December 31, 1996, the Company had open positions of $149.2 million and $94.1 million, respectively, related to United States Treasury futures contracts used to hedge loans and leases held for sale. At June 30, 1997 and December 31, 1996, the Company's unrealized and realized net losses on future contracts was $0.9 million and $1.3 million, respectively. See Note 7. F-14 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (12) BORROWINGS Borrowings consisted of the following at June 30, 1997, December 31, 1996, and 1995 (dollars in thousands):
JUNE 30, 1997 DECEMBER 31, 1996 ---------------------- ---------------------- INTEREST COMMITMENT PRINCIPAL INTEREST COMMITMENT PRINCIPAL EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING RATE AMOUNT OUTSTANDING --------------- ----- -------- ---------- ----------- -------- ---------- ----------- CS First December 31, 1998 Libor plus 7.29% $ 300,000 $167,447 7.31% $ 300,000 $ 48,673 Boston.......... 160 to 235 basis points Banco June 1, 1998 Libor plus 7.29% 50,000 16,465 7.63% 50,000 16,181 Santander....... 160 basis points Greenwich Capital 30 days on demand Libor plus -- -- -- 7.36% Not 35,158 Financial Products, Inc. .. 125 basis specified points Southern Pacific Thrift & Loan... Not specified Coupon less -- -- -- 9.17% 25,228 25,228 approximately 50 basis points Sanwa Bank...... September 30, 1997 Eurodollars 7.50% 15,000 12,010 -- -- -- plus 200 basis points Imperial Credit Industries, Inc. .. Not Specified Fixed 12.00% Not 9,997 12.00% Not 17,728 specified specified --------- -------- --------- -------- $ 365,000 $205,919 $ 375,228 $142,968 ========= ======== ========= ======== DECEMBER 31, 1995 ---------------------- INTEREST COMMITMENT PRINCIPAL RATE AMOUNT OUTSTANDING -------- ---------- ----------- CS First -- $ -- $ -- Boston.......... Banco 8.00% 25,000 12,615 Santander....... Greenwich Capital 7.25% Not 10,054 Financial Products, Inc. .. specified Southern Pacific Thrift & Loan... 9.17% 46,968 46,968 Sanwa Bank...... -- -- -- Imperial Credit Industries, Inc. .. 12.00% -- -- ---------- ----------- $ 71,968 $69,637 ========== ===========
The proceeds of the loan from Greenwich Capital Financial Products, Inc. at December 31, 1996, were used to purchase asset backed securities totaling $39.3 million which are included in securities available for sale in the accompanying balance sheets. The above borrowings are collateralized by franchise loans held for sale and interest bearing deposits. F-15 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (13) BONDS In December 1995, the Company, through a special purpose entity ("SPE"), issued pass-through certificates (the "Bonds") secured by $105.2 million of franchise loans. The Bonds consisted of three separate classes, Class A, Class B and Class C, with principal balances at December 31, 1995 of approximately $92.6 million, $4.2 million and $4.2 million, respectively. The Class C bonds were subordinate to Class B, and both Class B and C are subordinate to Class A. The Bonds had a weighted average loan rate of 9.63%, a pass-through rate of 8.59%, and a stated maturity of 13 years. The premium associated with the Bonds of $11.0 million was amortized as an adjustment to interest expense over the anticipated life of the Bonds. Due to the Company's retained interest in the SPE and the disproportionate payments on the pass-through certificates, the Company accounted for this transaction as a financing. On March 28, 1996, the Company sold its interest in the SPE to Imperial Credit Mortgage Holdings, Inc. an affiliate, receiving proceeds from the sale of $2.8 million. As a result of the sale, the Company removed from its balance sheet the loans and related bonds of $111.2 million and $112.0 million, respectively, resulting in a net gain of $3.6 million. (14) INCOME TAXES The Company has qualified to be treated as a partnership for both federal and state income tax purposes, and, as a result, is not subject to Federal and state income taxes. Therefore, no asset or liability for income taxes has been included in the historical financial statements. The Members are liable for individual Federal and state income taxes on their allocated portions of the Company's taxable income. Upon completion of the public offering discussed in Note 1, the Company will not be treated as a partnership for federal and state income tax purposes, and its income will become fully taxable. This will result in the establishment of a deferred income tax liability using normal federal and state income tax rates, causing a one-time non-cash charge against earnings for additional income tax expense equal to the amount of the deferred tax liability. As of June 30, 1997, the deferred income tax liability which would have been recorded had the Company not been treated as a partnership for tax purposes on that date was approximately $7,018,000. For further information on this deferred income tax liability and income taxes, see Note 3. (15) PROFIT SHARING AND 401(K) PLANS The Company's employees participate in a 401(k) plan sponsored by ICII. Under the plan, employees may elect to enroll at the beginning of any month in which the employee has been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the employee's contribution up to 4% of the employee's compensation. The Company may also make a discretionary contribution on an annual basis to be allocated to participants who have contributed in excess of 4% of their compensation. The allocation is based upon a formula set by the plan and requires a five- year vesting period. All forfeitures are allocated to the remaining participants in the plan. Distribution of vested benefits to a terminated participant in the 401(k) is made in accordance with the contribution allocation form signed by the employee. Distributions are made, by election of the participant, in either certificates of deposit, ICII common stock and stock or bond mutual funds or a combination thereof. The Company contributed $105,000, $88,000 and $13,000 to the 401(k) plan in for the six months ending June 30, 1997, the year ended December 31, 1996 and the six months ended December 31, 1995, respectively. F-16 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (16) TRANSACTIONS WITH AFFILIATES In the ordinary course of business, the Company has conducted transactions with affiliated companies. In the opinion of management all such transactions are conducted at "arm's length" in accordance with the Company's policies. At December 31, 1995, the Company had a net receivable of principal and interest on franchise loans from SPTL of $579,000. In July 1995, the Company sold approximately $3.8 million of franchise loan servicing rights to SPTL, resulting in a gain of $31,000. The Company also had a receivable from ICII, a member, of $924,000 bearing interest at 10.4% as of December 31, 1995 and a payable of $526,000 relating to ICII's residual interest in the Franchise Loan Receivable Trust 1995-B (FLRT 1995-B). The Company provides subservicing on a contractual basis for servicing rights owned by SPTL. At June 30, 1997, and December 31, 1996 and 1995, there were approximately $151 million, $183 million and $262 million of loans outstanding underlying this subservicing arrangement. The Company receives approximately 13 basis points for providing such services. The Company purchased $55.3 million in franchise loans at a $6.0 million premium from SPTL on December 29, 1995. These franchise loans were purchased by SPTL from Greenwich on November 30, 1995. The Company purchased $15.5 million in franchise loans at par value from SPTL on June 26, 1997. These franchise loans were purchased by SPTL from the Company in 1996 and 1997. SPTL has provided warehouse facilities for the Company under which the loans are closed under SPTL's name with the intent to resell the franchise loans to the Company for inclusion into securitizations. The rate charged is equivalent to the rate earned on the franchise loans less approximately 50 basis points, or 9.17%. As of June 30, 1997, December 31, 1996 and December 31, 1995, the Company had an outstanding balance of $0, $25.2 million and $47.0 million, respectively, with respect to this facility. During the six months ended June 30, 1997, the year ended December 31, 1996 and the six months ended December 31, 1995, the Company paid SPTL $0 million, $10.3 million and $1.2 million in interest expense associated with this facility. At June 30, 1997, loans originated by the Company for SPTL totaled approximately $104.3 million. At June 30, 1997 and December 31, 1996, the Company had borrowings from ICII outstanding of $10.0 million and $17.7 million, respectively. The Company pays interest at 12% on the outstanding balance. The Company pays to ICII monthly 15 basis points on the Company's non-affiliate borrowing commitments in consideration for ICII's guaranty of such borrowings. (17) OTHER INVESTMENTS At June 30, 1997, and December 31, 1996, the Company had approximately $4.4 million of equity investments included in other assets. These investments represent interests in limited liability companies ("LLCs") or limited partnerships (collectively, the "investees") which were formed to own and operate restaurant franchise concepts, and are owned through investor LLCs, the members of which consist of the Company, the Company's chief executive officer, and ICII. Member ownership percentages in the investor LLCs range from 50% to 100% for the Company, from 0% to 0.33% for the chief executive officer, and from 0.67% to 50% for ICII. The Company consolidates all investor LLCs in which it has a greater than 50% ownership interest because the terms of the operating agreements vest control with the Company. The investor LLC in which the Company has a 50% ownership interest is accounted for under the equity method because the operating agreement provides for joint and equal management by the Company and the other 50% owner. The investor LLC's ownership interests in the investees range from 32.5% to 49.0%. A director of the Company owns 60% of one investee and the investor LLC owns 40%; such investor LLC is owned 50% by the Company and 50% by ICII. Accordingly, the Company's ownership interests in the investees (through the F-17 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) investor LLCs) range from 20% to 48.5%. These investments are accounted for by the Company under the equity method as the terms of the investment agreements do not place the investor LLCs or the Company in a position of control over the investees. Management has determined that the Company's equity in the net income or loss of the investees is not material at this time. The June 30, 1997, unpaid balances of loans to the investees made by the Company total approximately $100.4 million of which $80.3 million has been securitized and sold and $20.1 million is included in loans held for sale. At June 30, 1997, none of these loans was past due. Under the terms of the partnership and investment agreements, the investor LLCs are committed under certain circumstances to make additional loans and capital contributions of approximately $5.6 million. (18) FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments include interest bearing deposits, securities available for sale, loans and leases held for sale, futures contracts used to hedge loans held for sale, retained interest in loan securitizations, receivables from and payables to affiliates, borrowings and bonds. Fair value estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The carrying values of interest-bearing deposits and receivables from and payables to affiliates and members approximate fair value due to their short- term nature. The fair value of securities available for sale was based on discounted cash flow. The fair value of loans and leases held for sale is estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such loans. The fair value of retained interest in loan securitizations was estimated by discounting future cash flows using rates that an unaffiliated third-party purchaser would require on instruments with similar terms and remaining maturities. The fair values of borrowings and bonds was estimated by discounting cash flows at interest rates for debt having similar credit ratings and maturities. The estimated fair values of the Company's financial instruments are as follows (in thousands):
1997 1996 1995 ------------------- ------------------- ------------------- CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- -------- ---------- Assets: Interest-bearing deposits............. $ 2,667 $ 2,667 $ 2,594 $ 2,594 $ -- $ -- Loans and leases held for sale............. 208,014 208,014 98,915 102,872 181,254 185,165 Retained interest in loan securitizations...... 7,002 7,002 6,908 6,908 -- -- Securities available for sale............. 2,581 2,581 39,349 39,349 -- -- Receivable due from affiliate............ -- -- -- -- 579 579 Receivable due from member............... -- -- -- -- 924 924 Liabilities: Payable due to Imperial Credit Industries, Inc...... $ 9,997 $ 9,997 $ 17,728 $ 17,728 $ -- $ -- Borrowings............ 195,922 195,922 125,240 125,240 69,637 69,637 Bonds................. -- -- -- -- 111,995 111,995
F-18 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (19) COMMITMENTS AND CONTINGENCIES Leases Minimum rental commitments under noncancelable operating leases at June 30, 1997, were as follows (in thousands): Six months ended December 31, 1997................................. $ 406 Year ended December 31,: 1998............................................................. 713 1999............................................................. 724 2000............................................................. 706 2001............................................................. 639 ------ Thereafter....................................................... 196 ------ Total............................................................ $3,384 ======
Rent expense for the six months ending June 30, 1997, the year ended December 31, 1996 and the six months ending December 31, 1995 was $241,000, $292,000 and $94,000, respectively. Litigation The Company is involved in litigation arising from the normal course of business. The Company is currently involved in a dispute with a vendor regarding the value of services rendered. Management does not believe that an adverse settlement, if any, would have a material impact on the Company's financial condition or results of operations. The predecessor entity to the Company, and an officer of such entity and of the Company, among others, are named as defendants in De Wald et al. vs. Knyal et al. filed on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. The Company has not been named as a defendant in this lawsuit. Financial Guarantees The Company, among other subsidiaries of ICII, has jointly and severally and fully and unconditionally guaranteed ICII's $200 million 9.875% senior notes due January 15, 2007 and ICII's $70 liquidation amount of remarketed par securities. Such guarantees will terminate upon the deconsolidation of the Company in the financial statements of ICII, effective upon the closing of the Company's initial public offering. Loan Servicing Related fiduciary funds held in trust for investors in non-interest bearing accounts at unaffiliated financial institutions totalled $24,000 as of June 30, 1997. These funds are segregated in special bank accounts and are held as deposits in such financial institutions. Loan Commitments As of June 30, 1997, the Company had open short-term lending commitments amounting to approximately $76.2 million in process subject to credit approval. There is no exposure to credit loss in this type of commitment until the loans are funded. Interest rate risk is mitigated by the use of hedging strategies applied to each loan at the time of funding. Equity Investments As of June 30, 1997 the Company was obligated to make up to an additional $5.6 million in loans and equity investments under existing arrangements. See Note 17. F-19 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, any of the Underwriters or the Selling Stockholders. This Prospectus does not constitute an offer to sell or a solicitation of, any offer to buy any shares of Common Stock other than the Shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. ------------------- TABLE OF CONTENTS -------------------
Page ---- Available Information.................................................... 2 Prospectus Summary....................................................... 3 Risk Factors............................................................. 10 The Reorganization....................................................... 28 Use of Proceeds.......................................................... 29 LLC Distributions........................................................ 29 Dividend Policy.......................................................... 29 Dilution................................................................. 30 Capitalization........................................................... 31 Selected Financial Data.................................................. 32 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 34 Business................................................................. 42 Management............................................................... 60 Certain Transactions..................................................... 68 Principal and Selling Stockholders....................................... 73 Description of Capital Stock............................................. 74 Shares Eligible for Future Sale.......................................... 76 Underwriting............................................................. 77 Legal Matters............................................................ 79 Experts.................................................................. 79 Index to Financial Statements............................................ F-1
Until , 1997 (25 days after the date of this Prospectus) all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 8,750,000 SHARES [LOGO OF FRANCHISE MORTGAGE ACCEPTANCE COMPANY] COMMON STOCK ---------------- PROSPECTUS ---------------- NATIONSBANC MONTGOMERY SECURITIES, INC. CREDIT SUISSE FIRST BOSTON PAINEWEBBER INCORPORATED , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The Registrant estimates that expenses in connection with the offering described in this registration statement will be as follows:
AMOUNT TO BE PAID --------- Securities and Exchange Commission registration fee.............. $ 51,838 NASD filing fee.................................................. 18,613 Nasdaq National Market Listing fee............................... 50,000 Printing expenses................................................ 150,000 Accounting fees and expenses..................................... 150,000 Legal fees and expenses.......................................... 200,000 Fees and expenses (including legal fees) for qualifications under state securities laws........................................... 50,000 Transfer agent's fees and expenses............................... 10,000 Miscellaneous.................................................... 69,549 -------- Total........................................................ $750,000* ========
- ------- * Of this amount, $295,000 is payable by the Selling Stockholders. All amounts except the Securities and Exchange Commission registration fee and the NASD filing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits the Registrant to, and Article 8 of the Certificate of Incorporation provides that the Registrant may, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Registrant, or is or was servicing, or has agreed to serve, at the request of the Registrant, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On June 30, 1995, Imperial Credit Industries, Inc. ("ICII") acquired from Greenwich Capital Financial Products Inc. ("Greenwich") certain assets of the Franchise Mortgage Acceptance Company division of Greenwich (the "Division") including all of Greenwich's rights under certain servicing contracts (the "FMAC Servicing Contracts") entered into by the Division and a $410,000 obligation owed by Wayne L. Knyal, the President and Chief Executive Officer of the Registrant, to Greenwich. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Mr. Knyal for the formation of Franchise Mortgage LLC. In connection with the acquisition, Franchise Mortgage LLC or its affiliates assumed certain liabilities related to the FMAC Servicing Contracts. Franchise Mortgage LLC was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66.7% ownership interest in Franchise Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33.3% ownership interest in Franchise Mortgage LLC, Knyal caused his wholly owned company, FLRT, Inc., to contribute to Franchise Mortgage LLC all of its rights under the FLRT Servicing Contracts. II-1 Immediately prior to this Offering, Franchise Mortgage LLC will merge into the Registrant (the "Reorganization"). As a result of the Reorganization, immediately prior to this Offering ICII will own 66.7% and FLRT, Inc. will own 33.3%, respectively, of the outstanding shares of capital stock of the Registrant representing 14,591,667 and 7,295,833 shares, respectively. The issuance of the ownership interests was and the stock issued on the effective date will be deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) promulgated under the Securities Act as transactions by an issuer not involving a public offering. In addition, the recipients of securities in each such transaction have or will represent their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends are affixed to the certificates issued in such transactions. All recipients had or have adequate access, through their relationships with the Company, to information about the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS 1.1+ Form of Underwriting Agreement 3.1+ Articles of Organization of Franchise Mortgage Acceptance Company LLC 3.2+ Operating Agreement of Franchise Mortgage Acceptance Company LLC 3.3 Form of Articles of Incorporation of Franchise Mortgage Acceptance Company, a Delaware corporation 3.4 Form of Bylaws of Franchise Mortgage Acceptance Company, a Delaware corporation 4.1 Form of Specimen Stock Certificate 5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein 10.1+ Form of 1997 Stock Option Plan and Form of Option Agreement 10.2 Form of Employment Agreement by and between the Registrant and Wayne L. Knyal 10.3+ Form of Services Agreement by and between the Registrant and Imperial Credit Industries, Inc. 10.4(a)+ First Amendment to Office Lease dated November 26, 1996 by and between the Registrant and Delta Towers Joint Venture (b)+ Office Lease dated August 24, 1995 by and between the Registrant and Delta Towers Joint Venture 10.5(a)+ Letter dated July 15, 1996 from Imperial Credit Industries, Inc. to Fawn Associates Limited Liability Company consenting to First Amendment to Lease dated as of March 22, 1996 by and between the Registrant and Fawn Associates Limited Liability Company (b)+ First Amendment to Lease dated as of March 22, 1996 by and between the Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company (c)+ Guaranty Agreement dated as of March 22, 1996 by and between Imperial Credit Industries, Inc. and Fawn Associates Limited Partnership (d)+ Lease dated as of March 22, 1996 by and between Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company 10.6(a)+ Letter of Intent dated August 19, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (b)+ Master Repurchase Agreement dated as of October 10, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (c)+ Tri-party Custodial Agreement for Contracts dated October 10, 1996 by and among the Franchise Mortgage Acceptance Company LLC, CS First Boston Mortgage Capital Corp. and First Bank National Association (d)+ First Amendment to Repurchase Agreement and Custodial Agreement dated May 1, 1997 by and among the Franchise Mortgage Acceptance Company LLC, Credit Suisse First Boston Mortgage Capital LLC and First Bank National Association 10.7+ Master Loan Sale Agreement, dated August 23, 1995 by and between the Franchise Mortgage Acceptance Company LLC and Southern Pacific Thrift & Loan Association 10.8+ Master Participation Agreement dated November 22, 1995 by and among the Franchise Mortgage Acceptance Company LLC, Imperial Credit Industries, Inc., Certain Financial Institutions and Banco Santander, New York Branch
II-2 10.9+ Credit Agreement dated as of February 28, 1997 by and among Franchise Mortgage Acceptance Company LLC and Sanwa Bank California 10.10 Form of Registration Rights Agreement by and among the Registrant, Imperial Credit Industries, Inc. and FLRT, Inc. 10.11 Form of Tax Agreement by and among the Registrant, Franchise Mortgage Acceptance Company LLC, FLRT, Inc. and Imperial Credit Industries, Inc. 10.12 Form of Master Loan and Security Agreement dated October 1997 by and between Franchise Mortgage Acceptance Company LLC and Morgan Stanley Asset Funding Inc. 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.1) 24.1+ Power of Attorney (included on signature page of Registration Statement)
-------- + Previously filed ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (b) insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it is declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON NOVEMBER 6, 1997. Franchise Mortgage Acceptance Company /s/ Wayne L. Knyal By: _________________________________ WAYNE L. KNYAL, PRESIDENT, CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED ON NOVEMBER 6, 1997.
SIGNATURE TITLE --------- ----- /s/ Wayne L. Knyal President, Chief Executive Officer - ------------------------------------- and Director (Principal Executive WAYNE L. KNYAL Officer) /s/ Raedelle Walker Chief Financial Officer Executive - ------------------------------------- Vice President (Principal RAEDELLE WALKER Accounting Officer) * Director - ------------------------------------- H. WAYNE SNAVELY * Director - ------------------------------------- G. LOUIS GRAZIADIO, III * Director - ------------------------------------- PERRY A. LERNER * Director - ------------------------------------- MICHAEL A. MATKINS * Director - ------------------------------------- RONALD V. DAVIS * Director - ------------------------------------- JOHN E. MARTIN * Director - ------------------------------------- RICHARD J. LOUGHLIN *By /s/ Wayne L. Knyal Attorney-in-Fact - ------------------------------------- WAYNE L. KNYAL
II-4 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1+ Form of Underwriting Agreement 3.1+ Articles of Organization of Franchise Mortgage Acceptance Company LLC 3.2+ Operating Agreement of Franchise Mortgage Acceptance Company LLC 3.3 Form of Articles of Incorporation of Franchise Mortgage Acceptance Company, a Delaware corporation 3.4 Form of Bylaws of Franchise Mortgage Acceptance Company, a Delaware corporation 4.1 Form of Specimen Stock Certificate 5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein 10.1+ Form of 1997 Stock Option Plan and Form of Option Agreement 10.2 Form of Employment Agreement by and between the Registrant and Wayne L. Knyal 10.3+ Form of Services Agreement by and between the Registrant and Imperial Credit Industries, Inc. 10.4(a)+ First Amendment to Office Lease dated November 26, 1996 by and between the Registrant and Delta Towers Joint Venture (b)+ Office Lease dated August 24, 1995 by and between the Registrant and Delta Towers Joint Venture 10.5(a)+ Letter dated July 15, 1996 from Imperial Credit Industries, Inc. to Fawn Associates Limited Liability Company consenting to First Amendment to Lease dated as of March 22, 1996 by and between the Registrant and Fawn Associates Limited Liability Company (b)+ First Amendment to Lease dated as of March 22, 1996 by and between the Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company (c)+ Guaranty Agreement dated as of March 22, 1996 by and between Imperial Credit Industries, Inc. and Fawn Associates Limited Partnership (d)+ Lease dated as of March 22, 1996 by and between Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company 10.6(a)+ Letter of Intent dated August 19, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (b)+ Master Repurchase Agreement dated as of October 10, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (c)+ Tri-party Custodial Agreement for Contracts dated October 10, 1996 by and among the Franchise Mortgage Acceptance Company LLC, CS First Boston Mortgage Capital Corp. and First Bank National Association (d)+ First Amendment to Repurchase Agreement and Custodial Agreement dated May 1, 1997 by and among the Franchise Mortgage Acceptance Company LLC, Credit Suisse First Boston Mortgage Capital LLC and First Bank National Association 10.7+ Master Loan Sale Agreement, dated August 23, 1995 by and between the Franchise Mortgage Acceptance Company LLC and Southern Pacific Thrift & Loan Association 10.8+ Master Participation Agreement dated November 22, 1995 by and among the Franchise Mortgage Acceptance Company LLC, Imperial Credit Industries, Inc., Certain Financial Institutions and Banco Santander, New York Branch 10.9+ Credit Agreement dated as of February 28, 1997 by and among Franchise Mortgage Acceptance Company LLC and Sanwa Bank California 10.10 Form of Registration Rights Agreement by and among the Registrant, Imperial Credit Industries, Inc. and FLRT, Inc. 10.11 Form of Tax Agreement by and among the Registrant, Franchise Mortgage Acceptance Company LLC, FLRT, Inc. and Imperial Credit Industries, Inc. 10.12 Form of Master Loan and Security Agreement dated October 1997 by and between Franchise Mortgage Acceptance Company LLC and Morgan Stanley Asset Funding Inc. 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.1) 24.1+ Power of Attorney (included on signature page of Registration Statement)
-------- + Previously filed EX-3.3 2 FORM OF ARTICLES OF INCORPORATION EXHIBIT 3.3 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 08/21/1997 971281213 - 2788016 CERTIFICATE OF INCORPORATION OF FRANCHISE MORTGAGE ACCEPTANCE COMPANY FIRST. The name of the corporation is FRANCHISE MORTGAGE ACCEPTANCE COMPANY. SECOND. The address of the corporations' registered office in the State of Delaware is 15 East North Street, Dover, Delaware 19901. The name of the registered agent at such address is Paracorp Incorporated. THIRD. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. A. The total number of shares of stock which the corporation shall have the authority to issue is One Hundred Ten Million (110,000,000), divided into One Hundred (100,000,000) shares of Common Stock of the par value of $0.001 per share and Ten Million (10,000,000) shares of Preferred Stock of the par value of $0.001 per share. B. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is expressly authorized to fix by resolution(s) the designation of each series of Preferred Stock and the powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, such provisions as may be desired concerning the dividend rights, the dividend rate, conversion rate, conversion rights, voting rights, rights in terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preferences and such other subjects or matters as may be fixed by resolution(s) of the Board of Directors under the General Corporation Law of Delaware; and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares of any such series then outstanding). In the event that the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution(s) originally fixing the number of shares of such series. All Preferred Stock of the same series shall be identical in all respects, except for the dates from which dividends, if any, shall be cumulative. FIFTH. The name and mailing address of the incorporator is Kasey Hannah, 9100 Wilshire Blvd., 8E, Beverly Hills, California 91021. SIXTH. The Board of Directors of the corporation is expressly authorized to make, alter or repeal by-laws of the corporation, but the stockholders may make additional by-laws and may alter or repeal any by-law whether adopted by them or otherwise. SEVENTH. Elections of directors need not be by written ballot except and to the extent provided in the by-laws of the corporation. EIGHTH. No director of the corporation shall be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation law, or (iv) for any transaction from which the director derived an improper personal benefit. The undersigned incorporator hereby acknowledges that the foregoing certificate of incorporation is her act and deed and that the facts stated therein are true. /s/ Kasey Hannah, Incorporator -------------------------------------- Kasey Hannah, Incorporator AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF FRANCHISE MORTGAGE ACCEPTANCE COMPANY FRANCHISE MORTGAGE ACCEPTANCE COMPANY, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on August 21, 1997. SECOND: This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the Corporation. THIRD: This Amended and Restated Certificate of Incorporation has been duly approved by written consent of the stockholders of the Corporation and written notice of such approval has been given to those stockholders who have not consented in writing in accordance with Section 228 of the General Corporation Law of the State of Delaware. FOURTH: The Restated Certificate of Incorporation of the Corporation is amended and restated in its entirety to read as follows: I. The name of the corporation (hereinafter called the "Corporation") is FRANCHISE MORTGAGE ACCEPTANCE COMPANY. II. The address of the Corporation's registered office in the State of Delaware is 15 East North Street, Dover, Delaware 19901. The name of the registered agent at such address is Paracorp Incorporated. III. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. IV. A. The total number of shares of stock which the Corporation shall have the authority to issue is One Hundred Ten Million (110,000,000), divided into One Hundred Million (100,000,000) shares of Common Stock of the par value of $0.001 per share and Ten Million (10,000,000) shares of Preferred Stock of the par value of $0.001 per share. B. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is expressly authorized to fix by resolution(s) the designation of each series of Preferred Stock and the powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, such provisions as may be desired concerning the dividend rights, the dividend rate, conversion rate, conversion rights, voting rights, rights in terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preferences and such other subjects or matters as may be fixed by resolution(s) of the Board of Directors under the General Corporation Law of Delaware; and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares of any such series then outstanding). In the event that the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution(s) originally fixing the number of shares of such series. All Preferred Stock of the same series shall be identical in all respects, except for the dates from which dividends, if any, shall be cumulative. V. The Board of Directors of the Corporation is expressly authorized to make, alter or repeal by-laws of the Corporation, but the stockholders may make additional by-laws and may alter or repeal any by-law whether adopted by them or otherwise. VI. Elections of directors need not be by written ballot except and to the extent provided in the by-laws of the Corporation. VII. No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation law, or (iv) for any transaction from which the director derived an improper personal benefit. VIII. No action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. IX. Special meetings of the stockholders may be called at any time by the Board of Directors pursuant to a resolution approved by a majority of the Board of Directors. Such special meetings may not be called by any other person or persons. IN WITNESS WHEREOF, Franchise Mortgage Acceptance Company has caused this Amended and Restated Certificate of Incorporation to be signed by its President and attested to by its Secretary this _____ day of October, 1997. ___________________________ Wayne L. Knyal President Acknowledged the ______ day of October, 1997. _____________________________ Raedelle A. Walker, Secretary EX-3.4 3 FORM OF BYLAWS OF FRANCHISE MORTGAGE ACCEPTANCE CO EXHIBIT 3.4 FRANCHISE MORTGAGE ACCEPTANCE COMPANY BYLAWS ARTICLE I. CORPORATE OFFICES The Board of Directors may at any time establish offices at any place or places where the corporation is qualified to do business. ARTICLE II. MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETING OF STOCKHOLDERS ------------------------------ The annual meeting of the stockholders of the Corporation shall be held on such date, within 180 days of the end of each prior fiscal year, as shall be designated by the Board of Directors and stated in the notice of the meeting, and on any subsequent day or days to which such meeting may be adjourned, for the purposes of electing directors and of transacting such other business as may properly come before the meeting. The Board of Directors shall designate the place and time for the holding of such meeting. At the annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before the annual meeting of stockholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder of the Corporation who is a stockholder of record at the time of giving notice provided for in this Section 1 of Article 1, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 1 of Article I. For business to be properly brought before an annual meeting by a stockholder, the stockholder, in addition to any other applicable requirements, must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Corporation. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of voting stock of the Corporation which are beneficially owned by the stockholder, (d) a representation that the stockholder intends to appear in person or by proxy at the meeting to bring the proposed business before the annual meeting, and (e) a description of any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1 of Article 1. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the provisions of this Section 1 of Article 1, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. For business to be properly brought before an annual meeting by a stockholder, the stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 1 of Article I. SECTION 2. SPECIAL MEETINGS OF STOCKHOLDERS -------------------------------- Special meetings of the stockholders may be called at any time by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. Such special meetings may not be called by any other person or persons. Upon written request of the persons who have duly called a special meeting, it shall be the duty of the Secretary of the Corporation to fix the date of the meeting to be held not less than ten or more than sixty days after the receipt of the request and to give due notice thereof in accordance with Section 4 of this Article. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the persons calling the meeting may do so. SECTION 3. PLACE OF MEETING ---------------- Every special meeting of the stockholders shall be held at such place within or without the State of Delaware as the Board of Directors may designate, or, in the absence of such designation, at the registered office of the Corporation in the State of Delaware. SECTION 4. NOTICE OF MEETING ----------------- Except as otherwise required by law, written notice of every meeting of the stockholders shall be given by the Secretary of the Corporation to each stockholder of record entitled to vote at the meeting, by placing such notice in the mail at least ten (10) days, but not more than sixty (60) days, prior to the day named for the meeting addressed to each stockholder at his address appearing on the books of the Corporation or supplied by him to the Corporation for the purpose of notice. SECTION 5. RECORD DATE ----------- The Board of Directors may fix a date, not less than ten or more than sixty days preceding the date of any meeting of stockholders, as a record date for the determination of stockholders entitled to notice of, or to vote at, any such meeting. The Board of Directors shall not close the books of the Corporation against transfers of shares during the whole or any part of such period. The initial determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, that the Board of Directors may, in its discretion, fix a new record date for the adjourned meeting. SECTION 6. PROXIES ------- The notice of every meeting of the stockholders may be accompanied by a form of proxy approved by the Board of Directors in favor of such person or persons as the Board of Directors may select. SECTION 7. QUORUM AND VOTING ----------------- A majority of the outstanding shares of stock of the Corporation entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of the stockholders, and the stockholders present at any duly convened meeting may continue to do business until adjournment notwithstanding any withdrawal from the meeting of holders of shares counted in determining the existence of a quorum. Directors shall be elected by a plurality of the votes cast in the election. For all other matters as to which no other voting requirement is specified by the General Corporation Law of the State of Delaware (the "General Corporation Law"), the Amended and Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation") or these By-laws, the affirmative vote required for stockholder action shall be that of a majority of the shares present in person or represented by proxy at the meeting (as counted for purposes of determining the existence of a quorum at the meeting). If so provided in the Amended and Restated Certificate of Incorporation, stockholders may cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) at a stockholders' meeting at which directors are to be elected. In the case of a matter submitted for a vote of the stockholders as to which a stockholder approval requirement is applicable under the stockholder approval policy of any exchange or quotation system on which the capital stock of the Company is quoted or traded, for exemption under the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 or under any provision of the Internal Revenue Code, in each case for which no higher voting requirement is specified by the General Corporation Law, the Certificate of Incorporation or these Bylaws, the vote required for approval shall be the requisite vote specified in such stockholder approval policy, Rule 16b-3 or Internal Revenue Code provision, as the case may be (or the highest such requirement if more-than one is applicable). For the approval of the appointment of independent public accountants (if submitted for a vote of the stockholders), the vote required for approval shall be a majority of the votes cast on the matter. SECTION 8. ADJOURNMENT ----------- Any meeting of the stockholders may be adjourned from time to time, without notice other than by announcement at the meeting at which such adjournment is taken, and at any such adjourned meeting at which a quorum shall be present any action may be taken that could have been taken at the meeting originally called; provided that if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. SECTION 9. NOMINATIONS FOR ELECTION OF DIRECTORS ------------------------------------- Except with respect to the initial directors elected by the Incorporator, only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as, and to serve as, directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 9 of Article I, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 9 of Article 1. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at the annual meeting of the stockholders of the Corporation, not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Corporation, and (ii) with respect to an election to be held at a special meeting of stockholders of the Corporation for the election of directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed to stockholders of the Corporation as provided in Section 4 of Article I or public disclosure of the date of the special meeting was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (x) as to each person whom the Stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected), and (y) as to the stockholder, giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of voting stock of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Except as provided in Section 3 of Article III, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 9 of Article l. The presiding officer of the meeting of stockholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. For a nomination by a stockholder to be proper, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 9 of Article 1. ARTICLE III. BOARD OF DIRECTORS SECTION 1. NUMBER OF DIRECTORS ------------------- The business, affairs and property of the Corporation shall be managed by a board of eight (8) directors. The number of directors constituting the Board of Directors may be increased or decreased from time to time by resolution by the Board of Directors; provided, however, that no such decrease shall have the effect of shortening the term of any incumbent director. SECTION 2. ELECTION AND TERM OF OFFICE OF DIRECTORS ---------------------------------------- Directors are elected annually to serve until the next annual meeting of stockholders. Each director shall hold office for the full term to which he shall have been elected and until his successor is duly elected and shall qualify, or until his earlier death, resignation, disqualification or removal. A director need not be a resident of the State of Delaware or a stockholder of the Corporation. A director may not stand for re-election unless that director has attended, during his current term, at least seventy-five percent (75%) of the combined number of Board of Director Meetings and applicable committee meetings. SECTION 3. VACANCIES --------- Newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 4. REMOVAL BY STOCKHOLDERS ----------------------- Any director of the Corporation may be removed, whether or not for cause, from his office as a director by vote or other action of stockholders by the holders of the majority of the shares then entitled to vote at an election of directors. SECTION 5. REGULAR MEETINGS ---------------- Regular meetings of the Board of Directors shall be held at such place or places within or without the State of Delaware, at such hour and on such day as may be fixed by resolution of the Board of Directors, without further notice of such meetings. The time or place of holding regular meetings of the Board of Directors may be changed by the Chairman of the Board or the President by giving written notice thereof as provided in Section 7 of this Article III. SECTION 6. SPECIAL MEETINGS ---------------- Special meetings of the Board of Directors shall be held, whenever called by the Chairman of the Board, the Chairman of the Executive Committee, the President, by two directors or by resolution adopted by the Board of Directors, at such place or places within or without the State of Delaware as may be stated in the notice of the meeting. SECTION 7. NOTICE ------ Notice of the time and place of, and general nature of the business to be transacted at, all special meetings of the Board of Directors, and written notice of any change in the time or place of holding the regular meetings of the Board of Directors, shall be delivered personally or by telephone to each director or sent by first-class mail, telecopier or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopier or by telegram, it shall be delivered personally or by telephone or by telecopier or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director provided, however, that notice of any meeting need not be given to any director if waived by him in writing, or if he shall be present at such meeting other than for purposes of objecting to the validity of the meeting. SECTION 8. QUORUM ------ A majority of the directors in office shall constitute a quorum of the Board of Directors for the transaction of business; but a lesser number may adjourn from day to day until a quorum is present. Except as otherwise provided by law or in these Bylaws, all questions shall be decided by the vote of a majority of the directors present at a meeting at which a quorum is present. SECTION 9. ACTION BY WRITTEN CONSENT ------------------------- Any action which may be taken at a meeting of the directors or members of any committee thereof may be taken without a meeting if consent in writing setting forth the action so taken shall be signed by all of the directors or members of such committee as the case may be and shall be filed with the Secretary of the Corporation. SECTION 10. MEETINGS BY CONFERENCE TELEPHONE -------------------------------- Unless otherwise restricted by the Restated Certificate of Incorporation or these Bylaws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 10 shall constitute presence in person at such meeting. SECTION 11. CHAIRMAN OR VICE CHAIRMEN ------------------------- The Board of Directors may designate one or more of its members to be Chairman or Vice Chairman of the Board, Chairman of the Executive Committee, and Chairman of any other committees of the Board and to hold such other positions on the Board as the Board of Directors may designate. SECTION 12. COMPENSATION AND REIMBURSEMENT OF EXPENSES ------------------------------------------ The non-management directors shall receive such compensation for their services as shall be determined by the Board of Directors and may be paid their expenses, if any, of attendance at each meeting of the Board of Directors. No such reimbursement shall preclude any non-management director from serving the Corporation in any other capacity and receiving compensation therefor. Non- management members of special or standing committees may be allowed like reimbursement for attending committee meetings. SECTION 13. COMMITTEES ---------- The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more of its members to constitute (i) an Executive Committee which committee, during intervals between meetings of the Board, shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation to the extent permitted by law; and (ii) one or more additional committees such as an Audit Committee to review the Corporation's financial statements and financial information and to act as liaison with the Corporation's auditors, a Compensation Committee to review and propose compensation for the officers and executives of the Corporation, which, to the extent provided in said resolution or resolutions and permitted by law, shall have and may exercise the power of the Board of Directors in the management of the business and affairs of the Corporation insofar as it pertains to the responsibilities of such committee or committees, and may authorize the seal of the Corporation to be affixed to all papers on which the Corporation desires to place a seal. Such additional committee or committees shall have such name or names as may be stated in these Bylaws or as may be determined from time to time by resolutions adopted by the Board of Directors. SECTION 14. APPROVAL OF LOANS TO OFFICERS ----------------------------- The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiary, including any officer or employee who is a director of the Corporation or its subsidiary, whenever, in the sole judgment of the Board of Directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors, in its sole discretion, shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. ARTICLE IV. OFFICERS SECTION 1. DESIGNATION AND REMOVAL ----------------------- The officers of the Corporation shall consist of a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, a Secretary, a Treasurer and such Vice Chairmen, Executive, Group, Senior or other Vice Presidents, and other officers as may be elected or appointed by the Board of Directors. Any number of offices may be held by the same person. All officers shall hold office until their successors are elected or appointed, except that the Board of Directors may remove any officer at anytime at its discretion. The Board of Directors may empower the Chairman of the Board or the President to appoint such officers as the business of the Corporation may require, provided that notice of such appointment is deposited with the minutes of the Board of Directors. Any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the Board of Directors or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Nothing herein shall affect such rights as an officer may have under such officer's employment contract, if any. SECTION 2. POWERS AND DUTIES ----------------- The officers of the Corporation shall have such powers and duties as generally pertain to their offices, except as modified herein or by the Board of Directors, as well as such powers and duties as from time to time may be conferred by the Board of Directors. The Chairman of the Board shall have such duties as may be assigned to him by the Board of Directors and shall preside at meetings of the Board and at meetings of the stockholders. The Vice Chairmen shall provide guidance to the Board of Directors and may act as the Chairman, as designated by a majority of the Board of Directors, if the Chairman is incapacitated or otherwise unavailable. The Chief Executive Officer of the Corporation shall have general supervision over the business, affairs, and property of the Corporation. ARTICLE V. SEAL The seal of the Corporation shall be in such form as the Board of Directors shall prescribe. ARTICLE VI. CERTIFICATES OF STOCK SECTION 1. CERTIFICATES ------------ The shares of stock of the Corporation shall be represented by certificates of stock, signed by the President or such Vice President or other officer designated by the Board of Directors, countersigned by the Treasurer or the Secretary or an Assistant Treasurer or an Assistant Secretary; and such signature of the President, Vice President, or other officer, such countersignature of the Treasurer or Secretary or Assistant Treasurer or Assistant Secretary, or any of them, may be executed in facsimile, engraved or printed. In case any officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be such officer because of death. resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Said certificates of stock shall be in such form as the Board of Directors may from time to time prescribe. SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES; ISSUANCE OF NEW -------------------------------------------------------- CERTIFICATES ------------ The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VII. INDEMNIFICATION SECTION 1. GENERAL ------- The Corporation shall indemnify, and advance Expenses (as this and all other capitalized words are defined in Section 14 of this Article) to, Indemnitee to the fullest extent permitted by applicable law in effect on the date of effectiveness of these Bylaws, and to such greater extent as applicable law may thereafter permit. The rights of Indemnitee provided under the preceding sentence shall include, but not be limited to, the right to be indemnified to the fullest extent permitted by (S) 145(b) of the D.G.C.L. in Proceedings by or in the right of the Corporation and to the fullest extent permitted by (S) 145(a) of the D.G.C.L. in all other Proceedings. SECTION 2. EXPENSES RELATING TO PROCEEDINGS -------------------------------- If Indemnitee is, by reason of his Corporate Status, a witness in any proceeding or is a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith as a witness or party as the case may be. If Indemnitee is a party to a proceeding and is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to each Matter. The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter. SECTION 3. ADVANCEMENT OF EXPENSES ----------------------- Indemnitee shall be advanced Expenses within ten days after requesting them to the fullest extent permitted by (S) 145(c) through (e), inclusive, of the D.G.C.L. SECTION 4. REQUEST FOR INDEMNIFICATION AND/OR ADVANCEMENT OF EXPENSES ---------------------------------------------------------- To obtain indemnification or advancement of expenses, Indemnitee shall submit to the Corporation a written request with such information as is reasonably available to Indemnitee. The Secretary of the Corporation shall promptly advise the Board of Directors of such request and in the case of a request for advancement of expenses, any undertaking required by (S) 145(e) of the D.G.C.L. SECTION 5. DETERMINATION OF ENTITLEMENT: NO CHANGE OF CONTROL --------------------------------------------------- If there has been no Change of Control at the time the request for indemnification is sent, Indemnitee's entitlement to indemnification shall be determined in accordance with (S) 145(d) of the D.G.C.L. If entitlement to indemnification is to be determined by Independent Counsel, the Corporation shall furnish notice to Indemnitee within ten days after receipt of the request for indemnification, specifying the identity and address of Independent Counsel. The Indemnitee may, within fourteen days after receipt of such written notice of selection, deliver to the Corporation a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel and the objection shall set forth with particularity the factual basis of such assertion. If there is an objection to the selection of Independent Counsel, either the Corporation or Indemnitee may petition the Court of Chancery of the State of Delaware or any other court of competent jurisdiction for a determination that the objection is without a reasonable basis and/or for the appointment of Independent Counsel selected by the Court. SECTION 6. DETERMINATION OF ENTITLEMENT: CHANGE OF CONTROL ------------------------------------------------ If there has been a Change of Control at the time the request for indemnification is sent, Indemnitee's entitlement to indemnification shall be determined in a written opinion by Independent Counsel selected jointly by Indemnitee and the Board of Directors. If no Independent Counsel has been agreed to within 21 days after either Indemnitee or the Board of Directors has first proposed a candidate for Independent Counsel, then either Indemnitee or the Board of Directors may petition the court of Chancery of the State of Delaware or any other Court of competent jurisdiction for appointment as Independent Counsel of a person selected by the Court. SECTION 7. PROCEDURES OF INDEPENDENT COUNSEL --------------------------------- If a Change of Control shall have occurred before the request for indemnification is sent by Indemnitee, Indemnitee shall be presumed (except as otherwise expressly provided in this Article) to be entitled to indemnification upon submission of a request for indemnification in accordance with Section 4 of this Article, and thereafter the Corporation shall have the burden of proof to overcome the presumption in reaching a determination contrary to the presumption. The presumption shall be used by Independent Counsel as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel convinces him by clear and convincing evidence that the presumption should not apply. Except in the event that the determination of entitlement to indemnification is to be made by Independent Counsel, if the person or persons empowered under Section 5 or 6 of this Article to determine entitlement to indemnification shall not have made and furnished to Indemnitee in writing a determination within sixty days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification or such indemnification is prohibited by law. The termination of any Proceeding or of any Matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere --------------- or its equivalent, shall not (except as otherwise expressly provided in this Article) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, or with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. SECTION 8. INDEPENDENT COUNSEL EXPENSES ---------------------------- The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred acting pursuant to this Article and in any proceeding to which it is a party or witness in respect of its investigation and written report and shall pay all reasonable fees and expenses incident to the procedures in which such Independent Counsel was selected or appointed. No Independent Counsel may serve if a timely objection has been made to his selection until a Court has determined that such objection is without a reasonable basis or such objection is withdrawn. SECTION 9. ADJUDICATION ------------ In the event that (i) a determination is made pursuant to Section 5 or 6 that Indemnitee is not entitled to indemnification under this Article, (ii) advancement of Expenses is not timely made pursuant to Section 3 of this Article, (iii) Independent Counsel has not made and delivered a written opinion determining the request for indemnification (a) within 90 days after being appointed by the Court, or (b) within 90 days after objections to his selection have been overruled by the Court, or (c) within 90 days after the time for the Corporation or Indemnitee to object to his selection, or (iv) payment of indemnification is not made within 5 days after a determination of entitlement to indemnification has been made or deemed to been made pursuant to Section 5, 6 or 7 of this Article, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. In the event that a determination shall have been made that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced ------- by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding commenced pursuant to this Section, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. If a determination shall have been made or deemed to have been made that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 9, or otherwise, unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification, or such indemnification is prohibited by law. The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 9 that the procedures and presumptions of this Article are not valid, binding and enforceable and shall stipulate in any such court that the Corporation is bound by all provisions of this Article. In the event that Indemnitee, pursuant to this Section 9, seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, this Article, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. SECTION 10. NONEXCLUSIVITY OF RIGHTS ------------------------ The rights of indemnification and advancement of Expenses as provided by this Article shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Restated Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Article or any provision thereof shall be effective as to any Indemnitee for acts, events and circumstances that occurred, in whole or in part, before such amendment, alteration or repeal. The provisions of this Article shall continue as to an Indemnitee whose Corporate Status has ceased and shall inure to the benefit of his heirs, executors and administrators. SECTION 11. INSURANCE AND SUBROGATION ------------------------- To the extent the Corporation maintains an insurance policy or policies providing liability insurance for directors or officers of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under such policy or policies. In the event of any payment hereunder, the Company shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. The Company shall not be liable under this Article to make any payment of amounts otherwise indemnifiable hereunder if, and to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. SECTION 12. SEVERABILITY ------------ If any provision or provisions of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. SECTION 13. CERTAIN PERSONS NOT ENTITLED TO INDEMNIFICATION ----------------------------------------------- Notwithstanding any other provision of this Article, no person shall be entitled to indemnification or advancement of Expenses under this Article with respect to any Proceeding, or any Matter therein brought or made by such person against the Corporation. SECTION 14. DEFINITIONS ----------- For purposes of this Article: "Change of Control" means a change in control of the Corporation after the date of adoption of these Bylaws in any one of the following circumstances: (i) there shall have occurred an event required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Corporation is then subject to such reporting requirement; (ii) any "person" (as such term is used in Section 13(d) and 14(d) of the Act) shall have become the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding voting securities without prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (iii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. "Corporate Status" describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation. "D.G.C.L." means the Delaware General Corporation Law, as currently in effect or as amended from time to time. "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts. witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding, provided that such fees are actually incurred. "Indemnitee" includes any person who is, or is threatened to be made, a witness in or a party to any Proceeding as described in Section 1 or 2 of this Article by reason of his Corporate Status. "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the five years previous to his selection or appointment has been, retained to represent: (i) the Corporation or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. "Matter" is a claim, a material issue, or a substantial request for relief. "Proceeding" includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Section 9 of this Article to enforce his rights under this Article. SECTION 15. NOTICES ------- Any communication required or permitted to the Corporation shall be addressed to the Secretary of the Corporation and any such communication to Indemnitee shall be addressed to his home address unless he specifies otherwise and shall be personally delivered or delivered by overnight mail delivery. SECTION 16. CONTRACTUAL RIGHTS ------------------ The right to be indemnified or to the advancement or reimbursement of Expenses (i) is a contract right based upon good and valuable consideration, Pursuant to which Indemnitee may sue as if these provisions were set forth in a separate written contract between him or her and the Corporation, (ii) is and is intended to be retroactive and shall be available as to events occurring prior to the adoption of these provisions, and (iii) shall continue after any rescission or restrictive modification of such provisions as to events occurring prior thereto. ARTICLE VIII. MISCELLANEOUS SECTION 1. FISCAL YEAR ----------- The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. SECTION 2. WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS AND ----------------------------------------------------------- COMMITTEES ---------- Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. SECTION 3. INTERESTED DIRECTORS; QUORUM ---------------------------- No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Adopted by the Incorporator pursuant to D.G.C.L. Section 108 as of the 21st day of August 1997 ---------------------------------------------- Kasey Hannah Incorporator EX-4.1 4 FORM OF SPECIMEN STOCK CERTIFICATE EXHIBIT 4.1 COMMON STOCK COMMON STOCK - ------------ ------------ NUMBER SHARES - ------------ ------------ FMAC INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 35181D 10 8 This certifies that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF $.001 EACH OF _________________ FRANCHISE MORTGAGE ACCEPTANCE COMPANY _________________ transferable on the books of the Corporation by the holder hereof, in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to all the provisions of the Articles of Incorporation and the Bylaws of the Corporation, and all amendments thereto, copies of which are on file in the principal office of the Corporation and the Transfer Agent, to all of which the holder of this Certificate by acceptance hereof assents. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. CORPORATE /s/ Raedelle Walker SEAL /s/ Wayne L. Knyal 1991 EXECUTIVE VICE PRESIDENT/CFO DELAWARE PRESIDENT/CFO Countersigned and Registered U.S. STOCK TRANSFER CORPORATION Transfer Agent and Registrar By AUTHORIZED SIGNATURE The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -___________ Custodian ___________ (Cust) (Minor) under Uniform Gifts to Minors Act _________________________________ (State) Additional abbreviations may also be used though not in the above list. For Value received hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ | | | | - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN) - -------------------------------------------------------------------------------- __________________________________________________________________________Shares of the Common Stock represented by the within Certificate and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the promises. Dated:____________________________ ____________________________________ SIGNATURE NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED By__________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM. PURSUANT TO S.E.C. RULE 17Ad-15. EX-5.1 5 OPINION OF FRESHMAN, MARANTZ, ORLANSKI, ET AL EXHIBIT 5.1 LETTERHEAD OF FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN November 7, 1997 Franchise Mortgage Acceptance Company 2049 Century Park East, Suite 350 Los Angeles, California 90067 Ladies and Gentlemen: We have acted as counsel to Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission (the "SEC") of the Registration Statement on Form S-1, File No. 333-34481 together with Amendment No. 1 and Amendment No. 2 thereto (collectively, the "Registration Statement"), of the Company, with exhibits as filed in connection therewith and the form of prospectus contained therein, for registration under the Securities Act of 1933, as amended (the "Securities Act"), of up to 10,062,500 shares of the Company's Common Stock (the "Shares"), par value $0.001 per share (the "Common Stock"), including 796,875 shares which may be purchased from the Company and 515,625 shares which may be purchased from the Selling Stockholders to cover over-allotments, if any. The shares are being sold to NationsBanc Montgomery Securities, Inc., Credit Suisse First Boston and PaineWebber Incorporated, as the representatives of the several underwriters (the "Underwriters"), pursuant to an underwriting agreement to be entered into by and among the Company, the Selling Stockholders and the Underwriters (the "Underwriting Agreement"). For the purpose of this opinion, we have examined such matters of law and originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, photostatic or conformed copies, and the authenticity of the originals of all such latter documents. We have also assumed the due execution and delivery of all documents where due execution and delivery are prerequisites to the effectiveness thereof. We have relied upon certificates of public officials and certificates of officers of the Company for the accuracy of material, factual matters contained therein which were not independently established. 1 Based on the foregoing and on all other instruments, documents and matters examined for the rendering of this opinion, it is our opinion that, subject to the effectiveness of the Registration Statement with the SEC (such Registration Statement as amended and finally declared effective, and the form of Prospectus contained therein or subsequently filed pursuant to Rule 430A of Rule 424 under the Securities Act, being hereinafter referred to as the "Registration Statement" and the "Prospectus," respectively) upon the sale and issuance of the Shares in the manner referred to in the Registration Statement and in accordance with the terms of the Underwriting Agreement, and upon payment therefor, the Shares will be legally issued, fully paid and non-assessable shares of the Common Stock of the Company. We express no opinion as to the applicability or effect of any laws, orders or judgments of any state or jurisdiction other than the substantive laws of the State of Delaware. Further, our opinion is based solely upon existing laws, rules and regulations, and we undertake no obligation to advise you of any changes that may be brought to our attention after the date hereof. We consent to the use of our name under the captioned "Legal Matters" in the Prospectus, constituting part of the Registration Statement, and to the filing of this opinion as an exhibit to the Registration Statement. By giving you this opinion and consent, we do not admit that we are experts with respect to any part of the Registration Statement or Prospectus within the meaning of the term "expert" as used in Section 11 of the Securities Act, or the rules and regulations promulgated thereunder by the SEC, nor do we admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, /s/ Freshman, Marantz, Orlanski, Cooper & Klein FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN 2 EX-10.2 6 FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AND NON-COMPETITION AGREEMENT ---------------------------------------- THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made and entered into as of August 26, 1997, by and between Franchise Mortgage Acceptance Company (the "Corporation"), a Delaware corporation, and Wayne Knyal, an individual (the "Executive"). WITNESSETH: WHEREAS, the Corporation desires to employ the Executive as its President and Chief Executive Officer; and WHEREAS, Executive has agreed not to compete with Corporation or use any confidential and proprietary business information regarding the business of Corporation to the detriment of Corporation during the term of this Agreement (and thereafter as applicable) in order to induce Corporation to enter into this Agreement and to perform its obligations hereunder; and WHEREAS, the Executive desires to accept such employment under the terms and conditions herein stated. NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows: 1. EMPLOYMENT AND TERM ------------------- (a) Employment - The Corporation hereby offers to employ the Executive as the President and Chief Executive Officer of the Corporation on the terms and conditions set forth herein, and the Executive hereby accepts such employment, for the term set forth in Section 1(b). (b) Term - The employment hereunder shall be for a term of five years (the "Term") commencing on November 1, 1997 and terminating on October 31, 2002 (the "Expiration Date"), provided that such term may be extended if authorized by the Board of Directors and evidenced by a written agreement signed by the Chairman of the Corporation and the Executive. 1 2. DUTIES ------ During his Term, the Executive shall serve as President and Chief Executive Officer of the Corporation and shall have all powers and duties consistent with such position subject to the direction of the Board of Directors of the Corporation, to whom the Executive shall report. Any directions of the Board of Directors to the Executive shall be consistent with the Executive's position as Chief Executive Officer. The Executive shall devote his full time and attention and best efforts to fulfill faithfully, responsibly and to the best of his ability his duties hereunder. 3. COMPENSATION ------------ (a) Base Salary - For services performed by the Executive for the Corporation pursuant to this Agreement during his Term, the Corporation shall pay the Executive a base salary ("Base Salary") at the rate of $400,000 per year, payable twice each month in the amount of $16,667 on the 15th day and the last day of each month, or in accordance with the Corporation's regular payroll practices. Such Base Salary may be adjusted annually to reflect increases in the consumer price index. Any compensation which may be paid to the Executive under any additional compensation plan of the Corporation, or which may be otherwise authorized from time to time by the Board, shall be in addition to the Base Salary to which the Executive shall be entitled under this Agreement. (b) Annual Bonus - For each full year during his Term, commencing on January 1, 1998, the Executive shall be eligible to receive a cash bonus based on the Corporation's achievement of certain financial goals. For calendar year 1998, and until changed by the Board's Compensation Committee, the annual cash bonus award shall be determined on the basis of the Corporation's return on equity ("ROE"). The Executive's cash bonus will range from $82,000 to $682,000 as follows: (i) if ROE for the calendar year is less than 15% and the Corporation's net income is negative, the cash bonus shall be $82,000; (ii) if ROE for the calendar year is less than 15% and the Corporation's net income is positive, the cash bonus shall be $162,000; (iii) if ROE for the calendar year is between 15% and 20% and the Corporation's net income is positive, the cash bonus shall be $282,000; (iv) if ROE for the calendar year is between 20% and 24% and the Corporation's net income is positive, the cash bonus shall be $482,000; (v) if ROE for the calendar year is at least 25% and the Corporation's net income is positive, the cash bonus shall be $682,000; 2 (vi) The bonus payable for any calendar year shall be paid to the Executive no later than the 15th day of April of the following year. Executive acknowledges that $82,000 of such annual bonus shall be deducted by the Corporation each year until $410,000 shall have been paid by Executive to the Corporation in full repayment of that certain promissory note executed by Executive in June 1995. This annual bonus arrangement shall be in lieu of the Executive's participation in any other cash bonus or cash incentive plan or arrangement of the Corporation; provided, however, that the foregoing shall not preclude the Executive from participating in any equity or equity-based compensation program of the Corporation, and the bonus program set forth herein may be replaced with a different program approved by the Board's Compensation Committee and agreed with the Executive. (c) Tax Withholding - The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state and local law with respect to any payment in cash, shares of capital stock or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (i) withhold such taxes from any cash payments owing from the Corporation to the Executive, including any payments owing under any other provision of the Agreement, (ii) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding or (iii) make other satisfactory arrangements with the Executive to satisfy such withholding obligations. 4. BENEFITS -------- In addition to the Base Salary to be paid to the Executive pursuant to Section 3(a) hereof and any annual bonuses earned by the Executive pursuant to Sections 3(b), the Executive shall also be entitled to the following: (a) Participation in Insurance and Healthcare Benefit Plans - Except as otherwise expressly provided herein, the Executive and his dependents shall be enrolled in the Corporation's insurance and healthcare benefit group plans, including disability insurance, in accordance with established Corporation policies. (b) Participation in the Corporation's 401(k) Plan - The Executive shall be entitled to participate in the Corporation's 401(k) Plan in accordance with established Corporation policies. (c) Expense Reimbursement - The Corporation shall reimburse the Executive, upon proper accounting, for reasonable business expenses incurred by him in the course of the performance of his duties under this Agreement. 3 (d) Vacations, Holidays, Absences and Leaves - The Executive shall be entitled to the benefit of the vacation, holiday, absence and leave policies applicable to all employees of comparable title or status in the Corporation. (e) Automobile Allowance - The Corporation shall pay the Executive a monthly automobile allowance of $1,000 to be applied in the Executive's discretion. The Corporation shall not provide the Executive any vehicles, insurance or the cost of any maintenance hereunder. (f) Other Benefits - The Corporation shall provide Executive with such other benefits as are generally made available from time to time to its employees. (g) Proration of Benefits - Any payments or benefits pursuant to this Section 4, in any year during which the Executive is employed by the Corporation for less than the entire year, shall, unless otherwise provided herein or in the applicable plan or arrangement, be prorated in accordance with the number of days in such year during which the Executive is employed by the Corporation. 5. INDEMNIFICATION --------------- The Executive shall be entitled to the maximum indemnification provided by the Bylaws and the Articles of Incorporation of the Corporation for officers, directors and employees of the Corporation. The Executive's rights under this paragraph shall continue without time limit so long as he may be subject to any such liability, whether or not the Executive's term of employment by the Corporation may have ended. Such indemnification provided by the Bylaws and Articles of Incorporation as of the date of this Agreement shall be deemed contract rights and no amendment, repeal or modification of any of the provisions of the Articles of Incorporation or Bylaws relating to indemnification shall have the effect of limiting or denying any such rights of indemnification. 6. REPRESENTATIONS AND WARRANTIES OF THE EXECUTIVE ----------------------------------------------- The Executive hereby represents and warrants to the Corporation that (a) the Executive's execution and delivery of this Agreement and his performance of his duties and obligations hereunder will not conflict with, or cause a default under, or give any party a right to damages under, or to terminate, any other agreement to which the Executive is a party or by which he is bound, and (b) there are no agreements or understandings that would make unlawful the Executive's execution or delivery of this Agreement or his employment hereunder. 4 7. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION ------------------------------------------------- The Corporation hereby represents and warrants to the Executive as follows: (a) The Corporation is duly organized and established as a corporation under the laws of the State of Delaware and has all requisite power and authority to enter into this Agreement and to perform its obligations hereunder. The consummation of the transactions contemplated by this Agreement will neither violate nor be in conflict with any agreement or instrument to which the Corporation is a party or by which it is bound. (b) The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of the Corporation and are valid, legal and binding obligations of the Corporation, enforceable in accordance with their terms except as may be limited by laws of general application relating to bankruptcy, insolvency, moratorium or other similar laws relating to or affecting the enforcement of creditors' rights generally, and rules of law governing specific performance, injunctive relief or other equitable remedies. 8. TERMINATION ----------- Executive's employment shall terminate prior to the Expiration Date upon the happening of any of the following events: A. For Cause --------- The Executive may be terminated for Cause immediately upon receipt of notice pursuant to a good faith determination to terminate for Cause made by a majority of the Board. For purposes of this Agreement, "Cause" means: (1) the Executive engages in any act of theft, embezzlement, falsification of records, misappropriation of funds or property, or fraud against, or with respect to the business of, the Corporation or any affiliate; (2) current use of illegal drugs on or off the job or current addiction to alcohol, unless the Executive voluntarily requests accommodation for rehabilitation before such time as the Corporation notifies the Executive that it suspects the Executive's use of illegal drugs or addiction to alcohol; (3) the Executive commits a breach of any material term of this Agreement and, if such breach is capable of being cured, fails to cure such breach within 30 days of written notice of such breach from the Corporation; 5 (4) the Executive is convicted of, or pleads guilty or nolo contendere to a felony or a crime involving moral turpitude, breach of trust or dishonesty; or (5) the Executive commits any act that causes, or knowingly fails to take reasonable and appropriate action to prevent, any material injury to the financial condition or business reputation of the Corporation or any of its affiliates; however, this shall not apply to any act of the Corporation or its affiliates by any other employee thereof except to the extent that such act is committed at the direction, or with the knowledge, of the Executive. B. Good Reason (by the Executive) ------------------------------ The Executive's employment may be terminated by the Executive at any time for any of the following reasons (each of which is referred to herein as "Good Reason") by giving the Corporation notice of the effective date of such termination (which effective date may be the date of such notice): (1) the Corporation commits a breach of any material term of this Agreement and, if such breach is capable of being cured, fails to cure such breach within 30 days of receipt of written notice of such breach; or (2) the Corporation removes the Executive from the position of Chief Executive Officer of the Corporation, other than for Cause, or the Corporation effects creates any diminution of the powers, duties or authority of the Executive. C. Executive's Rights to Terminate ------------------------------- The Executive may, at his option, terminate his employment hereunder for any reason upon 60 days prior written notice to the Corporation. D. Death ----- This Agreement shall terminate automatically upon the Executive's death. E. Disability ---------- The Corporation may terminate the Executive's employment upon a good faith determination by the Board that Executive has become so physically or mentally disabled as to be incapable of satisfactorily performing his duties hereunder for a period of 180 consecutive days, such determination to be based upon a certificate as to such physical or mental disability issued by a licensed physician or psychiatrist employed by the Corporation. 6 F. Without Cause ------------- The Corporation may, at its option, terminate the Executive's employment without Cause at any time upon written notice to the Executive. G. Date of Termination ------------------- For purposes of this Agreement, the term "Date of Termination" shall mean the later of the date that any party gives written notice that it intends to terminate this Agreement pursuant to the terms hereof or the date, if any, specified by the terminating party in such notice as the effective date of termination. 9. OBLIGATIONS OF THE CORPORATION UPON TERMINATION ----------------------------------------------- (a) Cause - If the Executive's employment shall be terminated for Cause, the Corporation's obligations to the Executive shall terminate, other than the obligation (i) to pay to the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination, and (ii) to continue to provide the Executive with benefits of the type described in Section 4 through the Date of Termination. (b) Voluntary - If the Executive terminates his employment for other than Good Reason (a "Voluntary Termination"), this Agreement shall terminate without further obligation to the Executive hereunder, other than the obligation (i) to pay the Executive his Base Salary through the Date of Termination at the rate in effect on the day preceding the Date of Termination and any previously awarded but not yet paid cash bonus; and (ii) to continue to provide the Executive with benefits of the type described in Section 4 through the Date of Termination. (c) Without Cause or for Good Reason - If the Corporation shall terminate the Executive's employment without Cause, or if the Executive shall terminate ------- his employment for Good Reason, the Corporation shall (i) continue in accordance with the Corporation's normal payroll procedures to pay the Executive his Base Salary through the Date of Termination and the pro rata portion of any cash bonus award the Executive would be entitled to receive as of year end, (ii) continue to provide the Executive with benefits of the type described in Section 4 through the Expiration Date and (iii) pay the Severance Amount to the Executive pro rata from the Date of Termination to the end of that month and thereafter as of the first day of each month commencing with the month immediately following the month in which the Date of Termination occurs and ending on the Expiration Date; provided, however, that payment of the Severance Amount shall be suspended during any period in which the Executive is an employee or independent contractor of a company that in the Board's opinion competes with the Corporation. "Severance Amount" shall mean $400,000 annual compensation benefit. 7 10. NON-COMPETITION --------------- The Executive acknowledges and recognizes the highly competitive nature of the business of the Corporation and its affiliates as well as his extensive participation in the ownership of the common stock of the Corporation. The Executive accordingly agrees, until the third anniversary of the Executive's termination or resignation of employment (such date being hereafter referred to as the "Restricted Date"), as follows: (a) The Executive will not directly or indirectly engage (as owner, stockholder, partner or otherwise, except as a holder of fewer than 5% of the outstanding shares or other equity interests of a company whose shares or other equity interests are publicly traded) in any business which directly or indirectly competes with the business of the Corporation or any of its affiliates within the same jurisdictions in which the Corporation or any of its affiliates engages in business at the time of the Executive's termination or resignation, as the case may be. (b) The Executive will not directly or indirectly induce any employee of the Corporation or any of its affiliates to engage in any activity in which the Executive is prohibited from engaging by paragraph (a) above or to terminate his employment with the Corporation or any of its affiliates, and will not directly or indirectly employ or offer employment to any person who was employed by the Corporation or any of its affiliates unless such person shall have been terminated without cause or ceased to be employed by any such entity for a period of at least 12 months. (c) The Executive will not make any statement or take any action intended to impair the goodwill or the business reputation of the Corporation or any of its affiliates, or to be otherwise detrimental to the interests of the Corporation or any of its affiliates, including any action or statement intended, directly or indirectly, to benefit a competitor of the Corporation or any of its affiliates. (d) It is expressly understood and agreed that although the Executive and the Corporation consider the restrictions contained in this Section 10 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 8 11. PROPRIETARY INFORMATION ----------------------- Through the Restricted Date, the Executive shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit on any person, firm, association or company other than the Corporation, any Proprietary Information. "Proprietary Information" means information relating to the properties, prospects, products, services or operations of the Corporation or any direct or indirect affiliate thereof that is not generally known, is proprietary to the Corporation or such affiliate and is made known to the Executive or learned or acquired by the Executive while in the employ of the Corporation, including, without limitation, information concerning trade secrets of the Corporation, or any of the Corporation's affiliates and any improvements relating to the products of the Corporation in accounting, marketing, selling, leasing, financing and other business methods and techniques. However, Proprietary Information shall not include (A) at the time of disclosure to the Executive such information that was in the public domain or later entered the public domain other than as a result of a breach of an obligation herein; or (B) subsequent to disclosure to the Executive, Executive received such information from a third party under no obligation to maintain such information in confidence, and the third party came into possession of such information other than as a result of a breach of an obligation herein. All materials or articles of information of any kind furnished to the Executive by the Corporation or developed by the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. 12. OWNERSHIP OF PROPRIETARY INFORMATION ------------------------------------ The Executive agrees that all Proprietary Information shall be the sole property of the Corporation and its assigns, and the Corporation and its assigns shall be the sole owner of all licenses and other rights in connection with such Proprietary Information. At all times, until the Restricted Date, the Executive will keep in the strictest confidence and trust all Proprietary Information and will not use or disclose such Proprietary Information, or anything relating to such information, without the prior written consent of the Corporation, except as may be necessary in the ordinary course of performing his duties under this Agreement. 13. DOCUMENTS AND OTHER PROPERTY ---------------------------- All materials and articles of information of any kind furnished to the Executive in the course of his employment hereunder are and shall remain the sole property of the Corporation; and if the Corporation requests the return of such information at any time during, upon or after the termination of the Executive's employment hereunder, the Executive shall immediately deliver the same to the Corporation. The Executive will not, without the prior written consent of the Corporation, retain any documents, data or property, or any reproduction thereof of any description, belonging to the Corporation or pertaining to any Proprietary Information. 14. INTELLECTUAL PROPERTY --------------------- 9 Any and all products, including but not limited to marketing and financing materials and methods made, developed or created by the Executive for use in the Corporation's then current markets (whether at the request or suggestion of the Corporation or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) (i) during the period of this Agreement, or (ii) within a period of one year after the date of termination or resignation of employment hereunder, which may be directly or indirectly useful in, or relate to, the business of or tests being carried out by any member of the Corporation, shall be promptly and fully disclosed by the Executive to the members of the Board and, if such intellectual property was made, developed or created other than pursuant to the Executive's employment hereunder, the Executive shall grant the Corporation a perpetual, royalty free license to such intellectual property, and if such intellectual property was made, developed or created pursuant to the Executive's employment hereunder, such intellectual property shall be the Corporation's exclusive property as against the Executive. 15. CUSTOMER LISTS -------------- The Executive will not during, or for a period of two years after the termination of, his employment (i) disclose the Corporation's (including its subsidiaries') customer lists or any part thereof to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, (ii) assist in obtaining any of the Corporation's (including its subsidiaries') existing customers for any competing business, or (iii) encourage any customer to terminate its relationship with the Corporation or any of its subsidiaries. 16. EQUITABLE RELIEF ---------------- The Executive acknowledges that, in view of the nature of the business in which the Corporation is engaged, the restrictions contained in Sections 10 through 15 16 inclusive (the "Restrictions") are reasonable and necessary in order to protect the legitimate interests of the Corporation, and that any violation thereof would result in irreparable injuries to the Corporation, and the Executive therefore further acknowledges that, if the Executive violates, or threatens to violate, any of the Restrictions, the Corporation shall be entitled to obtain from any court of competent jurisdiction, without the posting of any bond or other security, preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation, which rights shall be cumulative and in addition to any other rights or remedies in law or equity to which the Corporation may be entitled. 17. BINDING EFFECT -------------- This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation or otherwise) to all or a significant portion of its assets, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had 10 taken place. Regardless of whether such agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law and such successor shall be deemed the "Corporation" for purposes of this Agreement. 18. NOTICES ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or sent by facsimile transmission with telephonic confirmation of receipt, or one business day after being sent for next business day delivery by a reputable overnight courier service providing delivery confirmation, addressed as follows: (a) if to the Board or the Corporation, to: Franchise Mortgage Acceptance Company 2049 Century Park East Suite 350 Los Angeles, CA 90067 with a copy to: H. Wayne Snavely Imperial Credit Industries, Inc. 23550 Hawthorne Blvd. Suite 110 Torrance, CA 90505 (b) if to the Executive, to: Wayne Knyal 11560 Bellagio Road Los Angeles, CA 90049 Such addresses may be changed by written notice sent to the other party at the last recorded address of that party. 19. ARBITRATION OF ALL DISPUTES --------------------------- (a) Any controversy or claim arising out of or relating to this Agreement or the breach thereof (including the arbitrability of any controversy or claim), shall be settled by arbitration in the City of Los Angeles in accordance with the laws of the State of California by one arbitrator. If the parties cannot agree on the appointment of an arbitrator, then the arbitrator shall be appointed by the American Arbitration Association. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with 11 respect to the selection of an arbitrator which shall be as provided in this Section 19 Paragraph 20. The cost of any arbitration proceeding hereunder shall be borne equally by the Corporation and the Executive. The award of the arbitrator shall be binding upon the parties. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (b) If it shall be necessary or desirable for the Executive to retain legal counsel and incur other costs and expenses in connection with the enforcement of any or all of his rights under this Agreement, and provided that the Executive substantially prevails in the enforcement of such rights, the Corporation shall pay (or the Executive shall be entitled to recover from the Corporation, as the case may be) the Executive's reasonable attorneys' fees and costs and expenses in connection with the enforcement of his rights including the enforcement of any arbitration award and any costs of any arbitration which the Executive would otherwise be required to pay in accordance with Section Paragraph 19 (a). 20. NO ASSIGNMENT ------------- Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge. 21. EXECUTION IN COUNTERPARTS ------------------------- This Agreement may be executed by the parties hereto in two counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart. 22. JURISDICTION AND GOVERNING LAW ------------------------------ This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of California, without reference to its conflict of laws provisions. 23. SEVERABILITY ------------ If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. 24. ENTIRE AGREEMENT ---------------- This Agreement embodies the entire agreement of the parties hereof, and supersedes all other 12 oral or written agreements or understandings between them regarding the subject matter hereof. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. 25. HEADINGS DESCRIPTIVE -------------------- The headings of the several paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any of this Agreement. 13 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. FRANCHISE MORTGAGE ACCEPTANCE COMPANY By: _______________________________ _________________________ Name: Wayne Knyal Title: 14 EX-10.10 7 FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.10 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT AMONG FRANCHISE MORTGAGE ACCEPTANCE COMPANY AND IMPERIAL CREDIT INDUSTRIES, INC. AND FLRT, INC. DATED AS OF _______________, 1997 - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of __________, 1997, by and among FRANCHISE MORTGAGE ACCEPTANCE COMPANY (the "Company"), IMPERIAL CREDIT INDUSTRIES, INC. ("Imperial") and FLRT, INC. ("FLRT" and collectively, Imperial and FLRT are the "Selling Stockholders"). 1. Consideration. The Selling Stockholders and the Company have agreed to ------------- enter into this Agreement to provide the registration rights set forth herein and to otherwise perform their respective obligations hereunder in consideration of the mutual covenants contained herein. 2. Definitions. The following definitions shall apply in addition to those ----------- terms defined elsewhere herein: a. "Common Stock" means the Company's Common Stock, $0.001 par value per share. b. "Continuous Offering" means an Offering pursuant to Rule 415 under the Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if applicable. c. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. d. "FLRT Shares" means the shares of Common Stock, and any other securities into which the Common Stock may be changed by virtue of any merger, consolidation or recapitalization or otherwise, owned of record by FLRT as of the date hereof. e. "Imperial Shares" means the shares of Common Stock, and any other securities into which the Common Stock may be changed by virtue of any merger, consolidation or recapitalization or otherwise, owned of record by Imperial as of the date hereof. f. "Offering" means any public offering of the Common Stock of the Company, whether or not subject to the registration requirements of the Securities Act, and any other method of disposition of the Common Stock of the Company that is subject to the registration requirements of the Securities Act or any other applicable federal or state statute or regulation. g. "Offering Documents" means all documents relating to an Offering which are required to be filed with any governmental agency or authority or to be delivered to any Person to whom securities of the Company are offered for sale or sold, including, without limitation, Registration 2 Statements, Prospectuses, and preliminary Prospectuses, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing, in each case as such documents may be amended from time to time. h. "Party" means Imperial, FLRT or the Company and "Parties" means all of Imperial, FLRT and the Company. i. "Person" means any individual, corporation, partnership, limited liability company, association, trust or unincorporated association. j. "Prospectus" means the prospectus included in a Registration Statement, relating to an Offering in which Common Stock is included, as amended or supplemented by a prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. k. "Registration Expenses" means, with respect to an Offering, any and all expenses incident to the Company's performance of or compliance with the provisions of this Agreement, including without limitation (a) fees for any filings required to be made with the National Association of Securities Dealers, Inc., or the SEC in connection with such Offering, and any other registration and filing fees, (b) all fees and expenses of complying with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Common Stock to be included in such Offering), (c) all printing, messenger, telephone, and delivery expenses, (d) all fees and expenses incurred in connection with the listing of the Common Stock to be included in such Offering on any securities exchange, (e) the reasonable fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, and (f) the reasonable fees and disbursements of the Selling Stockholders' outside counsel, outside accountants, investment bankers, and financial consultants, if any, in connection with any Offering. l. "Registration Statement" means a registration statement filed with the SEC pursuant to the Securities Act, relating to an Offering in which Common Stock is included, including any pre-or post-effective amendment thereto, the Prospectus included therein, and all material incorporated by reference therein, and any schedule or exhibit to any of the foregoing. m. "Rule 144" means Rule 144 under the Securities Act, 17 C.F.R. 230.144, or any successor rule of the SEC, if applicable. n. "SEC" means the Securities and Exchange Commission. o. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 3 p. "Securities Offering Regulations" means any regulations promulgated by any agency or authority of the United States government, under the Securities Act, or any statute hereafter enacted into law, relating to or governing an Offering of securities by the Company. 3. a Incidental Registration Rights. If the Company proposes to make an ------------------------------ Offering of its Common Stock and to prepare Offering Documents not required pursuant to Paragraph 4 (other than any registration by the Company on Form S-8 or a successor or substantially similar form of (A) an employee stock option, stock purchase or compensation plan or securities issued or to be issued pursuant to any such plan, or (B) a dividend investment plan), the Company will give prompt written notice to Imperial of its intention to do so and of Imperial's rights under this Paragraph 3. Upon the written request of Imperial made within thirty (30) days after the receipt of any such notice (which request shall specify the number of Imperial Shares intended to be disposed of by Imperial), the Company will include in the Offering Documents relating to such Offering all Imperial Shares that the Company has been requested to include by Imperial; provided, that if at any time after giving written notice under this Paragraph 3 the Company shall determine for any reason not to proceed with the proposed Offering, the Company may, at its election, give written notice of such determination to Imperial and thereupon shall be relieved of its obligations to Imperial with respect to such proposed Offering under this Paragraph 3. Imperial shall be entitled to withdraw its request for the inclusion of Imperial Shares in an Offering and withdraw from the Offering at any time before the time that the Offering Documents, including any Registration Statement (if applicable), are declared effective and the Offering has commenced. b. Continuous Offering. If the Company intends to effect a Continuous ------------------- Offering, the Company will give written notice thereof to Imperial and include in such Offering all of the Imperial Shares which Imperial elects to include in such Offering. During the period in which a Registration Statement (if applicable) with respect to a Continuous Offering is effective, if Imperial desires to sell Imperial Shares in a transaction covered by such Registration Statement, it shall give notice to the Company of the proposed date of such sale at least thirty (30) days before such proposed date of sale, and the Company shall take all actions necessary to permit such sale. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection to such sale or that such sale should be delayed for up to sixty (60) days, on the basis that the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time. If the Company has not objected to 4 such proposed sale as permitted in this subparagraph (b) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. c. Underwritten Offerings. In the case of an underwritten Offering ---------------------- initiated by the Company under this Paragraph 3, including underwritten Offerings effected as part of a Continuous Offering, the underwriter(s) and the managing underwriter shall be selected by the Company. If the managing underwriter advises the Company in writing that, in its opinion, the number of Imperial Shares and securities of the Company, if any, being sold exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Company can sell securities for its own account, then there shall be included in such Offering (and in the Offering Documents) first, securities of the Company being sold for its own account, and second, the maximum number of Imperial Shares requested to be included in such Offering which, in the opinion of such managing underwriter, can be sold without having such adverse effect on such price. If Imperial Shares are so excluded from registration in an Offering, the Company shall, upon the request of Imperial, use its reasonable efforts to effect a registration with the SEC or take such actions as shall be reasonably required to effect an Offering (in the event the Imperial Shares are already registered with the SEC) in respect of such excluded Imperial Shares as soon as practicable after consummation of such Offering. Imperial may withdraw its Imperial Shares from such subsequent Offering without costs or penalty at any time before the effective date of the Registration Statement relating to such Offering. d. Expenses. In connection with any offering of Imperial Shares a -------- new issuance of Common Stock by the Company, Imperial and the Company shall each pay their pro rata share of Registration Expenses in proportion to the number of shares of Common Stock to be offered by each. 4. Demand Registration Rights. On or after one year from the effective -------------------------- date of the Company's initial public offering, Imperial, without limitation as to any other method of disposition available to it, shall be entitled to dispose of any or all of the Imperial Shares then held by it in accordance with the provisions of this Paragraph 4. a. Requests by Imperial. Upon the receipt by the Company of written -------------------- notice from Imperial of its intent to sell all or part of its Imperial Shares in an Offering subject to this Paragraph 4 at least 30 days before such proposed date of sale, and specifying both the number of Imperial Shares to be sold and the intended method of disposition, the Company will use its best efforts to register such Imperial Shares so as to permit as soon as practicable the requested sale of Imperial Shares. Within fifteen (15) days of receipt of notice of a proposed sale by Imperial, the Company will advise Imperial either that it has no objection of such sale or that 5 such sale should be delayed for up to sixty (60) days, on the basis that the Company is involved in a confidential proposed transaction or negotiations therefor (which have been previously disclosed to the Company's Board of Directors) which would not require the Company to make or amend any public filings under the securities laws at that time. If the Company has not objected to such proposed sale as permitted in this subparagraph (a) within such fifteen (15) day period, the Company shall take all actions necessary to permit such sale on the proposed date of sale pursuant to such Registration Statement. If, at any time after giving 30 days written notice under this Paragraph 4, Imperial shall notify the Company in writing that it has determined for any reason not to proceed with the proposed Offering, then the Company shall terminate such Offering. b. Limitation on Requests and Payment of Registration Expenses. ----------------------------------------------------------- Imperial shall be entitled to make a request to the Company to register Imperial Shares pursuant to the provisions of Paragraph 3(b) or this Paragraph 4 two times within each one year period commencing one year from the effective date of the Company's initial public offering. The Company shall not be required to register Imperial Shares in accordance with the provisions of Paragraph 4(a) if there is outstanding at the time of the request an effective Registration Statement for a Continuous Offering and Imperial can dispose of Imperial Shares in accordance with Paragraph 3(b). Imperial will pay all Registration Expenses in connection with an Offering of Imperial Shares requested by Imperial pursuant to the second sentence of Paragraph 3(b) or this Paragraph 4. Any Offering abandoned or terminated by Imperial after its filing in accordance with the provisions of Paragraph 4(a) shall be deemed to be a request pursuant to this Paragraph 4. c. Selection of Underwriters. If Imperial specifies in the notice ------------------------- delivered to the Company pursuant to the second sentence of Paragraph 3(b) or Paragraph 4 that it intends to sell Imperial Shares in an underwritten Offering pursuant to the second sentence of Paragraph 3(b) or Paragraph 4, Imperial shall be entitled to select the underwriter(s) and managing underwriter. If the Company issues and sells securities of the same class as the Imperial Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this Paragraph 4, the Company shall (i) sell such securities to the underwriter(s) selected by Imperial pursuant to this Paragraph 4(c) on the same terms and conditions as apply to Imperial and (ii) execute and deliver a copy of the underwriting agreement relating to such Offering. If the managing underwriter advises Imperial and the Company in writing that, in its opinion, the number of securities requested to be included in such Offering exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which the Imperial Shares or securities being offered by the Company can be sold, then there shall be included in such Offering (and in the Offering Documents relating to such Offering) first, the maximum number of Imperial Shares requested to be included in such Offering by 6 Imperial and second, the maximum number of securities, if any, proposed to be sold by the Company for its own account or for the account of any other holder of the Company's securities, which in the opinion of the managing underwriter can be sold without having such adverse effect. d. Registration on Form S-3. The Company shall not be required to ------------------------ register Imperial Shares in any Continuous Offering under this Paragraph 4 until the date which is one year after the date of the Company's initial public offering. Thereafter, Imperial shall have the right to require the Company to register any or all of its shares on Form S-3 (or on Form S-1, if Form S-3 is not available). e. (1) FLRT Incidental Registration Rights. During the period ----------------------------------- commencing upon the effective date of the Company's initial public offering of Common Stock and ending upon the third anniversary of such date, if Imperial demands the Company to make an Offering of its Common Stock and causes the Company to prepare Offering Documents pursuant to this Paragraph 4, the Company will give prompt written notice to FLRT of its intention to do so and of FLRT's rights under this Paragraph 4(e). Upon the written request of FLRT made within thirty (30) days after the receipt of any such notice (which request shall specify the number of FLRT Shares intended to be disposed of by FLRT; provided, however, that the amount actually sold by FLRT pursuant to any such Offering may not at any time exceed the amount that FLRT would otherwise be authorized to sell pursuant to the volume limitations of Rule 144), the Company will include in the Offering Documents relating to such Offering all FLRT Shares that the Company has been requested to include by FLRT, subject to the limitations of Paragraph 4(e)(2) herein; provided, that if at any time after giving written notice under this Paragraph 4(e) Imperial shall determine for any reason not to proceed with the proposed Offering, the Company may, at its election, give written notice of such determination to FLRT and thereupon shall be relieved of its obligations to FLRT with respect to such proposed Offering under this Paragraph 4. FLRT shall be entitled to withdraw its request for the inclusion of FLRT Shares in an Offering and withdraw from the Offering at any time before the time that the Offering Documents, including any Registration Statement (if applicable), are declared effective and the Offering has commenced. (2) Underwritten Offerings. In the case of an underwritten ---------------------- Offering initiated by Imperial under this Paragraph 4, including underwritten Offerings effected as part of a Continuous Offering, the underwriter(s) and the managing underwriter shall be selected by Imperial. If the Company issues and sells securities of the same class as the Imperial Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this 7 Paragraph 4, the Company shall (i) sell such securities to the underwriter(s) selected by Imperial pursuant to Paragraph 4(c) on the same terms and conditions as apply to Imperial and (ii) execute and deliver a copy of the underwriting agreement relating to such Offering. If the managing underwriter advises Imperial and the Company in writing that, in its opinion, the number of Imperial Shares, shares offered by the Company, if any, and FLRT Shares, if any, being sold exceeds the number that can be sold in such Offering, so as to be likely to have an adverse effect on the price at which Imperial can sell securities for its own account, then there shall be included in such Offering (and in the Offering Documents relating to such Offering) first, the maximum number of Imperial Shares requested to be included in such Offering by Imperial, second, the maximum number of securities, if any, proposed to be sold by the Company for its own account which in the opinion of the managing underwriter can be sold with out having such adverse effect, third, the maximum number of FLRT Shares requested to be included in such Offering which, in the opinion of such managing underwriter, can be sold without having such adverse effect and fourth, the maximum number of securities, if any, proposed to be sold by the Company for the account of any other holder of the Company's securities, which in the opinion of the managing underwriter can be sold without having such adverse effect. (3) Expenses. FLRT shall pay its pro rata share of Registration -------- Expenses in proportion to the number of FLRT Shares offered by it as compared to all shares offered pursuant to the subject Offering. 5. FLRT Registration Rights. On or after three years from the effective ------------------------ date of the Company's initial public offering, FLRT, without limitation as to any other method of disposition available to it, shall be entitled to dispose of any or all of the FLRT Shares then held by it in the same manner as accorded Imperial under the provisions of Paragraphs 3 and 4 except, that for so long as any Imperial Shares are outstanding, any disposition of FLRT Shares shall be subject to the provisions of Paragraph 4 (e)(2). Notwithstanding the foregoing, in the event that Wayne Knyal's employment is terminated pursuant to Sections 8B or 8F of that Employment and Non-Competition Agreement dated November 8, 1997 to be effective as of November 1, 1997 by and between the Company and Mr. Knyal, then FLRT, without limitation as to any other method of disposition available to it, shall be entitled to dispose of any or all of the FLRT Shares then held by it in the same manner as accorded Imperial under the provisions of Paragraphs 3 and 4. 6. The Company's Duties. If and whenever the Company is required to -------------------- permit either or both of the Selling Stockholders to effect any Offering as provided in Paragraphs 3 and 8 4, the Company covenants and agrees that it will, as expeditiously as possible (but not later than sixty (60) days after receipt of a request from either or both of the Selling Stockholders to include its respective Shares in a given Offering): a. (1) prepare all Offering Documents in accordance with all applicable requirements of the Securities Act, and the Securities Offering Regulations, including, if requested by Imperial and if permitted by the rules and regulations of the SEC, a Registration Statement pursuant to Rule 415 of the Securities Act or any successor rule of the SEC, with respect to such Offering to permit the disposition of the Selling Stockholder's Shares by the Selling Stockholder in accordance with the intended method of disposition (and, in the case of an underwritten Offering, consistent in form, substance, and scope with customary practice for the offering of securities of corporations by nationally recognized investment banking firms), (2) file with the SEC such Offering Documents and all other documents required to permit the disposition thereof; provided, that before filing any such Offering Documents (including any documents incorporated by reference therein), the Company will furnish to counsel designated by the subject Selling Stockholder and to the underwriter(s), if any, copies of all such Offering Documents, which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such Offering Documents as are reasonably requested by such counsel(s) or underwriter(s), and (3) use its reasonable efforts to have such Offering Documents declared effective by, and obtain all approvals from the SEC to the extent necessary to permit the Offering; provided, however, that the Company may discontinue any Offering that is being effected pursuant to Paragraph 3 at any time before the effective date of the related Offering Documents; and provided, further, that the Company shall not file any Offering Document which shall be disapproved by the subject Stockholder within a reasonable period after the same has been provided for review; b. thereafter, prepare and file with the SEC such amendments and post-effective amendments to the Offering Documents as may be necessary to keep the Offering Documents continuously effective and cause the Offering Documents to be supplemented by any required supplement, and as so supplemented to the filed, if required, with the SEC during the period ending on the later of (i) such time as all of the Selling Stockholder's Shares covered by such Offering Documents have been disposed of in accordance with the intended method of disposition set forth in such Offering Documents or, in the case of an Offering made pursuant to Rule 415 under the Securities Act or any successor rule of the SEC (if applicable), if securities remain unsold at the expiration of the Offering, such time as the Company shall file, with the consent of the subject Selling Stockholder, a post- effective amendment with the SEC deregistering the securities which remain unsold at the termination of the Offering or (ii) so long as a dealer is required to 9 deliver a Prospectus in connection with the Offering; provided, that before filing any such post-effective amendment, the Company will furnish to counsel designated by the subject Selling Stockholder and to the underwriter(s), if any, copies of the post-effective amendment (including any other document proposed to the filed therewith), which Offering Documents shall be subject to the review of such counsel(s) and the underwriter(s), if any, and, where feasible, the Company shall make such changes in such post-effective amendment as are reasonably requested by such counsel(s) or underwriter(s); c. furnish to the subject Selling Stockholder and to the underwriter(s), if any, such number of copies of the Offering Documents (including each amendment and supplement thereto) as they may reasonably request in order to facilitate the disposition of the Selling Stockholder's Shares included in such Offering; d. register or qualify, or cooperate with the subject Selling Stockholder, the underwriter(s), if any, and their respective counsel in registering or qualifying, all Imperial Shares covered by the Offering Documents for offer and sale under the applicable securities or blue sky laws of such jurisdictions as Imperial and the underwriter(s), if any, shall reasonably request in writing, and do any and all other acts and things which may be reasonably necessary or advisable to enable the subject Selling Stockholder and the underwriter(s), if any, to consummate the disposition in such jurisdictions of the Common Stock covered by the Offering Documents; provided however that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any tax in any such jurisdiction where it is not then so subject; e. use its reasonable efforts to cause such Common Stock covered by the Offering Documents to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the subject Selling Stockholder and the underwriter(s), if any, to consummate the disposition of such Common Stock; f. cooperate reasonably with any managing underwriter to effect the sale of the subject Selling Stockholder's Shares, including but not limited to attendance of the Company's executive officers at any planned "road show" presentations'; g. notify the subject Selling Stockholder and the underwriter(s), if any, at any time when the Offering Documents include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of the subject Selling Stockholder or any underwriter, prepare 10 and furnish to such Person(s), such reasonable number of copies of any amendment or supplement to the Offering Documents as may be necessary so that, as thereafter delivered to the purchasers of such Common Stock, such Offering Documents shall not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and to deliver to purchasers of any other securities of the Company included in the Offering copies of such Offering Documents as so amended or supplemented; h. keep the subject Selling Stockholder informed of the Company's best estimates of the earliest date on which the Offering Documents will become effective, and promptly notify the Selling Stockholder of (A) the effectiveness of such Offering Documents, (B) a request by the SEC for an amendment or supplement to such Offering Documents, (C) the issuance by the SEC of an order suspending the effectiveness of the Offering Documents, or of the threat of a proceeding for that purpose, and (D) the suspension of the qualification of any securities included in the Offering Documents for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose; i. comply with the provisions of the Securities Offering Regulations and the Securities Act with respect to the disposition of all securities covered by the Offering Documents in accordance with the intended method of distribution of the sellers thereof set forth in such Offering Documents; j. use its reasonable efforts to list the securities proposed to be sold in such Offering on the Nasdaq National Market, or on such other securities exchange or inter-dealer quotation system on which the Common Stock is then listed, not later than the closing of the Offering contemplated thereby; k. enter into such customary agreements (including but not limited to an underwriting agreement in customary form) and take such other reasonable actions as Imperial or the underwriter(s), if any, reasonably request in order to expedite or facilitate the disposition of such Common Stock; l. obtain such "cold comfort" letter(s) from the Company's independent public accountants, in customary form and covering matters of the type customarily covered by "cold comfort" letter(s), as Imperial or the underwriter(s), if any, shall reasonably request; and m. upon prior notice, make available for reasonable inspection by any underwriter(s) participating in any disposition to be effected pursuant to the Offering Documents and by any attorney, accountant, or other agent retained by any such Person(s), its financial and other records, pertinent corporate documents 11 and properties of the Company, and such opportunities to discuss the business of the Company with its officers, directors, and employees and the independent public accountants who have certified its financial statements as shall be necessary, in the opinions of such underwriters' respective counsels, to conduct a reasonable investigation; provided, that any records, information, or documents that are designated by the Company in writing as confidential shall be kept confidential by each such Person, unless disclosure of such records, information, or documents is required by law, by judicial or administrative order, or in order to defend a claim asserted against such Person in connection with such Offering. 7. Information from Selling Stockholders. ------------------------------------- a. Information. The Company may require the Selling Stockholders to ----------- furnish it with such information regarding the Selling Stockholders and regarding the method of distribution as is pertinent to the disclosure requirements relating to the Offering of such Common Stock as the Company may from time to time reasonably request in writing. b. Use of Offering Documents Upon Notice of Defects. The Selling ------------------------------------------------ Stockholders each agree, and shall cause underwriter(s), if any, acting on its behalf to agree, that upon receipt of any notice from the Company of the happening of any event of the kind described in Paragraph 6(f), it will immediately discontinue the use of the Offering Documents covering such Common Stock until the receipt by any Selling Stockholder and any such underwriter(s) of the copies of the supplemented or amended Offering Documents contemplated by such clause and, if so directed by the Company, any Selling Stockholder will deliver and cause each underwriter, if any, to deliver to the Company all copies, other than permanent file copies then in the possession of the Selling Stockholder or any such underwriter, of the Offering Documents covering such Common Stock at the time of receipt of such notice. If the Company shall give any such notice, the period mentioned in Paragraph 6(b) shall be extended by the number of days during which offerings were suspended (i.e., the period from and including the date of the receipt of such notice pursuant to Paragraph 6(f), to and including the date when the Selling Stockholder shall have received the copies of the supplemented or amended Offering Documents contemplated by such clause). 8. Resales; Reports Under Exchange Act. In order to permit the Selling ----------------------------------- Stockholders to sell their Shares, if they so desire, pursuant to any applicable resale exemption under the Securities Offering Regulations or the Securities Act, the Company will: a. comply with all rules and regulations of the SEC in connection with use of any such resale exemption; 12 b. make and keep available adequate and current public information regarding the Company; c. file with the SEC in a timely manner, all reports and other documents required to be filed under the Securities Act, the Exchange Act, or the Securities Offering Regulations; d. furnish to the Selling Stockholders copies of annual reports required to be filed under the Exchange Act and the Securities Offering Regulations; and e. furnish to the Selling Stockholders, upon request, (1) a copy of the most recent quarterly report of the Company and such other reports and documents filed by the Company with the SEC and (2) such other information as may be reasonably requested to permit the Selling Stockholders pursuant to any applicable resale exemption under the Securities Act or the Securities Offering Regulations, if any. 9. Indemnification. The obligations of indemnification of the Parties set --------------- forth in this Paragraph 9 shall be in addition to any liability which any Party may otherwise have to any other party. a. Indemnification by the Company. The Company agrees to indemnify ------------------------------ and hold harmless, to the full extent permitted by law, any Selling Stockholder, its officers, directors, employees and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee, or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) Imperial and such an underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, except insofar as the same are (i) made in reliance on and in conformity with any information about the Selling Stockholder or any underwriter furnished in writing to the Company by the Selling Stockholder or any underwriter specifically for inclusion in the Offering Documents relating to such Offering or (ii) the result of the fact that the Selling Stockholder or any underwriter sold Common Stock subject to an Offering to a Person to whom there was not sent or given, at or before the written configuration of such sale, a copy of the final Offering 13 Documents, if the Company has previously furnished copies thereof to Imperial or underwriter and such final Offering Documents corrected such untrue statement or alleged untrue statement or omission or alleged omission. b. Indemnification by Imperial. Imperial agrees to indemnify and --------------------------- hold harmless, to the full extent permitted by law, the Company, its officers, directors, employees, and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) the Company and such underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, but only to the extent that such untrue statement or omission is made in reliance on and in conformity with any information furnished in writing by Imperial concerning Imperial to the Company specifically for inclusion in the Offering Documents relating to such Offering. c. Indemnification by FLRT. FLRT agrees to indemnify and hold ----------------------- harmless, to the full extent permitted by law, the Company, its officers, directors, employees, and agents, each Person who participates as an underwriter in an Offering, each officer, director, employee or agent of such an underwriter, and each Person who controls (within the meaning of the Securities Act) the Company and such underwriter against any and all losses, claims, damages, liabilities, and expenses, joint or several, including without limitation reasonable legal or other expenses incurred in connection with investigating or defending against any loss, claim, damage, or liability, or action or proceeding (whether commenced or threatened) in respect thereof, caused by any untrue statement or alleged untrue statement of a material fact contained in any of the Offering Documents relating to such Offering or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, but only to the extent that such untrue statement or omission is made in reliance on and in conformity with any information furnished in writing by FLRT concerning FLRT to the Company specifically for inclusion in the Offering Documents relating to such Offering. d. Notices of Claims; Procedures. Promptly after receipt by an ----------------------------- indemnified 14 party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Paragraph 9, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; provided, that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Paragraph 9, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. If any such action is brought against an indemnified party (unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim) the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that, any Person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (A) the indemnifying party has agreed to pay such fees or expenses or (B) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such Person or (C) in the reasonable judgment of any such Person based upon advice of its counsel, a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include, as an unconditional term thereof, the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. An indemnifying party who is not entitled to or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel in each jurisdiction for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of such additional counsel or 15 counsels. e. Contribution. If the indemnification provided for this in this ------------ Paragraph 9 from the indemnifying party is unavailable to an indemnified party hereunder (other than pursuant to the terms hereof) in respect of any losses, claims, damages, liabilities, or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions that resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a Party as a result of the losses, claims, damages, liabilities, and expense referred to above shall be deemed to include, subject to the limitations set forth in this Paragraph 9(e) any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The Parties agree that it would not be just and equitable if contributions pursuant to this Paragraph 9(e) were datelined by a pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to above. No Person guilty of fraudulent misrepresentation shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. f. This Paragraph 9 shall apply to each Registration Statement filed by the Company pursuant to this Agreement that includes Imperial Shares. 10. Miscellaneous. ------------- a. Amendments and Waivers. This Agreement may be amended, and the ---------------------- Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent of Imperial to such amendment, action or omission to act. b. Successors, Assigns and Transferees. This Agreement shall be ----------------------------------- binding upon the parties hereto and their respective successors and assigns. c. Notices. Any notice, request, demand, consent, approval or other ------- 16 communication permitted or required to be given to any of the parties hereunder shall be deemed given when received, shall be in writing, and shall be delivered in person or sent by certified mail, postage prepaid, or by private courier service or by telecopy or telex, to such party at its address set forth below or at such other address as such party may hereunder furnish in writing to the other parties. (i) if to the Company, to: Franchise Mortgage Acceptance Company 2049 Century Park East, Suite 350 Los Angeles, California 90067 Attention: Secretary and Chief Financial Officer with a copy to: [ Attention: ] (ii) if to Imperial: Imperial Credit Industries, Inc. 23350 Hawthorne Blvd. Building 1, Suite 240 Torrance, California 90505 Attention: General Counsel with a copy to: Freshman, Marantz, Orlanski, Cooper & Klein 9100 Wilshire Blvd., East Tower, 8th Floor Beverly Hills, California 90212-3480 Attention: Thomas J. Poletti, Esq. (iii) if to FLRT: FLRT, Inc. 11560 Bellagio Road Los Angeles, California 90049 Attention: Wayne L. Knyal 17 with a copy to: [ Attention: ] d. Headings. The headings in this Agreement are for the convenience -------- of reference only and shall not limit or otherwise affect the meaning of the interpretation of this Agreement or any provision hereof. e. Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. f. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed an original, and all such counterparts shall together constitute one and the same instrument. g. Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the United States of America and, in the absence of controlling federal law, in accordance with the laws of the State of Delaware. Any legal action or proceedings with respect to this Agreement shall be brought in the federal courts of the United States located in California and each of the parties hereto submits to the exclusive jurisdiction of such courts and hereby waives any objections on the grounds of venue, forum non conveniens or any similar grounds. h. Entire Agreement. This Agreement embodies the entire Agreement of ---------------- the parties hereto in relation to the subject matter hereof and supersedes all prior understandings or agreements, oral or written, with respect thereto among the parties hereto. i. Certain Remedies. Without in any way limited the remedies ---------------- otherwise available under this Agreement, the parties hereto acknowledge that, in the event of any breach or nonperformance by any party of the agreements or covenants required by this Agreement to be performed or observed by it, the other parties shall be entitled to such equitable remedies as may be appropriate, including, without limitation specific performance. 18 IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or caused this Agreement to be executed on its behalf as of the date first written above. FRANCHISE MORTGAGE ACCEPTANCE COMPANY By: --------------------------------- Name: ------------------------------- Title: ------------------------------ IMPERIAL CREDIT INDUSTRIES, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ FLRT, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 19 EX-10.11 8 FORM OF TAX AGREEMENT EXHIBIT 10.11 TAX AGREEMENT This TAX AGREEMENT is made and entered into on October __, 1997, and is to be effective as of the closing date of the initial public offering of Common Stock on Registration Statement Form S-1 (the "Effective Date") of Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company"), by and among the Company, on the one hand, and FLRT, Inc., a California corporation ("FLRT"), Franchise Mortgage Acceptance Company LLC, a California limited liability company ("FMLLC"), Imperial Credit Industries, Inc., a California corporation ("ICII")(FLRT, FMLLC, and ICII are collectively referred to herein as the "Indemnified Parties"), on the other hand, and is made with respect to the following facts. A. Upon the Effective Date, Company will merge with and succeed to all of the assets of FMLLC. Company also will assume all of the liabilities of FMLCC. B. FMLLC files Federal and state income tax returns, but because it is treated as a partnership for tax purposes, it does not pay income taxes. Instead, its members, ICII and FLRT are responsible for any income taxes owed upon FMLLC's income. C. The parties hereto desire to apportion liability for taxes among themselves. NOW, THEREFORE, upon the above premises, an in consideration of the mutual covenants, promises, and agreements hereinafter contained, the parties hereto agree as follows. SECTION I. DEFINITIONS. ----------- The following terms, when used in this Agreement with an initial capital letter, have the following meanings: "After-Tax Basis" means on a basis such that any payment to be received or --------------- deemed to be received by the payee shall be supplemented by a further payment to the payee so that the sum of the two payments, after deduction of all Taxes resulting from the receipt or accrual of such payments, shall be equal to the payments to be received or deemed to have been received. "Tax" or "Taxes" means any and all taxes (including, without limitation, --- ----- gross receipts, sales, use, property, income, franchise, capital, occupational, license, value added, excise and stamp taxes and customs duties), assessments, fees (including, without limitation, documentation, license, filing and registration fees) and charges, of any nature or kind whatsoever, together with any penalties, fines, additions to tax or interest thereon, however imposed, withheld, levied, or assessed by any taxing authority. "Tax Assessment" means any and all liability (including, without -------------- limitation, interest, additions to tax and penalties) imposed by any taxing authority for or with respect to Taxes assessed, for any reason with respect to, for, or fairly attributable to the operations of FMLCC. -1- SECTION II. LIABILITY FOR TAXES. ------------------- 2.1 Indemnities. If any Tax Assessment shall be made by any taxing ----------- authority for any taxable period against any Indemnified Party, whether (i) as a result of or in settlement of any audit, administrative proceeding or judicial proceeding, or (ii) as the result of the filing of an amended return to reflect the consequences of any determination made in connection with an audit or proceeding, then Company shall indemnify and hold harmless Indemnified Parties from and against all such sums on an After-Tax Basis. If an adjustment is made to Taxes paid with respect to the net income (or other Tax computation base) of FMLLC by any taxing authority for any taxable period before the Effective Date, whether (i) as a result of or in settlement of any audit, administrative proceeding or judicial proceeding, or (ii) as the result of the filing of an amended return to reflect the consequences of any determination made in connection with an audit or proceeding, and such adjustment results in a tax benefit to any Indemnified Party, then all such Indemnified Parties receiving such tax benefit shall pay to Company the amount of such tax benefit. If an adjustment is made to Taxes paid with respect to the net income (or other Tax computation base) of FMLLC by any taxing authority for any taxable period before the Effective Date, whether (i) as a result of or in settlement of any audit, administrative proceeding or judicial proceeding, or (ii) as the result of the filing of an amended return to reflect the consequences of any determination made in connection with an audit or proceeding, and such adjustment results in a tax benefit to Company in a tax period after the Effective Date, then Company shall be entitled to retain such tax benefit. 2.2 Exception to Indemnities. Notwithstanding anything to the contrary ------------------------ set forth in this Agreement, no indemnity shall be provided by Company to any Indemnified Party to the extent that any Tax Assessment or Tax which would otherwise be the subject of such indemnity comes about (i) as the result of or in settlement of any audit, administrative proceeding or judicial proceeding, or (ii) as the result of the filing of an amended return to reflect the consequences of any determination made in connection with an audit or proceeding, in which FMLLC is determined for tax purposes to be an association taxable as a corporation. Instead, the Indemnified Parties shall indemnify Company for all Taxes on an After-Tax Basis that Company is required to pay as a result of such a determination. (The forgoing exception shall only apply to such Tax Assessment or Tax to the extent that the Tax Assessment or Tax pertains to the income of FMLLC as originally reported on its income tax return for the period in question. By way of example only and without limitation: If FMLLC (i) reported net income of $2,000,000 on its 1996 income tax return (the "1996 Return"), (ii) Company amended the 1996 Return to report additional net income of $1,000,000 for the reporting period, and (iii) the Internal Revenue Service successfully asserted that FMLLC should be taxed as a corporation for the 1996 taxable year, then (a) Company would owe no indemnity to any Indemnified Party for Taxes on the $2,000,000 reported on the 1996 Return, (b) Indemnified Parties would owe Company indemnity on an After-Tax Basis for all Taxes assessed against Company on the $2,000,000 initially reported on the 1996 Return on account of the reclassification of FMLLC's tax status, (c) Indemnified Parties would be entitled to retain all Taxes for which they receive a refund, if any, on account of the reclassification, and (d) Company would owe full indemnity on an After-Tax Basis to -2- Indemnified Parties on the additional $1,000,000 net income reported on the amended 1996 return to the extent it is assessed and collected against the Indemnified Parties. SECTION III. TAX RETURNS AND REPORTING POSITIONS. ----------------------------------- 3.1 All Returns For Periods Ending on or Before the Effective Date. The -------------------------------------------------------------- Indemnified Parties shall cause to be prepared and filed all required Tax returns of FMLLC for all periods ending on or before the Effective Date. All such returns of FMLLC shall be prepared and all elections with respect to such returns shall be made, to the extent permitted by law, in a manner consistent with prior practice with respect to FMLLC. 3.2 Consistency. Unless otherwise required to settle any adjustments ----------- proposed or asserted by a taxing authority, Company shall not take any material position with respect to Taxes or foreign income taxes for periods ending after the Effective Date that is inconsistent with positions taken by FMLLC with respect to Taxes for periods ending on or before the Effective Date; provided however, if within thirty days of notification of Indemnified Parties by Company of its proposed assertion of an inconsistent tax position, Indemnified Parties have furnished to the Company an opinion of counsel, which counsel shall be reasonable satisfactory to Company, to the effect that there is "substantial authority" (or such higher standard as may be required by Code Section 6662(d)(2)(C)) within the meaning of section 6662(d)(2)(B)(i) of the Internal Revenue Code of 1986, as amended( the "Code"), for not asserting such inconsistent tax position, then Company shall not assert an inconsistent position except as may be required by a final determination by a court of law. 3.3 Elections. Indemnified Parties acknowledge that, for any period on or --------- after the Effective Date, Company may make any election, and any affiliated group of which Company after the Effective Date was or is a member may cause Company to make any election, respectively, permitted to them under the Code. SECTION IV. AUDITS AND CONTESTS. ------------------- 4.1 In General. The Indemnified Parties shall promptly notify Company in ---------- writing upon receipt by any of them of any notice of any pending or threatened Federal, state or local Tax audit or assessment of FMLLC. Company shall have the right to represent the Indemnified Parties' interests in any Tax audit, or administrative or judicial proceeding and to employ counsel of its choice at its expense. The Indemnified Parties agree to consult with Company and cooperate with it at all reasonable times upon Company's request in defense of any audit or other proceeding. SECTION V. MISCELLANEOUS. ------------- 5.1 Supersedes Prior Agreements. This Agreement supersedes any existing --------------------------- agreement presently in effect among the parties with respect to the subject matter hereof. -3- 5.2 Cooperation. After the Effective Date, Company and the Indemnified ----------- Parties shall make available to the other, as reasonably requested, and to any taxing authority, all information, records or documents relating to Tax liabilities or potential Tax liabilities of Company for all periods prior to or including the Effective Date and shall preserve all such information, records and documents until the expiration of any applicable statute of limitations or extensions thereof. 5.3 Payments. Amounts payable pursuant to this Agreement shall be paid -------- within thirty days after notice and demand therefor by the person entitled thereto. 5.4 Reference Provision. ------------------- (i) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in Los Angeles County, California, in accordance with the provisions of Section 638, et sequoir, of the California Code of Civil Procedure, or successor provisions("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding. The parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Los Angeles County (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Los Angeles County Superior Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall entered pursuant to CCP 644 in any court in the State of California having jurisdiction thereof. Any party may apply for a reference at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a reference pursuant to the previously cited section 638 of the CCP. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and, requests for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. -4- (ii) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (iii) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a statement of decision which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee in the same manner as if it had been entered by a court without a jury. A new trial, if granted for any reason, is also to be a reference proceeding under this provision. (iv) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Los Angeles County Superior Court, in accordance with the California Arbitration Act, Sections 1280 through 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 5.5 Notices. All notices, requests, demands and other communications ------- provided for hereunder shall be in writing (including telegraphic or facsimile communications) and shall be mailed (return receipt requested), telegraphed , sent by facsimile or delivered to each party at the address set forth as follows, or at such other addresses either party may designate by notice to the other, and any such notice, request, demand or other communication shall be effective upon receipt. If to Company: Franchise Mortgage Acceptance Company 2049 Century Park East, Suite 350 Los Angeles, California 90067 Attention: Wayne L. Knyal, President and Chief Executive Officer Telephone: (310) 229-2600 Facsimile: (310) 843-0976 -5- If to ICII: Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 240 Torrance, California 90505 Attention: Irwin L. Gubman, General Counsel Telephone: (310) 791-8040 Facsimile: (310) 791-8230 If to FMLLC: Franchise Mortgage Acceptance Company LLC 2049 Century Park East, Suite 350 Los Angeles, California 90067 Attention: Wayne L. Knyal, Manager Telephone: (310) 229-2600 Facsimile: (310) 843-0976 If to FLRT: FLRT, Inc. 11560 Bellagio Road Los Angeles, California 90049 Attention: Wayne L. Knyal Telephone: (310) 472-5193 Facsimile: (310) 472-5393 5.6 Governing Law. This Agreement shall be deemed a contract made under ------------- the laws of the State of California, and the rights and obligations of the parties hereto shall be governed and construed in accordance with the laws of such State. 5.7 Sections and Headings. Titles or captions of sections or subsections --------------------- contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. 5.8 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. -6- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first herein above set forth. IMPERIAL CREDIT INDUSTRIES, INC. By: _____________________________________ Name: H. Wayne Snavely Title: Chairman FRANCHISE MORTGAGE ACCEPTANCE COMPANY By: _____________________________________ Name: Wayne L. Knyal Title: President and Chief Executive Officer FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC By: _____________________________________ Name: Wayne L. Knyal Title: Manager FLRT, INC. By: _____________________________________ Name: Wayne L. Knyal Title: Chief Executive Officer -7- EX-10.12 9 FORM OF MASTER LOAN AND SECURITY AGREEMENT EXHIBIT 10.12 ================================================================================ MASTER LOAN AND SECURITY AGREEMENT _____________________________ DATED AS OF SEPTEMBER 30, 1997 ______________________________ FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC AS BORROWER AND MORGAN STANLEY ASSET FUNDING INC. AS LENDER ================================================================================ TABLE OF CONTENTS RECITALS 1 SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS 1 1.01 CERTAIN DEFINED TERMS 1 1.02 ACCOUNTING TERMS AND DETERMINATIONS 11 SECTION 2. LOANS, NOTE AND PREPAYMENTS 11 2.01 LOANS 11 2.02 NOTES 12 2.03 PROCEDURE FOR BORROWING 12 2.04 LIMITATION ON TYPES OF LOANS; ILLEGALITY 13 2.05 REPAYMENT OF LOANS; INTEREST 13 2.06 MANDATORY PREPAYMENTS OR PLEDGE 14 2.07 EXTENSION OF TERMINATION DATE 14 2.08 RELEASE OF EXCESS COLLATERAL 14 2.09 RELEASE OF COLLATERAL UPON PREPAYMENT 15 SECTION 3. PAYMENTS; COMPUTATIONS; ETC. 15 3.01 PAYMENTS 15 3.02 COMPUTATIONS 16 3.03 U.S. TAXES 16 SECTION 4. COLLATERAL SECURITY 17 4.01 COLLATERAL; SECURITY INTEREST 17 4.02 FURTHER DOCUMENTATION 18 4.03 CHANGES IN LOCATIONS, NAME, ETC. 18 4.04 LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT 18
-i- 4.05 PERFORMANCE BY LENDER OF BORROWER'S OBLIGATIONS 19 4.06 PROCEEDS 19 4.07 REMEDIES 20 4.08 LIMITATION ON DUTIES REGARDING PRESERVATION OF COLLATERAL 21 4.09 POWERS COUPLED WITH AN INTEREST 21 4.10 RELEASE OF SECURITY INTEREST 21 SECTION 5. CONDITIONS PRECEDENT 21 5.01 INITIAL LOAN 21 5.02 INITIAL AND SUBSEQUENT LOANS 22 SECTION 6. REPRESENTATIONS AND WARRANTIES 23 6.01 EXISTENCE 23 6.02 LITIGATION 23 6.03 NO BREACH 23 6.04 ACTION 24 6.05 APPROVALS 24 6.06 MARGIN REGULATIONS 24 6.07 TAXES 24 6.08 INVESTMENT COMPANY ACT 24 6.09 COLLATERAL; COLLATERAL SECURITY 24 6.10 CHIEF EXECUTIVE OFFICE 25 6.11 LOCATION OF BOOKS AND RECORDS 25 6.12 HEDGING 25 6.13 TRUE AND COMPLETE DISCLOSURE 25 6.14 ERISA 25 6.15 TANGIBLE NET WORTH 26 SECTION 7. COVENANTS OF THE BORROWER 26
-ii- 7.01 FINANCIAL STATEMENTS 26 7.02 LITIGATION 27 7.03 EXISTENCE, ETC. 28 7.04 PROHIBITION OF FUNDAMENTAL CHANGES 28 7.05 BORROWING BASE DEFICIENCY 28 7.06 NOTICES 28 7.07 HEDGING 29 7.08 REPORTS 29 7.09 UNDERWRITING GUIDELINES 29 7.10 TRANSACTIONS WITH AFFILIATES 29 7.11 LIMITATION ON LIENS 29 7.12 LIMITATION ON DISTRIBUTIONS 30 7.13 MAINTENANCE OF PROFITABILITY 30 7.14 SERVICING TAPE 30 7.15 CONTINUING REPRESENTATIONS 30 7.16 MAINTENANCE OF TANGIBLE NET WORTH 30 7.17 MAINTENANCE OF RATIO OF TOTAL INDEBTEDNESS TO TANGIBLE NET WORTH 30 SECTION 8. EVENTS OF DEFAULT 30 SECTION 9. REMEDIES UPON DEFAULT 32 SECTION 10. NO DUTY OF LENDER 33 SECTION 11. MISCELLANEOUS 33 11.01 WAIVER 33 11.02 NOTICES 33 11.03 INDEMNIFICATION AND EXPENSES 33 11.04 AMENDMENTS 34 11.05 SUCCESSORS AND ASSIGNS 34
-iii- 11.06 SURVIVAL 34 11.07 CAPTIONS 34 11.08 COUNTERPARTS 34 11.09 LOAN AGREEMENT CONSTITUTES SECURITY AGREEMENT; GOVERNING LAW 35 11.10 SUBMISSION TO JURISDICTION; WAIVERS 35 11.11 WAIVER OF JURY TRIAL 35 11.12 ACKNOWLEDGMENTS 35 11.13 HYPOTHECATION OR PLEDGE OF LOANS 36 11.14 SERVICING 36 11.15 PERIODIC DUE DILIGENCE REVIEW 37
SCHEDULES --------- SCHEDULE 1 Representations and Warranties re: Mortgage Loans SCHEDULE 2 Filing Jurisdictions and Offices SCHEDULE 3 List of Approved Concepts as of the Effective Date EXHIBITS -------- EXHIBIT A Form of Promissory Note EXHIBIT B Form of Custodial Agreement EXHIBIT C Form of Opinion of Counsel to Borrower EXHIBIT D Form of Request for Borrowing EXHIBIT E-1 Form of Borrower's Release Letter EXHIBIT E-2 Form of Warehouse Lender's Release Letter EXHIBIT F Underwriting Guidelines EXHIBIT G Summary Credit File EXHIBIT H [RESERVED] EXHIBIT I Form of Summary Credit File Review Confirmation EXHIBIT J Form of Bailee Agreement EXHIBIT K Description of Merger EXHIBIT L Request for Release - Overcollateralization -iv- MASTER LOAN AND SECURITY AGREEMENT MASTER LOAN AND SECURITY AGREEMENT, dated as of September 30, 1997, between FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, a California limited liability company (the "Borrower"), and MORGAN STANLEY ASSET FUNDING INC., a -------- Delaware corporation (the "Lender"). ------ RECITALS The Borrower has requested that the Lender from time to time make revolving credit loans to it to finance certain mortgage loans secured by gasoline and convenience stores, quick service restaurants, golf courses and certain other asset classes acceptable to Lender owned by the Borrower, and the Lender is prepared to make such loans upon the terms and conditions hereof. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. ---------------------------------- 1.01 Certain Defined Terms. As used herein, the following terms --------------------- shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Loan Agreement in the singular to have the same meanings when used in the plural and vice versa): ---- ----- "Affiliate" shall mean any "affiliate" as such term is defined in the --------- United States Bankruptcy Code in effect from time to time. "Applicable Collateral Percentage" shall mean (a) with respect to C- -------------------------------- Store Mortgage Loans and with respect to Q-Store Mortgage Loans, 95% (b) with respect to Golf Course Loans, 87.5%, and (c) with respect to Other Asset-Backed Mortgage Loans and STARS/DEVCO Mortgage Loans, such percentage as determined by the Lender in its sole discretion. "Applicable Margin" shall mean: ----------------- (a) with respect to Loans that are Tranche A Loans, Tranche B Loans and Tranche C Loans, respectively, the applicable rate per annum set forth below for each day that such Loans shall be secured as provided in clause (b) below: Tranche A Loans.................. 0.95% Tranche B Loans.................. 1.10% Tranche C Loans.................. 1.55% (b) In determining at any time to what extent Loans are Tranche A Loans, Tranche B Loans or Tranche C Loans, (i) the Collateral Value of all Q- Store Mortgage Loans shall first be taken into account to determine the amount of Tranche A Loans, (ii) the Collateral Value of C-Store Mortgage Loans shall then be taken into account to determine the amount of Tranche B Loans and (iii) the Collateral Value of Golf Course Loans shall then be taken into account to determine the amount of Tranche C Loans. All Loans shall be either Tranche A Loans, Tranche B Loans or Tranche C Loans. "Approved Concept" shall mean any concept approved in writing by the ---------------- Lender. A list of Approved Concepts as of the Effective Date is attached as Schedule 3 hereto. -1- "Assignment of Mortgage" shall mean, with respect to any Mortgage, an ---------------------- assignment of the Mortgage, notice of transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect the assignment and pledge of the Mortgage to the Lender. "Bailee Agreement" shall mean a Bailee Agreement, among the Borrower, ---------------- the Lender and a Settlement Agreement, substantially in the form of Exhibit J as --------- the same shall be modified and supplemented and in effect from time to time. "Bankruptcy Code" shall mean the United States Bankruptcy Code of --------------- 1978, as amended from time to time. "Borrower" shall have the meaning provided in the heading hereof. -------- "Borrower's Release Letter" shall have the meaning provided in Section ------------------------- 5.01 hereof. "Borrowing Base" shall mean the aggregate Collateral Value of all -------------- Eligible Mortgage Loans. "Borrowing Base Deficiency" shall have the meaning provided in Section ------------------------- 2.06 hereof. "Borrowing Request" shall have the meaning provided in Section 2.03(a) ----------------- hereof. "Business Day" shall mean any day other than (i) a Saturday or Sunday ------------ or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of New York or the Custodian is authorized or obligated by law or executive order to be closed. "Capital Expenditures" shall mean, as to any Person for any period, -------------------- the aggregate amount paid or accrued by such Person and its Affiliates for the rental, lease, purchase (including by way of the acquisition of securities of any Person), construction or use of any Property during such period, the value or cost of which, in accordance with GAAP, would appear on such Person's consolidated balance sheet in the category of property, plant or equipment at the end of such period. "Capital Lease Obligations" shall mean, for any Person, all ------------------------- obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Loan Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Code" shall mean the Internal Revenue Code of 1986, as amended from ---- time to time. "Collateral" shall have the meaning provided in Section 4.01(b) ---------- hereof. "Collateral Value" shall mean (a) with respect to each Eligible ---------------- Mortgage Loan (other than Golf Course Loans), the Applicable Collateral Percentage of the lesser of (i) the Market Value of such Mortgage Loan and (ii) the outstanding principal balance of such Mortgage Loan and (b) with respect to each Golf Course Loan, the lesser of (i) the Applicable Collateral Percentage of such Golf Course Loan multiplied by the Market Value of such Golf Course Loan and (ii) 95% of the outstanding principal balance of such Golf Course Loan and (c) with respect to each Other Asset-Backed Mortgage Loan and STARS/DEVCO Mortgage Loan, the Applicable Collateral Percentage determined by Lender -2- in its sole discretion, multiplied by the Market Value of such Other Asset- Backed Mortgage Loan or STARS/DEVCO Mortgage Loan, as the case may be; provided that, (i) the Collateral Value shall be deemed to be zero with respect to each Mortgage Loan (1) in respect of which there is a breach of a representation and warranty set forth on Schedule 1 (assuming each representation and warranty is made as of the date Collateral Value is determined), (2) in respect of which there is a delinquency in the payment of principal and/or interest which continues for a period in excess of fifty nine (59) calendar days (without regard to any applicable grace periods), (3) which has been released from the possession of the Custodian under the Custodial Agreement to the Borrower for a period in excess of 14 days, (4) which is an Eligible Mortgage Loan that is a Wet-Ink Mortgage Loan and for which the Custodian has failed to receive the related Mortgage Loan Documents by the fifth Business Day following the applicable Funding Date (unless extended in writing by the Lender (in its sole discretion) if the Borrower so requests), or (5) other than a STARS/DEVCO Mortgage Loan which has been pledged to the Lender to secure a Committed Loan and which remains pledged to the Lender hereunder later than 270 days after the date on which it is first included in the Collateral; provided, however, that notwithstanding anything contained in this subclause (5) to the contrary, up to 25% of the aggregate Collateral Value of all Mortgage Loans that are not STARS/DEVCO Mortgage Loans may remain pledged to the Lender hereunder later than 270 days, but not later than 364 days after the date on which each such Mortgage Loan is first included in the Collateral if the Borrower and Lender mutually agree that Mortgagor concentration issues related to such Mortgage Loans will adversely affect efficient securitization pricing based upon rating agency requirements regarding individual Mortgagor concentration; and (ii) subject to clause (i)(2) above, the aggregate principal amount outstanding under the Loans secured by Eligible Mortgage Loans that are delinquent for 30 or more days at any one time may not exceed 2% of the aggregate principal amount of all Loans outstanding; (iii) the aggregate Collateral Value of Mortgage Loans that are Wet- Ink Mortgage Loans may not exceed 10% of the Maximum Credit; (iv) if the aggregate principal amount of Loans outstanding equals $50,000,000 or more, then the aggregate Collateral Value of Space Lease Mortgage Loans may not exceed 30% of the aggregate principal amount of all Loans outstanding. "Committed Loan" shall have the meaning assigned thereto in Section -------------- 2.01(a) hereof. "Consent Date" shall have the meaning provided in Section 2.07 hereof. ------------ "C-Store Mortgage Loans" shall mean Mortgage Loans secured by gasoline ---------------------- stations and convenience stores. "Custodial Agreement" shall mean the Custodial Agreement, dated as of ------------------- September 30, 1997, among the Borrower, the Custodian and the Lender, substantially in the form of Exhibit B hereto, as the same shall be modified and --------- supplemented and in effect from time to time. "Custodian" shall mean U.S. Bank National Association doing business --------- as First Bank National Association, as custodian under the Custodial Agreement, and its successors and permitted assigns thereunder. -3- "Default" shall mean an Event of Default or an event that with notice ------- or lapse of time or both would become an Event of Default. "Dollars" and "$" shall mean lawful money of the United States of ------- - America. "Due Diligence Review" shall mean the performance by the Lender of any -------------------- or all of the reviews permitted under Section 11.15 hereof with respect to any or all of the Mortgage Loans, as desired by the Lender from time to time. "Effective Date" shall mean the date upon which the conditions -------------- precedent set forth in Section 5.01 shall have been satisfied. "Eligible Mortgage Loan" shall mean a C-Store Mortgage Loan, a Q-Store ---------------------- Mortgage Loan or a Golf Course Loan which meets the Underwriting Guidelines (other than with respect to Mortgage Loans expressly excluded from the definition of STARS/DEVCO Mortgage Loans pursuant to clause (i) thereof which do not meet the Underwriting Guidelines for standard non-STARS/DEVCO Mortgage Loans, but which are nevertheless included in the definition of Eligible Mortgage Loans hereof) and as to which the representations and warranties in Section 6.10 and Schedule 1 hereof are correct in all material respects except as otherwise approved in writing by the Lender. "Energy-Related Mortgage Loan" shall mean (i) a C-Store Mortgage Loan ---------------------------- or (ii) any other Mortgage Loan secured by property on which petroleum products or fractions thereof, and similar products used for lubrication or the recovery of energy content, are used, handled, kept or stored on a regular basis. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that --------------- is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Borrower is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Borrower is a member. "Eurodollar Rate" shall mean, with respect to each day a Loan is --------------- outstanding (or if such day is not a Business Day, the next succeeding Business Day), the rate per annum equal to the rate appearing at page 5 of the average Telerate Screen as one-month LIBOR on such date, and if such rate shall not be so quoted, the average rate per annum at which three mutually acceptable banks are offered Dollar deposits at or about 10:00 A.M., New York City time, on such date by prime banks in the interbank eurodollar market where the eurodollar and foreign currency exchange operations in respect of its Loans are then being conducted for delivery on such day for a period of 30 days and in an amount comparable to the amount of the Loans to be outstanding on such day. "Event of Default" shall have the meaning provided in Section 8 ---------------- hereof. "Federal Funds Rate" shall mean, for any day, the weighted average of ------------------ the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the -4- quotations for the day of such transactions received by the Lender from three federal funds brokers of recognized standing selected by it. "Fixed Charge Coverage Ratio" means with respect to any Eligible --------------------------- Mortgage Loan, as of any date of determination and for any period, the applicable "Fixed Charge Coverage Ratio" determined in accordance with, and defined in, the Underwriting Guidelines. "Funding Date" shall mean the date on which a Loan is made hereunder. ------------ "GAAP" shall mean generally accepted accounting principles as in ---- effect from time to time in the United States. "Golf Course Loans" shall mean Mortgage Loans secured by golf courses. ----------------- "Governmental Authority" shall mean any nation or government, any ---------------------- state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over the Borrower, any of its Subsidiaries or any of its properties. "Ground Lease" means a ground lease for all or any portion of the ------------ parcel of real property comprising the Mortgaged Property, the lessee's interest in which is held by the Mortgagor of the related Mortgage Loan. "Guarantee" shall mean, as to any Person, any obligation of such --------- Person directly or indirectly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise); provided that the term "Guarantee" shall not include (i) endorsements for collection or deposit in the ordinary course of business, or (ii) obligations to make servicing advances for delinquent taxes and insurance or other obligations in respect of a Mortgaged Property, to the extent required by the Lender. The amount of any Guarantee of a Person shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have --------- ---------- correlative meanings. "Hazardous Material" shall means (a) those substances included within ------------------ the definitions of any one or more of the terms "contaminants," "pollutants," "hazardous substances," "hazardous materials" and "toxic substances" in CERCLA, RCRA, and the Hazardous Materials Transportation Act, as amended, 49 U.S.C. (S)(S) 1801 et seq., and in the regulations promulgated pursuant thereto; (b) those substances listed in the United States Department of Transportation Table (49 CFR (S)(S) 172. 101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) (40 CFR (S) 302 and amendments thereto) as hazardous substances; (c) such other substances, materials and wastes that are or become regulated under applicable local, state or federal laws or regulations, or that are classified as hazardous or toxic under federal, state or local laws or regulations; and (d) any materials, wastes or substances that are (i) petroleum, (ii) polychlorinated biphenyl, (iii) within the definition of "hazardous substance" set forth in Section 311 of the Clean Water Act, (33 U.S.C. (S) 1321) or designated as "toxic pollutants" subject to Chapter 26 of the Clean Water Act pursuant to -5- Section 307 to the Clean Water Act (33 U.S.C. (S)(S) 1317), (iv) inflammable substances or explosives, or (v) radioactive materials. "Indebtedness" shall mean, for any Person: (a) obligations created, ------------ issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) obligations (contingent or otherwise) of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; (f) obligations of such Person under repurchase agreements or like arrangements; (g) Indebtedness of others Guaranteed by such Person; (h) all obligations of such Person incurred in connection with the acquisition or carrying of fixed assets by such Person; and (i) Indebtedness of general partnerships of which such Person is a general partner. "Interest Rate Protection Agreement" shall mean, with respect to any ---------------------------------- or all of the Mortgage Loans, any short sale of US Treasury Security, or futures contract, or mortgage related security, or Eurodollar futures contract, or options related contract, or interest rate swap, cap or collar agreement or similar arrangements providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by the Borrower. "Lease Against Improvements" shall mean a space lease for all or any -------------------------- portion of real property comprising the Mortgaged Property, the lessee's interest in which is held by the Mortgagor of the related Mortgage Loan. "Leasehold Mortgage Loan" shall mean a mortgage loan secured by a ----------------------- Lease Against Improvements or Ground Lease. "Lender" shall have the meaning provided in the heading hereto. ------ "Lien" shall mean any mortgage, lien, pledge, charge, security ---- interest or similar encumbrance. "Loan" shall mean any Committed Loan or Uncommitted Loan, as ---- applicable, and collectively "Loans" shall mean the sum of all Committed Loans ----- and Uncommitted Loans. "Loan Agreement" shall mean this Master Loan and Security Agreement, -------------- as the same may be amended, supplemented or otherwise modified from time to time. "Loan Documents" shall mean, collectively, this Loan Agreement, the -------------- Note and the Custodial Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Market Value" shall mean, as of any date in respect of an Eligible ------------ Mortgage Loan, the price at which such Eligible Mortgage Loan could readily be sold as determined in good faith by -6- the Lender, which price may be determined to be zero. In determining the Market Value of each Eligible Mortgage Loan the Lender shall consult with the Borrower and may consider all information which it deems relevant, including without limitation, then current interest rates, the creditworthiness of the Mortgagor and projected proceeds from a securitization or sale. The Lender's determination of Market Value shall be conclusive upon the parties absent manifest error on the part of the Lender. "Material Adverse Effect" shall mean a material adverse effect on (a) ----------------------- the Property, business, operations, financial condition of the Borrower, (b) the ability of the Borrower to perform its obligations under any of the Loan Documents to which it is a party, (c) the validity or enforceability of any of the Loan Documents, (d) the rights and remedies of the Lender under any of the Loan Documents, (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith or (f) the Collateral. "Maximum Credit" shall mean $200,000,000. -------------- "Maximum Uncommitted Amount" shall mean $50,000,000. -------------------------- "Mortgage" shall mean the mortgage, deed of trust or other instrument -------- securing a Mortgage Note, which creates a first lien on the fee in real property and/or a first lien on the leasehold estate in real property securing the Mortgage Note and the assignment of rents and leases related thereto. "Mortgage File" shall have the meaning assigned thereto in the ------------- Custodial Agreement. "Mortgage Loan" shall mean a mortgage loan, including a Leasehold ------------- Mortgage Loan, which the Custodian has been instructed to hold for the Lender pursuant to the Custodial Agreement, and which Mortgage Loan includes, without limitation, (i) a Mortgage Note and related Mortgage and (ii) all right, title and interest of the Borrower in and to the Mortgaged Property covered by such Mortgage. "Mortgage Loan Documents" shall mean, with respect to a Mortgage Loan, ----------------------- the documents comprising the Mortgage File for such Mortgage Loan. "Mortgage Loan Medium" shall mean a computer-readable transmission -------------------- containing the information, with respect to each Mortgage Loan, to be delivered by the Borrower to the Lender pursuant to Section 2.03(a) hereof and shall contain the information set forth in Annex I attached to the Custodial Agreement. "Mortgage Loan Schedule" shall have the meaning assigned thereto in ---------------------- the Custodial Agreement. "Mortgage Loan Schedule and Exception Report" shall mean the mortgage ------------------------------------------- loan schedule and exception report prepared by the Custodian pursuant to the Custodial Agreement. "Mortgage Note" shall mean the original executed promissory note or ------------- other evidence of the indebtedness of a mortgagor/borrower with respect to a Mortgage Loan. "Mortgaged Property" shall mean the real property (including all ------------------ improvements, buildings, fixtures, building equipment and personal property thereon and all additions, alterations and -7- replacements made at any time with respect to the foregoing) and all other collateral securing repayment of the debt evidenced by a Mortgage Note. "Mortgagor" shall mean the obligor or obligors on a Mortgage Note; --------- including any person who has assumed or guaranteed the obligations of the obligor thereunder. "MS & Co." shall mean Morgan Stanley & Co. Incorporated, a registered -------- broker-dealer. "Multiemployer Plan" shall mean a multiemployer plan defined as such ------------------ in Section 3(37) of ERISA to which contributions have been or are required to be made by the Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA. "Net Income" shall mean, for any period, the net income of the ---------- Borrower for such period as determined in accordance with GAAP. "Note" shall mean the promissory note provided for by Section 2.02(a) ---- hereof for Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Other Asset-Backed Mortgage Loans" shall mean Mortgage Loans secured --------------------------------- by products other than gasoline stations, convenience stores, quick service restaurants, casual dining restaurants or golf courses which are acceptable to the Lender in its sole discretion, and which shall include, without limitation, truck stops, lube centers and car washes. "Payment Date" shall mean the first Business Day of each month. ------------ "PBGC" shall mean the Pension Benefit Guaranty Corporation or any ---- entity succeeding to any or all of its functions under ERISA. "Person" shall mean any individual, corporation, company, voluntary ------ association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee benefit plan established or maintained ---- by the Borrower or any ERISA Affiliate and covered by Title IV of ERISA, other than a Multiemployer Plan. "Post-Default Rate" shall mean, in respect of any principal of any ----------------- Loan or any other amount under this Loan Agreement, the Note or any other Loan Document that is not paid when due to the Lender (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 2% per annum plus the Prime ---- Rate. "Prime Rate" shall mean the prime rate announced to be in effect from ----------- time to time, as published as the average rate in The Wall Street Journal. --- ---- ------ ------- "Property" shall mean any right or interest in or to property of any -------- kind whatsoever, whether real, personal or mixed and whether tangible or intangible. -8- "Q-Store Mortgage Loans" shall mean mortgage loans secured by quick ---------------------- service restaurants or casual dining restaurants. "Regulations G, T, U and X" shall mean Regulations G, T, U and X of ------------------------- the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Request for Borrowing" shall mean the request for borrowing required --------------------- pursuant to Section 2.03 hereof. "Responsible Officer" shall mean, as to any Person, the chief ------------------- executive officer or, with respect to financial matters, the chief financial officer of such Person. "Secured Obligations" shall have the meaning provided in Section ------------------- 4.01(c) hereof. "Security Agreement" shall mean with respect to any Mortgage Loan, any ------------------ contract, instrument or other document related to security for repayment thereof (other than the related Mortgage and Mortgage Note), executed by the Mortgagor and/or others in connection with such Mortgage Loan, including without limitation, any security agreement, guaranty, title insurance policy, hazard insurance policy, chattel mortgage, letter of credit or certificate of deposit or other pledged accounts, and any other documents and records relating to any of the foregoing. "Servicer" shall have the meaning provided in Section 11.14(c) hereof. -------- "Servicer Account" shall mean any account established by the Servicer ---------------- in connection with the servicing of the Mortgage Loans. "Servicing Agreement" shall have the meaning provided in Section ------------------- 11.14(d) hereof. "Servicing Records" shall have the meaning provided in Section ----------------- 11.14(c) hereof. "Settlement Agent" shall mean, with respect to any Mortgage Loan, the ---------------- entity approved by the Lender, in its sole good-faith discretion (which may be a title company, escrow company or attorney in accordance with local law and practice in the jurisdiction where the related Wet-Ink Mortgage Loan is being originated) to act pursuant to the Bailee Agreement. "Space Lease Mortgage Loan" shall mean a Mortgage Loan which is ------------------------- secured by a Mortgage on the lessee's interest in a Lease Against Improvements. "STARS/DEVCO Mortgage Loan" shall mean a Mortgage Loan which is ------------------------- collateralized by a property or business enterprise wherein the loan amount advanced by the Borrower is based on cash flow projected by the Borrower rather than on the preceding 12 months of operating history. The proceeds of such loan, which will typically be interest only and have a maturity of between 3-18 months, is typically used for: (i) the purchase of a currently operating quick service restaurant unit by an experienced operator which based on financial projections will have improved performance such that it would qualify for a permanent loan under the Borrower's Underwriting Guidelines within 3-18 months. Typically, the basis for projecting any satisfactory performance is based on the Mortgagor having demonstrated ability to lower the cost structure of the unit. This definition excludes permanent loans -9- made for acquisitions as described in the foregoing sentences and which loan provides for regular principal and interest payments and is originated under the Underwriting Guidelines for standard non-STARS/DEVCO Mortgage Loans and shall be of a credit quality so as to be eligible to be placed into a securitization with no credit enhancement in excess of the credit enhancement required for Eligible Mortgage Loans other than STARS/DEVCO Mortgage Loans which are securitized in the same manner; and (ii) the construction of a new quick service restaurant unit or conversion of an existing unit of a different brand (concept) by an experienced operator which, based on projections will have the required performance such that it would qualify for a permanent loan under the Borrower's Underwriting Guidelines within 3-18 months. Typically, construction for these units is completed within 180 days. "Subsidiary" shall mean, with respect to any Person, any corporation, ---------- partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Summary Credit File" shall mean, with respect to each Mortgage Loan, ------------------- a file containing the documents listed in Exhibit G hereto. --------- "Tangible Net Worth" shall mean, as of a particular date, ------------------ (a) all amounts which would be included under capital on a balance sheet of the Borrower at such date, determined in accordance with GAAP, less ---- (b) (i) amounts owing to the Borrower from Affiliates and (ii) intangible assets. "Termination Date" shall mean September 30, 1998 or such earlier date ---------------- on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law or as extended pursuant to Section 2.07 hereof. "Test Period" shall have the meaning provided in Section 7.13 hereof. ----------- "Total Indebtedness" shall mean, for any period, the aggregate ------------------ Indebtedness of the Borrower during such period less the amount of any ---- nonspecific balance sheet reserves maintained in accordance with GAAP. "Tranche A Loans" shall mean Loans so long as, and to the extent that, --------------- they are secured by Q-Store Mortgage Loans, determined in accordance with clause (b) of the definition hereof for "Applicable Margin." "Tranche B Loans" shall mean Loans so long as, and to the extent that, --------------- they are secured by C-Store Mortgage Loans, determined in accordance with clause (b) of the definition hereof for "Applicable Margin." -10- "Tranche C Loans" shall mean Loans so long as, and to the extent that, --------------- they are secured by Golf Course Loans, determined in accordance with clause (b) of the definition hereof for "Applicable Margin." "Trust Receipt" shall have the meaning assigned thereto in the ------------- Custodial Agreement. "Uncommitted Loan" shall have the meaning assigned thereto in Section ---------------- 2.01(b) hereof. "Underwriting Guidelines" shall mean the underwriting guidelines ----------------------- (including the loan origination guidelines) previously delivered to the Lender by the Borrower. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in ----------------------- effect on the date hereof in the State of New York; provided that the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. "U.S. Taxes" shall have the meaning provided in Section 3.03 hereof. ---------- "Warehouse Lender's Release Letter" shall have the meaning provided in --------------------------------- Section 5.02 hereof. "Wet-Ink Mortgage Loan" shall mean a Mortgage Loan which is pledged to --------------------- the Lender simultaneously with the origination thereof by the Borrower, which origination is financed in part or in whole with proceeds of Loans advanced directly to a Settlement Agent. A Mortgage Loan will be considered a Wet-Ink Mortgage Loan until such time as the Mortgage Loan Documents are received by the Custodian. 1.02 Accounting Terms and Determinations. Except as otherwise ----------------------------------- expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lender hereunder shall be prepared, in accordance with GAAP. Section 2. Loans, Note and Prepayments. --------------------------- 2.01 Loans. ----- (a) Subject to fulfillment of the conditions precedent set forth in Sections 5.01 and 5.02 hereof, and provided that no Default shall have occurred and be continuing hereunder, the Lender agrees from time to time, on the terms and conditions of this Loan Agreement, to make loans (individually, a "Committed Loan"; collectively, the "Committed Loans") to the Borrower in -------------- --------------- Dollars, from and including the Effective Date to and including the Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the lesser of (i) the Borrowing Base and (ii) the Maximum Credit as in effect from time to time. (b) In addition to the foregoing, the Lender may from time to time in its sole discretion, on the terms and conditions of this Loan Agreement, make loans (individually, an "Uncommitted Loan"; collectively, the "Uncommitted ---------------- ----------- Loans") to the Borrower in Dollars during the -11- period from and including the Effective Date to and including the Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the lesser of (i) the Maximum Uncommitted Amount as in effect from time to time and (ii) the Maximum Credit minus the aggregate outstanding principal balance of Committed Loans. (c) Subject to the terms and conditions of this Loan Agreement, during such period the Borrower may borrow, repay and reborrow hereunder. (d) In no event shall a Loan be made when any Default or Event of Default has occurred and is continuing. 2.02 Notes. ----- (a) The Loans made by the Lender shall be evidenced by a single promissory note of the Borrower substantially in the form of Exhibit A hereto --------- (the "Note"), dated the date hereof, payable to the Lender in a principal amount ---- equal to the amount of the Maximum Credit as originally in effect and otherwise duly completed. The Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise. (b) The date, amount and interest rate of each Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of the Note, endorsed by the Lender on the schedule attached to the Note or any continuation thereof; provided that the failure of the Lender to make any such -------- recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. 2.03 Procedure for Borrowing. ----------------------- (a) The Borrower may request a borrowing hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, by delivering to the Lender, with a copy to the Custodian, an irrevocable written request for borrowing, substantially in the form of Exhibit ------- D attached hereto (a "Borrowing Request"), which request must be received by the - - ----------------- Lender prior to 5:00 p.m., New York City time, one (l) Business Day prior to the requested Funding Date. Such request for borrowing shall (i) attach a schedule identifying the Eligible Mortgage Loans that the Borrower proposes to pledge to the Lender and to be included in the Borrowing Base in connection with such borrowing, (ii) specify the requested Funding Date, (iii) include a Mortgage Loan Medium containing information with respect to the Eligible Mortgage Loans that the Borrower proposes to pledge to the Lender and to be included in the Borrowing Base in connection with such borrowing, and (iv) specify any exceptions to the Underwriting Guidelines and the representations and warranties set forth on Schedule 1 hereto that are applicable to such Eligible Mortgage Loans to be pledged on such Funding Date. Prior to the Funding Date, the Lender will notify Borrower of Lender's current determination of Market Value. (b) Upon the Borrower's request for a borrowing pursuant to Section 2.03(a), the Lender shall, assuming all conditions precedent set forth in Section 5.01 and 5.02 have been met and provided no Default shall have occurred and be continuing, make a Committed Loan to the Borrower on the requested Funding Date, in the lesser of (i) the amount so requested and (ii) the excess of the Borrowing Base over the principal amount of Loans outstanding. Under no circumstances will the -12- Lender be required to make a Committed Loan pursuant to this Section 2.03 secured by an Other Asset-Backed Mortgage Loan or by a STARS/DEVCO Mortgage Loan. (c) Upon the Borrower's request for a borrowing pursuant to Section 2.03(a), the Lender may at its sole option, assuming all conditions precedent set forth in Section 5.01 and 5.02 have been met and provided no Default shall have occurred and be continuing, make an Uncommitted Loan to the Borrower on the requested Funding Date, in the amount so requested. (d) The Borrower shall release to the Custodian no later than 12:00 p.m., New York City time, one (1) Business Day prior to the requested Funding Date, the Mortgage File pertaining to each Eligible Mortgage Loan (other than a Wet-Ink Mortgage Loan) to be pledged to the Lender and included in the Borrowing Base on such requested Funding Date, in accordance with the terms and conditions of the Custodial Agreement. (e) Pursuant to the Custodial Agreement, the Custodian shall deliver to the Lender and the Borrower, no later than 3:00 p.m. on a Funding Date, a Trust Receipt (as defined in the Custodial Agreement) in respect of all Mortgage Loans pledged to the Lender on such Funding Date, and a Mortgage Loan Schedule and Exception Report. Subject to Section 5 hereof, such borrowing will then be made available to the Borrower by the Lender transferring, via wire transfer, to the following account of the Borrower: Franchise Mortgage Acceptance Company LLC c/o Imperial Bank, Inglewood, CA, for the A/C of 009-097-287, ABA# 1-222-01- 444, Attn: Wilma Labuda, in the aggregate amount of such borrowing in funds immediately available to the Borrower. 2.04 Limitation on Types of Loans; Illegality. Anything herein to ---------------------------------------- the contrary notwithstanding, if, on or prior to the determination of any Eurodollar Rate: (a) the Lender determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Loans as provided herein; or (b) it becomes unlawful for the Lender to honor its obligation to make or maintain Loans hereunder using a Eurodollar Rate; then the Lender shall give the Borrower prompt notice thereof and, so long as such condition remains in effect, the Lender shall be under no obligation to make additional Loans, and the Borrower shall either prepay all such Loans as may be outstanding or pay interest on such Loans at a rate per annum equal to the Federal Funds Rate plus 1.75% and for the remainder of the term of this Loan Agreement, the Lender will make Loans, subject to the conditions precedent set forth in Section 5.02 hereof at a rate equal to the Federal Funds Rate plus 1.75%. 2.05 Repayment of Loans; Interest. ---------------------------- (a) The Borrower hereby promises to repay in full on the Termination Date the then aggregate outstanding principal amount of the Loans. (b) The Borrower hereby promises to pay to the Lender interest on the unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at a rate per annum equal to the Eurodollar Rate plus the Applicable Margin, except ---- to the extent set forth in Section 2.04 hereof. Notwithstanding the -13- foregoing, the Borrower hereby promises to pay to the Lender interest at the applicable Post-Default Rate on any principal of any Loan and on any other amount payable by the Borrower hereunder or under the Note that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory prepayment or otherwise) for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable monthly on the Payment Date and for the last month of the Loan Agreement on the Payment Date of such last month and on the Termination Date, except that interest payable at the Post-Default Rate shall accrue daily and shall be payable upon such accrual. Promptly after the determination of any interest rate provided for herein or any change therein, the Lender shall give notice thereof to the Borrower. (c) It is understood and agreed that, unless and until a Default shall have occurred and be continuing, the Borrower shall be entitled to the proceeds of the Mortgage Loans pledged to the Lender hereunder in accordance with Section 11.14 hereof. 2.06 Mandatory Prepayments or Pledge. ------------------------------- If at any time the aggregate outstanding principal amount of Loans exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined by the ------------------------- Lender and notified to the Borrower on any Business Day, the Borrower shall no later than one Business Day after receipt of such notice, either prepay the Loans in part or in whole or pledge additional Eligible Mortgage Loans (which Collateral shall be in all respects acceptable to the Lender) to the Lender, such that after giving effect to such prepayment or pledge the aggregate outstanding principal amount of the Loans does not exceed the Borrowing Base. 2.07 Extension of Termination Date. ----------------------------- The Borrower may, by notice to the Lender not less than sixty (60) days and not more than ninety (90) days prior to the Termination Date as then in effect (the "Existing Termination Date"), request that the Lender extend the ------------------------- Termination Date for an additional 360 days from the Consent Date (as defined below). The Lender, acting in its sole discretion, shall, by notice to the Borrower and given no earlier than the date occurring thirty (30) days prior to the Existing Termination Date (such date, the "Consent Date") and no later than ------------ the date three (3) Business Days after the Consent Date, advise the Borrower whether or not the Lender agrees to such extension. 2.08 Release of Excess Collateral. ---------------------------- On any day on which the Borrowing Base exceeds the aggregate outstanding principal amount of the Loans, so long as no Default or Event of Default has occurred and is continuing: (a) The Borrower may prepare a request for release of Mortgage Loans in the form of Exhibit L hereto ("Request for Release- --------- ------------------- Overcollateralization"), specifying (1) the Mortgage Loans to be released --------------------- and the requested release date, (2) the Borrowing Base with respect to such Mortgage Loans pledged hereunder, (3) the remaining Borrowing Base after giving effect to the release of the Mortgage Loans to be released, (4) the unpaid principal balance of the Loans, and (5) a certification from the Borrower that, upon release of the Eligible Mortgage Loans to be released, the Borrowing Base would be equal to or greater than the unpaid principal balance of the Loans. -14- (b) The Borrower shall transmit the Request for Release- Overcollateralization by facsimile transmission to the Lender. Upon confirming that the Request for Release-Overcollateralization correctly reflects the information set forth in Section 2.08(a) and that, after giving effect to the requested release, the amount of the Borrowing Base would be equal to or greater than the unpaid principal balance of the Loans, the Lender shall countersign the Request for Release- Overcollateralization and transmit the countersigned Request for Release- Overcollateralization to the Custodian. In the event that the Lender's assessment of the Borrowing Base would alter the information set forth in any Request for Release, the Lender shall promptly notify the Borrower in writing of such assessment. (c) Upon receipt of the countersigned Request for Release- Overcollateralization and upon approval of the Request for Release- Overcollateralization by the Lender, the Custodian shall take the actions set forth in the Custodial Agreement with respect to the Eligible Mortgage Loan to be released pursuant to the Custodial Agreement. With respect to any Mortgage Loan released pursuant to this Section 2.08, the Lender covenants that it will release any Liens that it has placed or caused to be placed on such Mortgage Loan. (d) The Lender shall not be obligated to countersign a Request for Release-Overcollateralization (i) which the Lender reasonably determines is based on erroneous information or would result in a release of Collateral other than in accordance with the terms of this Agreement, or (ii) which does not reflect the Lender's current determination of Market Value. 2.09 Release of Collateral Upon Prepayment. ------------------------------------- With the prior written consent of the Lender, in each case, the Borrower may obtain the release of one or more Mortgage Loans constituting Collateral hereunder by paying any portion of the Loans outstanding; provided -------- that, after giving effect to such release, the Secured Obligations then outstanding shall not exceed the Borrowing Base, which determination shall be made solely by the Lender. In connection with any such requested release, the Borrower will provide notice to the Custodian and the Lender no later than 3:00 p.m., New York City time, on the date of such request, specifying the Mortgage Loans to be released. Each such release shall be deemed to be a representation and warranty by the Borrower that after giving effect to such release, the Secured Obligations then outstanding shall not exceed the Borrowing Base. With respect to any Mortgage Loan released pursuant to this Section 2.09, the Lender covenants that it will release any Liens that it has placed or caused to be placed on such Mortgage Loan. Section 3. Payments; Computations; Etc. ---------------------------- 3.01 Payments. -------- (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrower under this Loan Agreement and the Note, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Lender at the following account maintained by the Lender: Account No. 40615114, For the A/C of MSMCI, Citibank, N.A., ABA# 021000089, not later than 3:00 p.m., New York City time, on the date on which such payment shall become due (and each such payment made after such time on such due date shall be deemed to have been made on the next succeeding Business Day). The Borrower acknowledges that it has no rights of withdrawal from the foregoing account. -15- (b) Except to the extent otherwise expressly provided herein, if the due date of any payment under this Loan Agreement or the Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 3.02 Computations. Interest on the Loans shall be computed on the ------------ basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 3.03 U.S. Taxes. ---------- (a) The Borrower agrees to pay to the Lender such additional amounts as are necessary in order that the net payment of any amount due to the Lender hereunder after deduction for or withholding in respect of any U.S. Tax (as defined below) imposed with respect to such payment (or in lieu thereof, payment of such U.S. Tax by the Lender), will not be less than the amount stated herein to be then due and payable; provided that the foregoing obligation to pay such -------- additional amounts shall not apply: (i) to any payment to the Lender hereunder unless the Lender is entitled to submit a Form 1001 (relating to the Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by the Lender hereunder in respect of the Loans), or (ii) to any U.S. Tax imposed solely by reason of the failure by the Lender to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of the Lender if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Tax. For the purposes of this Section 3.03, (x) "Form 1001" shall mean Form 1001 --------- (Ownership, Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America, (y) "Form 4224" shall mean Form 4224 --------- (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of the Treasury of the United States of America (or in relation to either such Form such successor and related form as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates), and (z) "U.S. Taxes" shall mean any present or ---------- future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein. (b) Within 30 days after paying any such amount to the Lender, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Borrower shall deliver to the Lender evidence satisfactory to the Lender of such deduction, withholding or payment (as the case may be). (c) The Lender represents and warrants to the Borrower that on the date hereof the Lender is either incorporated under the laws of the United States or a State thereof or is entitled to submit a Form 1001 (relating to the Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by the Lender hereunder in respect of the Loans). -16- (d) If the Lender receives a refund or credit solely in respect of U.S. Taxes, with respect to Mortgage Loans pledged hereunder, it shall pay over such refund or credit to the Borrower to the extent that it has already received indemnity payments or additional amounts pursuant to this Section 3.03 with respect to such U.S. Taxes giving rise to the refund or credit, net of all out- of-pocket expenses, with respect to Mortgage Loans pledged hereunder, and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund or credit); provided, however, that the -------- ------- Borrower shall, upon request of the Lender, repay such refund or credit, (plus penalties, interest or other charges imposed by the relevant Governmental Authority) to the Lender if the Administrative Agent or such Lender is required to repay such refund or credit to such Governmental Authority. Nothing contained herein shall require the Lender to make its tax returns (or any other information relating to its taxes that it deems confidential) available to the Borrower or any other Person. Section 4. Collateral Security. ------------------- 4.01 Collateral; Security Interest. ----------------------------- (a) Pursuant to the Custodial Agreement, the Custodian shall hold the Mortgage Loan Documents as exclusive bailee and agent for the Lender pursuant to terms of the Custodial Agreement and shall deliver to the Lender Trust Receipts each to the effect that it has reviewed such Mortgage Loan Documents in the manner and to the extent required by the Custodial Agreement and identifying any deficiencies in such Mortgage Loan Documents as so reviewed. (b) All of the Borrower's right, title and interest in, to and under each of the following items of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter referred to as the "Collateral": ---------- (i) all Mortgage Loans; (ii) all Mortgage Loan Documents, including without limitation all promissory notes, and all Servicing Records (as defined in Section 11.14(b) below), servicing agreements and any other collateral pledged or otherwise relating to such Mortgage Loans, together with all files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, computer storage media, accounting records and other books and records relating thereto; (iii) all mortgage guaranties and insurance (issued by governmental agencies or otherwise) and any mortgage insurance certificate or other document evidencing such mortgage guaranties or insurance relating to any Mortgage Loan and all claims and payments thereunder; (iv) all other insurance policies and insurance proceeds relating to any Mortgage Loan or the related Mortgaged Property; (v) all Interest Rate Protection Agreements; (vi) any Servicer Accounts established pursuant to any Servicing Agreement and all amounts on deposit therein, from time to time; (vii) all "general intangibles" as defined in the Uniform Commercial Code relating to or constituting any and all of the foregoing; and -17- (viii) any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing. (c) The Borrower hereby assigns, pledges and grants a security interest in all of its right, title and interest in, to and under the Collateral to the Lender to secure the repayment of principal of and interest on all Loans and all other amounts owing to the Lender hereunder, under the Note and under the other Loan Documents (collectively, the "Secured Obligations"). The ------------------- Borrower agrees to mark its computer records and tapes to evidence the interests granted to the Lender hereunder. 4.02 Further Documentation. At any time and from time to time, upon --------------------- the written request of the Lender, and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments and documents and take such further action as the Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Loan Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. The Borrower also hereby authorizes the Lender to file any such financing or continuation statement without the signature of the Borrower to the extent permitted by applicable law. 4.03 Changes in Locations, Name, etc. The Borrower shall not (i) -------------------------------- change the location of its chief executive office/chief place of business from that specified in Section 6 hereof or (ii) change its name, identity or corporate structure (or the equivalent) or change the location where it maintains its records with respect to the Collateral unless it shall have given the Lender at least 30 days prior written notice thereof and shall have delivered to the Lender all Uniform Commercial Code financing statements and amendments thereto as the Lender shall request and taken all other actions deemed necessary by the Lender to continue its perfected status in the Collateral with the same or better priority. 4.04 Lender's Appointment as Attorney-in-Fact. ---------------------------------------- (a) The Borrower hereby irrevocably constitutes and appoints the Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Borrower and in the name of the Borrower or in its own name, from time to time in the Lender's discretion, for the purpose of carrying out the terms of this Loan Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Loan Agreement, and, without limiting the generality of the foregoing, the Borrower hereby gives the Lender the power and right, on behalf of the Borrower, without assent by, but with notice to, the Borrower, if an Event of Default shall have occurred and be continuing, to do the following: (i) in the name of the Borrower or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Lender for the purpose of collecting any and all such moneys due under any such mortgage insurance or with respect to any other Collateral whenever payable; -18- (ii) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; and (iii) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to the Lender or as the Lender shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Borrower with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Lender may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Lender were the absolute owner thereof for all purposes, and to do, at the Lender's option and the Borrower's expense, at any time, and from time to time, all acts and things which the Lender deems necessary to protect, preserve or realize upon the Collateral and the Lender's Liens thereon and to effect the intent of this Loan Agreement, all as fully and effectively as the Borrower might do. The Borrower hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The Borrower also authorizes the Lender, at any time and from time to time, to execute, in connection with any sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on the Lender are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither the Lender nor any of its officers, directors, or employees shall be responsible to the Borrower for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. 4.05 Performance by Lender of Borrower's Obligations. If the ----------------------------------------------- Borrower fails to perform or comply with any of its agreements contained in the Loan Documents and the Lender may itself perform or comply, or otherwise cause performance or compliance, with such agreement (provided that it does so in a commercially reasonable manner) the expenses of the Lender incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Post-Default Rate, shall be payable by the Borrower to the Lender on demand and shall constitute Secured Obligations. The Lender shall use its reasonable efforts to give the Borrower prior notice (but in any event prompt notice) of any actions taken pursuant to this Section 4.05. 4.06 Proceeds. If an Event of Default shall occur and be continuing, -------- (a) all proceeds of Collateral received by the Borrower consisting of cash, checks and other near-cash items shall be held by the Borrower in trust for the Lender, segregated from other funds of the Borrower, and shall forthwith upon receipt by the Borrower be turned over to the Lender in the exact form received by the -19- Borrower (duly endorsed by the Borrower to the Lender, if required) and (b) any and all such proceeds received by the Lender (whether from the Borrower or otherwise) may, in the sole discretion of the Lender, be held by the Lender as collateral security for, and/or then or at any time thereafter may be applied by the Lender against, the Secured Obligations (whether matured or unmatured), such application to be in such order as the Lender shall elect. Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full and this Loan Agreement shall have been terminated shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned rents and any other income and all other amounts received with respect to the Collateral. 4.07 Remedies. If an Event of Default shall occur and be continuing, -------- the Lender may exercise, in addition to all other rights and remedies granted to it in this Loan Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, the Lender without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Borrower or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker's board or office of the Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby waived or released. The Borrower further agrees, at the Lender's request, to assemble the Collateral and make it available to the Lender at places which the Lender shall reasonably select, whether at the Borrower's premises or elsewhere. The Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Lender hereunder, including without limitation reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as the Lender may elect, and only after such application and after the payment by the Lender of any other amount required or permitted by any provision of law, including without limitation Section 9-504(1)(c) of the Uniform Commercial Code, need the Lender account for the surplus, if any, to the Borrower. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands it may acquire against the Lender arising out of the exercise by the Lender of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of the Lender. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Borrower shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 2.05(b) hereof) if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by the Lender to collect such deficiency. -20- 4.08 Limitation on Duties Regarding Preservation of Collateral. The --------------------------------------------------------- Lender's duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Lender deals with similar property for its own account. Neither the Lender nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Borrower or otherwise. 4.09 Powers Coupled with an Interest. All authorizations and ------------------------------- agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 4.10 Release of Security Interest. Upon termination of this Loan ---------------------------- Agreement and repayment to the Lender of all Secured Obligations and the performance of all obligations under the Loan Documents the Lender shall release its security interest in any remaining Collateral. Section 5. Conditions Precedent. -------------------- 5.01 Initial Loan. The obligation of the Lender to make its initial ------------ Loan hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan, of the condition precedent that the Lender shall have received all of the following documents, each of which shall be satisfactory to the Lender and its counsel in form and substance: (a) Loan Documents. -------------- (i) Note. The Note, duly completed and executed; ---- (ii) Custodial Agreement. The Custodial Agreement, duly executed and ------------------- delivered by the Borrower and the Custodian. In addition, the Borrower shall have taken such other action as the Lender shall have requested in order to perfect the security interests created pursuant to the Loan Agreement; (b) Organizational Documents. A good standing certificate and ------------------------ certified copies of the charter and by-laws (or equivalent documents) of the Borrower and of all corporate or other authority for the Borrower with respect to the execution, delivery and performance of the Loan Documents and each other document to be delivered by the Borrower from time to time in connection herewith (and the Lender may conclusively rely on such certificate until it receives notice in writing from the Borrower to the contrary); (c) Legal Opinion. A legal opinion of counsel to the Borrower, ------------- substantially in the form attached hereto as Exhibit C; --------- (d) Mortgage Loan Schedule and Exception Report. A Mortgage Loan ------------------------------------------- Schedule and Exception Report, dated the Effective Date, from the Custodian, duly completed; (e) Servicing Agreement(s). Any Servicing Agreement, certified as a ---------------------- true, correct and complete copy of the original, with the letter of the applicable Servicer consenting to termination of such Servicing Agreement upon the occurrence of an Event of Default attached; and -21- (f) Other Documents. Such other documents as the Lender may --------------- reasonably request. 5.02 Initial and Subsequent Loans. The making of each Loan to the ---------------------------- Borrower (including the initial Loan) on any Funding Date is subject to the satisfaction of the following further conditions precedent, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) no Default or Event of Default shall have occurred and be continuing; (b) both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof, the representations and warranties made by the Borrower in Section 6 and Schedule 1 hereof, and elsewhere in each of the Loan Documents, shall be true and complete on and as of the date of the making of such Loan in all material respects (in the case of the representations and warranties in Section 6.10 and Schedule 1, solely with respect to Mortgage Loans included in the Borrowing Base) with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). The Lender shall have received an officer's certificate signed by a Responsible Officer of the Borrower certifying as to the truth and accuracy of the above, which certificate shall specifically include a statement that the Borrower is in compliance with all governmental licenses and authorizations and is qualified to do business and in good standing in all required jurisdictions. (c) the aggregate outstanding principal amount of the Loans shall not exceed the Borrowing Base; (d) the Lender shall have received from the Custodian a Trust Receipt on the initial Funding Date, and on each Funding Date, a Mortgage Loan Schedule and Exception Report with exceptions as are acceptable to the Lender in its sole discretion in respect of Eligible Mortgage Loans to be pledged hereunder on such Business Day; (e) the Lender shall have received from the Borrower a Warehouse Lender's Release Letter substantially in the form of Exhibit E-2 hereto (or ----------- such other form acceptable to the Lender) or a Borrower's Release Letter substantially in the form of Exhibit E-1 hereto (or such other form ----------- acceptable to the Lender) covering each Mortgage Loan to be pledged to the Lender; (f) none of the following shall have occurred and/or be continuing: (i) an event or events shall have occurred resulting in the effective absence of a "repo market" or comparable "lending market" for financing debt obligations secured by mortgage loans or securities for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in the Lender not being able to finance any Loans through the "repo market" or "lending market" with traditional counterparties at rates which would have been reasonable prior to the occurrence of such event or events; or (ii) an event or events shall have occurred resulting in the effective absence of a "securities market" for securities backed by mortgage loans for a period of (or -22- reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in the Lender not being able to sell securities backed by mortgage loans at prices which would have been reasonable prior to such event or events; or (iii) a Material Adverse Effect or a material adverse effect on the prospects of the Borrower shall have occurred; (g) the Lender shall have been given at least (i) five (5) Business Days in the case of any Funding Date to occur within 30 days following the Effective Date or (ii) three (3) Business Days for any other Funding Date, to conduct a due diligence review of the Summary Credit File with respect to such Loan pursuant to Section 11.15(b) to confirm that such Mortgage Loan is in conformity with the Underwriting Guidelines; and (h) the Lender shall have approved, in its sole discretion, all exceptions to the Underwriting Guidelines. Each request for a borrowing by the Borrower hereunder shall constitute a certification by the Borrower that all the conditions set forth in this Section 5 have been satisfied (both as of the date of such notice, request or confirmation and as of the date of such borrowing). Section 6. Representations and Warranties. The Borrower represents ------------------------------ and warrants to the Lender that throughout the term of this Loan Agreement: 6.01 Existence. The Borrower (a) is a limited liability company duly --------- organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power, and has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the lack of such licenses, authorizations, consents and approvals would not be reasonably likely to have a material adverse effect on its Property, business or financial condition or prospects; and (c) is qualified to do business and is in good standing in all other jurisdictions in which the nature of the business conducted by it makes such qualification necessary, except where failure so to qualify would not be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its Property, business or financial condition or prospects. 6.02 Litigation. There are no actions, suits, arbitrations, ---------- investigations or proceedings pending or, to its knowledge, threatened against the Borrower or any of its Subsidiaries or affecting any of the Property of any of them before any Governmental Authority (i) as to which individually or in the aggregate there is a reasonable likelihood of an adverse decision which would be reasonably likely to have a material adverse effect on its Property, business or financial condition or prospects or (ii) which questions the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby. 6.03 No Breach. Neither (a) the execution and delivery of the Loan --------- Documents nor (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the charter or by-laws of the Borrower, or any applicable law, rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any Servicing Agreement or other material agreement or instrument to which the Borrower or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such material agreement or -23- instrument or result in the creation or imposition of any Lien (except for the Liens created pursuant to this Loan Agreement) upon any Property of the Borrower or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. 6.04 Action. The Borrower has all necessary corporate or other ------ power, authority and legal right to execute, deliver and perform its obligations under each of the Loan Documents; the execution, delivery and performance by the Borrower of each of the Loan Documents have been duly authorized by all necessary corporate or other action on its part; and each Loan Document has been duly and validly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. 6.05 Approvals. No authorizations, approvals or consents of, and no --------- filings or registrations with, any Governmental Authority or any securities exchange are necessary for the execution, delivery or performance by the Borrower of the Loan Documents or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to this Loan Agreement. 6.06 Margin Regulations. Neither the making of any Loan hereunder, ------------------ nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X. 6.07 Taxes. The Borrower and its Subsidiaries have filed all Federal ----- income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except for any such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Borrower, adequate. 6.08 Investment Company Act. Neither the Borrower nor any of its ---------------------- Subsidiaries is an "investment company", or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 6.09 Collateral; Collateral Security. -------------------------------- (a) The Borrower has not assigned, pledged, or otherwise conveyed or encumbered any Mortgage Loan to any other Person, and immediately prior to the pledge of such Mortgage Loan to the Lender, the Borrower was the sole owner of such Mortgage Loan and had good and marketable title thereto, free and clear of all Liens, in each case except for Liens to be released simultaneously with the Liens granted in favor of the Lender hereunder. No Mortgage Loan pledged to the Lender hereunder was acquired by the Borrower from an Affiliate of the Borrower or a true sale opinion acceptable to the Lender is delivered to the Lender prior to such pledge. (b) The provisions of this Loan Agreement are effective to create in favor of the Lender a valid security interest in all right, title and interest of the Borrower in, to and under the Collateral. (c) Upon receipt by the Custodian of each Mortgage Note, endorsed in blank by a duly authorized officer of the Borrower, the Lender shall have a fully perfected first priority security -24- interest therein, in the Mortgage Loan evidenced thereby and in the Borrower's interest in the related Mortgaged Property. (d) Upon the delivery of the Collateral to the Custodian and filing of financing statements on Form UCC-1 naming the Lender as "Secured Party" and the Borrower as "Debtor", and describing the Collateral, in the jurisdictions and recording offices listed on Schedule 2 attached hereto, the security interests granted hereunder in the Collateral will constitute fully perfected first priority security interests under the Uniform Commercial Code in all right, title and interest of the Borrower in, to and under such Collateral. 6.10 Chief Executive Office. The Borrower's chief executive office ---------------------- on the Effective Date is located at 2049 Century Park East, Suite 350, Los Angeles, California 90067. 6.11 Location of Books and Records. The location where the Borrower ----------------------------- keeps its books and records, including all computer tapes and records relating to the Collateral is its chief executive office. 6.12 Hedging. The Borrower has entered into Interest Rate Protection ------- Agreements, having a notional amount not less than 85% of the aggregate unpaid principal amount of the fixed-rate Mortgage Loans, with MS & Co. or any affiliate, having terms with respect to protection against fluctuations in interest rates reasonably acceptable to the Lender. 6.13 True and Complete Disclosure. ---------------------------- (a) The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Borrower to the Lender in connection with the negotiation, preparation or delivery of this Loan Agreement and the other Loan Documents or included herein or therein or delivered pursuant hereto or thereto (other than with respect to the Mortgage Loans), when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of the Borrower to the Lender in connection with this Loan Agreement and the other Loan Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to a Responsible Officer of the Borrower, after due inquiry, that could reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Loan Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Lender for use in connection with the transactions contemplated hereby or thereby. (b) The information solely with respect to the underlying Mortgage Loans furnished in writing by or on behalf of the Borrower to the Lender does not contain any untrue statement of material fact. 6.14 ERISA. Each Plan to which the Borrower or its Subsidiaries make ----- direct contributions, and, to the knowledge of the Borrower, each other Plan and each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law. -25- No event or condition has occurred and is continuing as to which the Borrower would be under an obligation to furnish a report to the Lender under Section 7.01(d) hereof. 6.15 Tangible Net Worth. On the Effective Date, the Tangible Net -------- --------- Worth is not less than $20,000,000. Section 7. Covenants of the Borrower. The Borrower covenants and ------------------------- agrees with the Lender that, so long as any Loan is outstanding and until payment in full of all Secured Obligations: 7.01 Financial Statements. The Borrower shall deliver to the Lender: -------------------- (a) as soon as available and in any event within 45 days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Borrower, the unaudited consolidated balance sheets of the Borrower and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated statements of income and retained earnings and of cash flows for the Borrower and its consolidated Subsidiaries for such period and the portion of the fiscal year through the end of such period, setting forth in each case in comparative form the figures for the previous year, accompanied by a certificate of a Responsible Officer of the Borrower, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Borrower and its consolidated Subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, the consolidated balance sheets of the Borrower and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for the Borrower and its consolidated Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Borrower and its consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default; (c) from time to time such other information regarding the financial condition, operations, or business of the Borrower as the Lender may reasonably request; and (d) as soon as reasonably possible, and in any event within thirty (30) days after a Responsible Officer of the Borrower knows, or with respect to any Plan or Multiemployer Plan to which the Borrower or any of its Subsidiaries makes direct contributions, has reason to believe, that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Borrower setting forth details respecting such event or condition and the action, if any, that the Borrower or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Borrower or an ERISA Affiliate with respect to such event or condition): -26- (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event and to which there is a reasonable likelihood of adverse determination which would result in a Material Adverse Effect (provided that a failure to meet the minimum funding -------- standard of Section 412 of the Code or Section 302 of ERISA, including without limitation the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041(c) of ERISA of a notice of intent to terminate any Plan or any action taken by the Borrower or an ERISA Affiliate to terminate any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Borrower or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA which liability would result in a Material Adverse Effect (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower or an ERISA Affiliate fails to provide timely security to such Plan in accordance with the provisions of said Sections. The Borrower will furnish to the Lender, at the time it furnishes each set of financial statements pursuant to paragraphs (a) and (b) above, a certificate of a Responsible Officer of the Borrower to the effect that, to the best of such Responsible Officer's knowledge, the Borrower during such fiscal period or year has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Loan Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate (and, if any Default or Event of Default has occurred and is continuing, describing the same in reasonable detail and describing the action the Borrower has taken or proposes to take with respect thereto). 7.02 Litigation. The Borrower will promptly, and in any event within ---------- 10 days after service of process or actual notice on any of the following, give to the Lender notice of all actions, suits, arbitrations, investigations or proceedings affecting the Borrower or any of its Subsidiaries that -27- questions or challenges the validity or enforceability of any of the Loan Documents or as to which there is a reasonable likelihood of adverse determination which would result in a Material Adverse Effect. 7.03 Existence, etc. The Borrower will: --------------- (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 7.03(a) shall prohibit any transaction expressly permitted under Section 7.04 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, all environmental laws) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect; (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied; (d) not move its chief executive office from the address referred to in Section 6.10 unless it shall have provided the Lender 30 days' prior written notice of such change; (e) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and (f) permit representatives of the Lender, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by the Lender. 7.04 Prohibition of Fundamental Changes. Except for the contemplated ---------------------------------- merger with Franchise Mortgage Acceptance Corporation described in Exhibit K --------- hereto, the Borrower shall not enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or dissolution) or sell all or substantially all of its assets; provided, that the Borrower may merge or consolidate with (a) -------- any wholly owned subsidiary of the Borrower, or (b) any other Person if the Borrower is the surviving company; and provided further, that if after giving -------- ------- effect thereto, no Default would exist hereunder. 7.05 Borrowing Base Deficiency. If at any time there exists a ------------------------- Borrowing Base Deficiency the Borrower shall cure same in accordance with Section 2.06 hereof. 7.06 Notices. The Borrower shall give notice to the Lender: ------- (a) promptly upon receipt of notice or knowledge of the occurrence of any material Default or Event of Default; (b) with respect to any Mortgage Loan pledged to the Lender hereunder, immediately upon receipt of any principal prepayment (in full or partial) of such pledged Mortgage Loan; -28- (c) with respect to any Mortgage Loan pledged to the Lender hereunder, immediately upon receipt of notice or knowledge that the underlying Mortgaged Property has been damaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, or otherwise damaged so as to affect materially and adversely the Collateral Value of such pledged Mortgage Loan; and (d) promptly upon receipt of notice or knowledge of (i) any material default related to any Collateral, (ii) any Lien or security interest (other than security interests created hereby or by the other Loan Documents) on, or claim asserted against, any of the Collateral or (iii) any event or change in circumstances which could reasonably be expected to have a material adverse effect on the Property, business or financial condition or prospects of the Borrower. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken or proposes to take with respect thereto. 7.07 Hedging. The Borrower shall at all times maintain Interest Rate ------- Protection Agreements, having a notional amount not less than 85% of the aggregate outstanding principal balance of all fixed-rate Mortgage Loans, with Morgan Stanley, Dean Witter, Discover & Co. or any affiliate, having terms with respect to protection against fluctuations in interest rates reasonably acceptable to the Lender. The Borrower shall deliver to the Lender monthly a written summary of the notional amount of all outstanding Interest Rate Protection Agreements. 7.08 Reports. The Borrower shall provide the Lender with a quarterly ------- report, which report shall include, among other items, a summary of the Borrower's delinquency and loss experience with respect to mortgage loans serviced by the Borrower, any Servicer or any designee of either, plus any such additional reports as the Lender may reasonably request with respect to the Borrower's or any Servicer's servicing portfolio or pending originations of mortgage loans and such additional information as is reasonably requested by the Lender. 7.09 Underwriting Guidelines. Without the prior written consent of ----------------------- the Lender, the Borrower shall not materially amend or otherwise materially modify the Underwriting Guidelines with respect to the Mortgage Loans. 7.10 Transactions with Affiliates. The Borrower will not enter into ---------------------------- any transaction for an amount greater than $60,000, including without limitation any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate (except for (i) the acquisition of equity of stock, warrants of an Affiliate, or loans made to an Affiliate, in either case, in the ordinary course of business, and (ii) the purchase or sale of loans in the ordinary course of business which is a true sale and does not constitute a fraudulent conveyance) unless such transaction is (a) not otherwise expressly prohibited under this Loan Agreement, (b) in the ordinary course of the Borrower's business and (c) upon fair and reasonable terms no less favorable to the Borrower than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate, or make a payment that is not otherwise permitted by this Section 7.10 to any Affiliate. 7.11 Limitation on Liens. Immediately upon notice of a Lien or any ------------------- circumstance which could give rise to a Lien on the Collateral, the Borrower will defend the Collateral against, and will take such other action as is necessary to remove, any Lien, security interest or claim on or to the -29- Collateral, other than the security interests created under this Loan Agreement, and the Borrower will defend the right, title and interest of the Lenders in and to any of the Collateral against the claims and demands of all persons whomsoever. 7.12 Limitation on Distributions. After the occurrence and during --------------------------- the continuation of any Event of Default, the Borrower shall not make any payment on account of, or set apart assets for, a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of any equity or partnership interest of the Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower. 7.13 Maintenance of Profitability. The Borrower shall not permit, ---------------------------- for any period of three consecutive fiscal quarters (each such period, a "Test ---- Period"), Net Income for such Test Period, before income taxes for such Test - ------ Period and distributions made during such Test Period, to be less than $1.00. 7.14 Servicing Tape. The Borrower shall provide to the Lender -------------- (electronically in a format mutually acceptable to Lender and Borrower) on a monthly basis a report containing servicing information, including without limitation those fields specified by the Lender from time to time, on a loan-by- loan basis and in the aggregate, with respect to the Mortgage Loans serviced hereunder by the Borrower or any Servicer. 7.15 Continuing Representations. The Borrower covenants that from -------------------------- the Effective Date until the Termination Date that each of the representations and warranties set form in Sections 6.01, 6.02, 6.03, 6.05, and 6.07 shall continue to be true and correct in all material respects. 7.16 Maintenance of Tangible Net Worth. Prior to the initial public --------------------------------- offering contemplated in connection with the merger more fully described on Exhibit K hereto, the Borrower shall not permit Tangible Net Worth at any time - --------- to be less than $25,000,000, and subsequent to such merger, the Borrower shall not permit Tangible Net Worth at any time to be less than $75,000,000. 7.17 Maintenance of Ratio of Total Indebtedness to Tangible Net ---------------------------------------------------------- Worth. The Borrower shall not permit the ratio of Total Indebtedness to - ----- Tangible Net Worth at any time to be greater than 30:1; provided that following the consummation of the contemplated merger with Franchise Mortgage Acceptance Corporation described in Exhibit K hereto, the Borrower shall not permit the --------- ratio of Total Indebtedness to Tangible Net Worth at any time to be greater than 15:1. Section 8. Events of Default. Each of the following events shall ----------------- constitute an event of default (an "Event of Default") hereunder: ---------------- (a) the Borrower shall default in the payment of any principal of or interest on any Loan when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or (b) the Borrower shall default in the payment of any other amount payable by it hereunder or under any other Loan Document after notification by the Lender of such default, and such default shall have continued unremedied for five Business Days; or (c) any representation, warranty or certification made or deemed made herein or in any other Loan Document by the Borrower or any certificate furnished to the Lender pursuant -30- to the provisions hereof or thereof shall prove to have been false or misleading in any material respect as of the time made or furnished (other than the representations and warranties set forth in Schedule 1, which shall be considered solely for the purpose of determining the Collateral Value of the Mortgage Loans; unless the Borrower shall have made any such representations and warranties with knowledge that they were materially false or misleading at the time made); or (d) (i) the Borrower shall fail to comply with the requirements of any of Section 7.03(a), Section 7.03(e) (but only if such failure would be reasonably likely to have a Material Adverse Effect), Section 7.04, Section 7.05, Section 7.06, or any of Sections 7.09 through 7.13 or any of Sections 7.15 through 7.17 hereof; or (ii) the Borrower shall otherwise fail to comply with the requirements of Section 7.03(d) or 7.03(f) hereof and such default shall continue unremedied for a period of five Business Days; or (iii) the Borrower shall otherwise fail to comply with the requirements of Section 7.14 hereof and such default shall continue unremedied for a period of five Business Days following notice thereof; or (iv) the Borrower shall fail to comply with the requirements of Section 7.03(e) hereof (if such failure would not be likely to have a Material Adverse Effect), and such default shall continue unremedied for a period of seven Business Days following notice thereof; or (v) the Borrower shall fail to comply with the requirements of Section 7.03(c) hereof and such default shall continue unremedied for a period of fifteen Business Days following notice thereof; or (vi) the Borrower shall fail to observe or perform any other covenant or agreement contained in this Loan Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of seven Business Days; or (e) a final judgment or judgments for the payment of money in excess of $500,000 in the aggregate shall be rendered against the Borrower or any of its Subsidiaries by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof, and the Borrower or any such Subsidiary shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (f) the Borrower shall admit in writing its inability to pay its debts as such debts become due; or (g) the Borrower or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator or the like of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to -31- bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (h) a proceeding or case shall be commenced, without the application or consent of the Borrower or any of its Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of the Borrower or any such Subsidiary or of all or any substantial part of its property, or (iii) similar relief in respect of the Borrower or any such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Borrower or any such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (i) the Custodial Agreement or any Loan Document shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by the Borrower; or (j) the Borrower shall grant, or suffer to exist, any Lien on any Collateral except the Liens contemplated hereby; or the Liens contemplated hereby shall cease to be first priority perfected Liens on the Collateral in favor of the Lender or shall be Liens in favor of any Person other than the Lender; or (k) any Material Adverse Effect shall occur. Section 9. Remedies Upon Default. --------------------- (a) Upon the occurrence of one or more Events of Default other than those referred to in Section 8(g) or (h), the Lender may immediately declare the principal amount of the Loans then outstanding under the Note to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Loan Agreement. Upon the occurrence of an Event of Default referred to in Sections 8(g) or (h), such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. (b) Upon the occurrence of one or more Events of Default, the Lender shall have the right to obtain physical possession of the Servicing Records and all other files of the Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of the Borrower or any third party acting for the Borrower and the Borrower shall deliver to the Lender such assignments as the Lender shall request and the Lender shall have the right to appoint any Person to act as Servicer for the Mortgage Loans. The Lender shall be entitled to specific performance of all agreements of the Borrower contained in this Loan Agreement. -32- Section 10. No Duty of Lender. The powers conferred on the Lender ----------------- hereunder are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Borrower for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct. Section 11. Miscellaneous. ------------- 11.01 Waiver. No failure on the part of the Lender to exercise and ------ no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. Except as otherwise expressly permitted by this Loan ------- Agreement, all notices, requests and other communications provided for herein and under the Custodial Agreement (including without limitation any modifications of, or waivers, requests or consents under, this Loan Agreement) shall be given or made in writing (including without limitation by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or thereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Loan Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03 Indemnification and Expenses. ---------------------------- (a) The Borrower agrees to hold the Lender harmless from and indemnify the Lender against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by or asserted against the Lender, excluding the Lender's ordinary costs of doing business in the ordinary course, including the interest costs of obtaining funds to lend, internal overhead, and taxes on income (collectively, the "Costs") relating to ----- or arising out of this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than the Lender's gross negligence or willful misconduct. The Lender agrees to use reasonable efforts to mitigate such Costs. Without limiting the generality of the foregoing, the Borrower agrees to hold the Lender harmless from and indemnify the Lender against all Costs with respect to all Mortgage Loans relating to or arising out of any breach, violation or alleged breach or violation of any Environmental Laws, consumer credit laws, including without limitation the Truth in Lending Act and/or the Real Estate Settlement Procedures Act. In any suit, proceeding or action brought by the Lender in connection with any Mortgage Loan for any sum owing thereunder, or to enforce any provisions of any Mortgage Loan, the Borrower will save, indemnify and hold the Lender harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Borrower of any obligation -33- thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Borrower. The Borrower also agrees to reimburse the Lender as and when billed by the Lender for all the Lender's costs and expenses incurred in connection with the enforcement or the preservation of the Lender's rights under this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby following the occurrence of a Default, including without limitation the reasonable fees and disbursements of its counsel. The Borrower hereby acknowledges that, notwithstanding the fact that the Note is secured by the Collateral, the obligation of the Borrower under the Note is a recourse obligation of the Borrower; provided, that in no event shall there be recourse to the officers, directors, shareholders, members and/or managers of the Borrower, except for fraud or willful misconduct or its or their part. (b) The Borrower agrees to pay as and when billed by the Lender all of the out-of-pocket costs and expenses incurred by the Lender in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Loan Agreement, the Note, any other Loan Document or any other documents prepared in connection herewith or therewith. The Borrower agrees to pay as and when billed by the Lender all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including without limitation (i) all the reasonable fees, disbursements and expenses of counsel to the Lender and (iii) all custodial expenses (except as otherwise provided in the Custodial Agreement). 11.04 Amendments. Except as otherwise expressly provided in this ---------- Loan Agreement, any provision of this Loan Agreement may be modified or supplemented only by an instrument in writing signed by the Borrower and the Lender and any provision of this Loan Agreement may be waived by the Lender. 11.05 Successors and Assigns. This Loan Agreement shall be binding ---------------------- upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Lender shall not assign the Loans made hereunder or this Loan Agreement to any party without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed. 11.06 Survival. The obligations of the Borrower under Sections 3.03 -------- and 11.03 hereof shall survive the repayment of the Loans and the termination of this Loan Agreement. In addition, each representation and warranty made or deemed to be made by a request for a borrowing, herein or pursuant hereto shall survive the making of such representation and warranty, and the Lender shall not be deemed to have waived, by reason of making any Loan, any Default that may arise because any such representation or warranty shall have proved to be false or misleading, notwithstanding that the Lender may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.07 Captions. The table of contents and captions and section -------- headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement. 11.08 Counterparts. This Loan Agreement may be executed in any ------------ number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. -34- 11.09 Loan Agreement Constitutes Security Agreement; Governing Law. ------------------------------------------------------------ This Loan Agreement shall be governed by New York law without reference to choice of law doctrine, and shall constitute a security agreement within the meaning of the Uniform Commercial Code. 11.10 SUBMISSION TO JURISDICTION; WAIVERS. THE BORROWER HEREBY ----------------------------------- IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER -------------------- HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 11.12 Acknowledgments. The Borrower hereby acknowledges that: --------------- (a) it has been advised by counsel in the negotiation, execution and delivery of this Loan Agreement, the Note and the other Loan Documents; (b) the Lender has no fiduciary relationship to the Borrower, and the relationship between the Borrower and the Lender is solely that of debtor and creditor; and (c) no joint venture exists between the Lender and the Borrower. -35- 11.13 Hypothecation or Pledge of Loans. The Lender shall have free -------------------------------- and unrestricted use of all Collateral and nothing in this Loan Agreement shall preclude the Lender from engaging in repurchase transactions with the Collateral or otherwise pledging, repledging, transferring, hypothecating, or rehypothecating the Collateral; provided that the Lender shall comply with its obligations to the Borrower with respect to the Collateral otherwise set forth in this Loan Agreement including, but not limited to, Section 2.08 and 2.09 hereto. Nothing contained in this Loan Agreement shall obligate the Lender to segregate any Collateral delivered to the Lender by the Borrower. 11.14 Servicing. --------- (a) The Borrower covenants to maintain or cause the servicing of the Mortgage Loans to be maintained in conformity with accepted and prudent servicing practices in the industry for the same type of mortgage loans as the Mortgage Loans and in a manner at least equal in quality to the servicing the Borrower provides for mortgage loans which it owns. In the event that the preceding language is interpreted as constituting one or more servicing contracts, each such servicing contract shall terminate automatically upon the earliest of (i) an Event of Default, (ii) the date on which all the Secured Obligations have been paid in full or (iii) the transfer of servicing approved by the Borrower. (b) All remittances from the Servicer under the Servicing Agreement, so long as the Lender shall not have notified the Servicer and the Borrower that a Default or an Event of Default has occurred and is continuing (in which event the Lender shall be entitled to apply such amounts as the Lender may determine in its sole discretion), shall be applied by the Lender on each Payment Date in the following order of priority: (1) to the payment of the Servicer's servicing fee; (2) to the payment of interest due and payable on the Loans on such Payment Date; (3) to the payment of any other Secured Obligations then due and payable; and (4) to the extent any amounts remain, to the Borrower or such other Person as is entitled to receive the same. (c) If the Mortgage Loans are serviced by the Borrower, (i) the Borrower agrees that the Lender is the collateral assignee of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii) ----------------- the Borrower grants the Lender a security interest in all servicing fees and rights relating to the Mortgage Loans and all Servicing Records to secure the obligation of the Borrower or its designee to service in conformity with this Section and any other obligation of the Borrower to the Lender. The Borrower covenants to safeguard such Servicing Records and to deliver them promptly to the Lender or its designee (including the Custodian) at the Lender's request following a Default. (d) If the Mortgage Loans are serviced by a third party servicer (such third party servicer, the "Servicer"), the Borrower (i) shall provide a copy of -------- the servicing agreement to the -36- Lender, which shall be in form and substance acceptable to the Lender (the "Servicing Agreement"); and (ii) hereby irrevocably assigns to the ------------------- Lender and the Lender's successors and assigns all right, title, interest of the Borrower in, to and under, and the benefits of, any Servicing Agreement with respect to the Mortgage Loans. (e) If the servicer of the Mortgage Loans is the Borrower or the Servicer is an Affiliate of the Borrower, the Borrower shall provide to the Lender a letter from the Borrower or the Servicer, as the case may be, to the effect that upon the occurrence of an Event of Default, the Lender may terminate any Servicing Agreement and transfer servicing to its designee, at no cost or expense to the Lender, it being agreed that the Borrower will pay any and all fees required to terminate the Servicing Agreement and to effectuate the transfer of servicing to the designee of the Lender. (f) After the Funding Date, until the pledge of any Mortgage Loan is relinquished by the Custodian, the Borrower will have no right to modify or alter the terms of such Mortgage Loan and the Borrower will have no obligation or right to repossess such Mortgage Loan or substitute another Mortgage Loan, except as provided in the Custodial Agreement. (g) In the event the Borrower or its Affiliate is servicing the Mortgage Loans, the Borrower shall permit the Lender to inspect the Borrower's or its Affiliate's servicing facilities, as the case may be, for the purpose of satisfying the Lender that the Borrower or its Affiliate, as the case may be, has the ability to service the Mortgage Loans as provided in this Loan Agreement. 11.15 Periodic Due Diligence Review. ----------------------------- (a) The Borrower acknowledges that the Lender has the right to perform continuing due diligence reviews with respect to the Mortgage Loans, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and the Borrower agrees that upon reasonable (but no less than five (1) Business Day's) prior notice unless an Event of Default shall have occurred and is continuing, in which case no notice is required, to the Borrower, the Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Mortgage Files and any and all documents, records, agreements, instruments or information relating to such Mortgage Loans in the possession or under the control of the Borrower and/or the Custodian. The Borrower also shall make available to the Lender a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Mortgage Files and the Mortgage Loans. Without limiting the generality of the foregoing, the Borrower acknowledges that the Lender may make Loans to the Borrower based solely upon the information provided by the Borrower to the Lender in the Mortgage Loan Medium and the representations, warranties and covenants contained herein, and that the Lender, at its option, has the right at any time to conduct a partial or complete due diligence review on some or all of the Mortgage Loans securing such Loan, including without limitation ordering new credit reports and new appraisals on the related Mortgaged Properties and otherwise re-generating the information used to originate such Mortgage Loan. The Lender may underwrite such Mortgage Loans itself or engage a mutually agreed upon third party underwriter to perform such underwriting. (b) At least (i) five (5) Business Days in the case of any Funding Date to occur within 30 days following the Effective Date or (ii) three (3) Business Days for any other Funding Date, before each such Funding Date, the Borrower shall either, as specified by the Lender, deliver to the Lender, or its designee, in escrow, or make available, or cause to be made available, for examination during normal business hours, copies of all credit files, underwriting documentation, third party reports -37- and Summary Credit Files on such Funding Date. The fact that the Lender has conducted or has failed to conduct any partial or complete examination of the credit files, underwriting documentation, third party reports or Mortgage Files shall not affect the Lender's right and obligations hereunder; provided however that by making a Loan pursuant to the terms hereof, unless otherwise set forth in writing prior to such Loan, the Lender shall be deemed to have approved any exception to the Underwriting Guidelines or the representations and warranties set forth on Schedule 1 hereto that are specified in the related Request for Borrowing. (c) The Borrower agrees to cooperate with the Lender and any third party underwriter in connection with such underwriting, including, but not limited to, providing the Lender and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Mortgage Loans in the possession, or under the control, of the Borrower. The Lender further agrees that the Lender shall pay for any and all out-of- pocket costs and expenses incurred by the Lender in connection with the Lender's activities pursuant to this Section 11.15 ("Due Diligence Costs"); provided ------------------- that, in the event that a Default or an Event of Default shall have occurred, the Borrower shall reimburse the Lender for all Due Diligence Costs. (d) The Lender shall give written notice to the Borrower upon the completion of its examination of a Summary Credit File for which it intends to make a Loan by transmitting a Summary Credit File Review Confirmation, substantially in the form of Exhibit I hereto, by facsimile to Pierrette Newman, --------- or such other person designated by the Borrower, at (203) 622-1984; provided, however, that any notice given pursuant to this Section 11.15(d) shall in no way be deemed (i) to be an approval by the Lender to any exception to the Underwriting Guidelines or the representations and warranties set forth on Schedule 1 hereto that are not specified in the related Request for Borrowing, (ii) to be a waiver of any rights the Lender may have under this Agreement, including, without limitation, the right to determine Market Value of the related Mortgage Loan at that time or any future time or (iii) to be a waiver of any eligibility criteria for the related Mortgage Loan pursuant to other eligibility criteria as set forth in this Agreement. [SIGNATURE PAGE FOLLOWS] -38- IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. BORROWER -------- FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By_________________________________ Title: Address for Notices: ------------------- 2049 Century Park East Suite 350 Los Angeles, California 90067 Attention: Raedelle Walker Telecopier No.: (310) 785-1674 Telephone No.: (310) 229-2619 5 Greenwich Office Park Greenwich, Connecticut 06831 Attention: Mr. John Rinaldi Telecopier No.: (203) 622-1984 Telephone No.: (203) 863-7100 LENDER ------ MORGAN STANLEY ASSET FUNDING INC. By_________________________________ Title: Address for Notices: ------------------- 1585 Broadway New York, New York 10036 Attention: Mr. Peter Mozer Telecopier No.: 212-761-0570 Telephone No.: 212-761-2408 -39- SCHEDULE 1 REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS Schedule 1-1 SCHEDULE 2 FILING JURISDICTIONS AND OFFICES Secretary of State of Connecticut Secretary of State of California SCHEDULE 3 LIST OF APPROVED CONCEPTS AS OF THE EFFECTIVE DATE EXHIBIT A --------- [FORM OF PROMISSORY NOTE] $200,000,000.00 September 30, 1997 New York, New York FOR VALUE RECEIVED, FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, a limited liability company (the "Borrower"), hereby promises to pay to the order -------- of MORGAN STANLEY ASSET FUNDING INC. (the "Lender"), at the principal office of ------ the Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the United States, and in immediately available funds, the principal sum of TWO HUNDRED MILLION DOLLARS ($200,000,000) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Lender to the Borrower under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of the Lender to make any such recordation -------- or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Loans made by the Lender. This Note is the Note referred to in the Master Loan and Security Agreement dated as of September 30, 1997 (as amended, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement") between the -------------- Borrower and the Lender, and evidences Loans made by the Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Loan Agreement. The Borrower agrees to pay all the Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees that the Borrower's obligations under this Note are recourse obligations of the Borrower to which the Borrower pledges its full faith and credit provided, that in no event shall there be recourse to the officers, directors, shareholders, members and/or managers of the Borrower, except for fraud or willful misconduct or its or their part. The Borrower, and any indorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, (b) expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust the Lender's remedies against the Borrower or any other party liable hereon or against any Collateral for A-1 this Note. No extension of time for the payment of this Note, or any installment hereof, made by agreement by the Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of the Borrower, even if the Borrower is not a party to such agreement; provided, -------- however, that the Lender and the Borrower, by written agreement between - ------- them, may affect the liability of the Borrower. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Note. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE) WHOSE LAWS THE BORROWER EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, BOROUGH OF MANHATTAN, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By: _______________________________ Name: Title: A-2 SCHEDULE OF LOANS This Note evidences Loans made under the within-described Loan Agreement to the Borrower, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below:
PRINCIPAL AMOUNT INTEREST AMOUNT PAID UNPAID PRINCIPAL NOTATION DATE MADE OF LOAN RATE OR PREPAID AMOUNT MADE BY - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
A-3 EXHIBIT B --------- [FORM OF CUSTODIAL AGREEMENT] [to be added] B-1 EXHIBIT C --------- [FORM OF OPINION OF COUNSEL TO BORROWER] (date) Morgan Stanley Asset Funding Inc. 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: You have requested [our] [my] opinion, as counsel to Franchise Mortgage Acceptance Company LLC, a limited liability company (the "Borrower"), -------- with respect to certain matters in connection with that certain Master Loan and Security Agreement, dated as of September 30, 1997 (the "Loan and Security ----------------- Agreement"), by and between the Borrower and Morgan Stanley Asset Funding Inc. - --------- (the "Lender"), being executed contemporaneously with a Promissory Note dated ------ September 30, 1997 from the Borrower to the Lender (the "Note"), a Custodial ---- Agreement, dated as of September 30, 1997 (the "Custodial Agreement"), by and ------------------- among the Borrower, LaSalle National Bank (the "Custodian"), and the Lender. --------- Capitalized terms not otherwise defined herein have the meanings set forth in the Loan and Security Agreement. [We] [I] have examined the following documents: 1. the Loan and Security Agreement; 2. the Note; 3. Custodial Agreement; 4. unfiled copies of the financing statements listed on Schedule 1 ---------- (collectively, the "Financing Statements") naming the Borrower as -------------------- Debtor and the Lender as Secured Party and describing the Collateral (as defined in the Loan and Security Agreement) as to which security interests may be perfected by filing under the Uniform Commercial Code of the States listed on Schedule 1 (the ---------- "Filing Collateral"), which I understand will be filed in the ------------------ filing offices listed on Schedule 1 (the "Filing Offices"); ---------- -------------- 5. the reports listed on Schedule 2 as to UCC financing statements ---------- (collectively, the "UCC Search Report"); and ----------------- 6. such other documents, records and papers as we have deemed necessary and relevant as a basis for this opinion. To the extent [we] [I] have deemed necessary and proper, [we] [I] have relied upon the representations and warranties of the Borrower contained in the Loan and Security Agreement. [We] [I] have assumed the authenticity of all documents submitted to me as originals, the genuineness of all signatures, the legal capacity of natural persons and the conformity to the originals of all documents. C-1 Based upon the foregoing, it is [our] [my] opinion that: 1. The Borrower is a [________ limited liability company] duly organized, validly existing and in good standing under the laws of [state] and is qualified to transact business in, and is in good standing under, the laws of the state of [state]. 2. The Borrower has the [corporate] power to engage in the transactions contemplated by the Loan and Security Agreement, the Note, and the Custodial Agreement and all requisite [corporate] power, authority and legal right to execute and deliver the Loan and Security Agreement, the Note, and the Custodial Agreement and observe the terms and conditions of such instruments. The Borrower has all requisite [corporate] power to borrow under the Loan and Security Agreement and to grant a security interest in the Collateral pursuant to the Loan and Security Agreement. 3. The execution, delivery and performance by the Borrower of the Loan and Security Agreement, the Note, and the Custodial Agreement, and the borrowings by the Borrower and the pledge of the Collateral under the Loan and Security Agreement have been duly authorized by all necessary corporate action on the part of the Borrower. Each of the Loan and Security Agreement, the Note and the Custodial Agreement have been executed and delivered by the Borrower and are legal, valid and binding agreements enforceable in accordance with their respective terms against the Borrower, subject to bankruptcy laws and other similar laws of general application affecting rights of creditors and subject to the application of the rules of equity, including those respecting the availability of specific performance, none of which will materially interfere with the realization of the benefits provided thereunder or with the Lender's security interest in the Mortgage Loans. 4. No consent, approval, authorization or order of, and no filing or registration with, any court or governmental agency or regulatory body is required on the part of the Borrower for the execution, delivery or performance by the Borrower of the Loan and Security Agreement, the Note and the Custodial Agreement or for the borrowings by the Borrower under the Loan and Security Agreement or the granting of a security interest to the Lender in the Collateral, pursuant to the Loan and Security Agreement. 5. The execution, delivery and performance by the Borrower of, and the consummation of the transactions contemplated by, the Loan and Security Agreement, the Note and the Custodial Agreement do not and will not (a) violate any provision of the Borrower's charter or by-laws, (b) violate any applicable law, rule or regulation, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to the Borrower of which I have knowledge (after due inquiry) or (d) result in a breach of, constitute a default under, require any consent under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any agreement or instrument of which I have knowledge (after due inquiry) to which the Borrower is a party or by which it is bound or to which it is subject, or (except for the Liens created pursuant to the Loan and Security Agreement) result in the creation or imposition of any Lien upon any Property of the Borrower pursuant to the terms of any such agreement or instrument. 6. There is no action, suit, proceeding or investigation pending or, to the best of [our] [my] knowledge, threatened against the Borrower which, in [our] [my] judgment, either in any one instance or in the aggregate, would be reasonably likely to result in any material adverse change in the properties, business or financial condition, or prospects of the Borrower or in any material impairment of the right or ability of the Borrower to carry on its business substantially as now conducted or in any material liability on the part of the Borrower or which would draw into question the validity of the Loan and Security Agreement, the Note, the Custodial Agreement or the Mortgage Loans or of any action taken or to be taken in connection with the transactions contemplated thereby, or which would be reasonably likely to impair materially the ability of the Borrower to perform under C-2 the terms of the Loan and Security Agreement, the Note, the Custodial Agreement or the Mortgage Loans. 7. The Loan and Security Agreement is effective to create, in favor of the Lender, a valid security interest under the Uniform Commercial Code in all of the right, title and interest of the Borrower in, to and under the Collateral as collateral security for the payment of the Secured Obligations (as defined in the Loan and Security Agreement), except that (a) such security interests will continue in Collateral after its sale, exchange or other disposition only to the extent provided in Section 9-306 of the Uniform Commercial Code, (b) the security interests in Collateral in which the Borrower acquires rights after the commencement of a case under the Bankruptcy Code in respect of the Borrower may be limited by Section 552 of the Bankruptcy Code. 8. When the Mortgage Notes are delivered to the Custodian, endorsed in blank by a duly authorized officer of the Borrower, the security interest referred to in paragraph 7 above in the Mortgage Notes will constitute a fully perfected first priority security interest in all right, title and interest of the Borrower therein, in the Mortgage Loan evidenced thereby and in the Borrower's interest in the related Mortgaged Property. 9. (a) Upon the filing of financing statements on Form UCC-1 naming the Lender as "Secured Party" and the Borrower as "Debtor", and describing the Collateral, in the jurisdictions and recording offices listed on Schedule 1 ---------- attached hereto, the security interests referred to in paragraph 8 above will constitute fully perfected security interests under the Uniform Commercial Code in all right, title and interest of the Borrower in, to and under such Collateral, which can be perfected by filing under the Uniform Commercial Code. (b) The UCC Search Report sets forth the proper filing offices and the proper debtors necessary to identify those Persons who have on file in the jurisdictions listed on Schedule 1 financing statements covering the Filing ---------- Collateral as of the dates and times specified on Schedule 2. Except for the ---------- matters listed on Schedule 2, the UCC Search Report identifies no Person who has ---------- filed in any Filing Office a financing statement describing the Filing Collateral prior to the effective dates of the UCC Search Report. 10. The Assignments of Mortgage are in recordable form, except for the insertion of the name of the assignee, and upon the name of the assignee being inserted, are acceptable for recording under the laws of the state where each related Mortgaged Property is located. Very truly yours, C-3 EXHIBIT D --------- FORM OF REQUEST FOR BORROWING ----------------------------- Master Loan and Security Agreement, dated as of September 30, 1997 (the "Loan ---- and Security Agreement"), by and between the Borrower and Morgan Stanley Asset - ---------------------- Funding Inc. (the "Lender"), ------ Lender: Morgan Stanley Asset Funding Inc. Borrower: Franchise Mortgage Acceptance Company LLC Requested Fund Date: ___________________________ Transmission Date: ___________________________ Transmission Time: Type of Funding: (Wet or Dry) ___________________________ Number of Mortgage Loans to be Pledged: ___________________________ UPB: $___________________________ Requested Wire Amount: $___________________________ Wire Instructions: Requested by: FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By:__________________________ Name: Title: D-1 EXHIBIT E-1 ----------- FORM OF BORROWER'S RELEASE LETTER [Date] Morgan Stanley Asset Funding Inc. 1585 Broadway New York, New York 10036 Attention: ____________________ Facsimile: ____________________ Re: Master Loan and Security Agreement, dated as of September 30, 1997 (the "Loan and Security Agreement"), by and between Franchise Mortgage ---------------------------- Acceptance Company LLC (the "Borrower") and Morgan Stanley Asset -------- Funding Inc. (the "Lender") ------ Ladies and Gentlemen: With respect to the mortgage loans described in the attached Schedule -------- A (the "Mortgage Loans") we hereby certify to you that the Mortgage Loans are - - -------------- not subject to a lien of any third party. Very truly yours, FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By: __________________________ Name: __________________________ Title: __________________________ E-1-1 EXHIBIT E-2 ----------- FORM OF WAREHOUSE LENDER'S RELEASE LETTER (Date) Morgan Stanley Asset Funding Inc. 1585 Broadway New York, New York 10036 Attention: ________________ Facsimile: ________________ Re: Certain Mortgage Loans Identified on Schedule A hereto and owned by ---------- Franchise Mortgage Acceptance Company LLC The undersigned hereby releases all right, interest, lien or claim of any kind with respect to the mortgage loan(s) described in the attached Schedule -------- A, such release to be effective automatically without any further action by any - - party upon payment in one or more installments, in immediately available funds of $__________________, in accordance with the following wire instructions: ________________________ ________________________ Very truly yours, [WAREHOUSE LENDER] By:____________________________ Name:__________________________ Title:_________________________ E-2-1 EXHIBIT F --------- [RESERVED] G-1 EXHIBIT G --------- SUMMARY CREDIT FILE 1) The Borrower's credit write-up package with supporting financial analysis performed by the Borrower; 2) To the extent available, the appraisal constructed by a approved third party entity. To the extent that this third party appraisal has not been completed, the Borrower's internal appraisal analysis may be substituted. However, the Lender reserves the right to review final third party appraisal upon completion; 3) To the extent obtained by the Borrower, the executive summary of any engineering reports; 4) To the extent obtained by the Borrower, the executive summary of any environmental reports such as VISTA or phase 1; 5) With respect to Energy-Related Mortgage Loans, a copy of commitment to provide by environmental related insurance by a pre-approved insurer under a pre-approved policy; and 6) Other information that Lender may reasonably request and is reasonably obtainable by the Borrower. H-1 EXHIBIT H --------- [RESERVED] H-2 EXHIBIT I --------- FORM OF SUMMARY CREDIT FILE REVIEW CONFIRMATION On this _____ day of _____________ 199_, Morgan Stanley Asset Funding Inc. (the "Lender"), under that certain Master Loan and Security Agreement, ------ dated as of September 30, 1997 (the "Loan and Security Agreement"), by and --------------------------- between Franchise Mortgage Acceptance Company LLC (the "Borrower") and Lender, -------- does hereby give notice to Borrower, pursuant to Section 11.15(d) of the Loan and Security Agreement, of the Lender's completion of its examination of the Summary Credit File attached as Exhibit A hereto. This notice shall in no way be deemed (i) to be an approval by the Lender to any exception to the Underwriting Guidelines or the representations and warranties set forth on Schedule 1 to the Loan and Security Agreement that are not specified in the related Request for Borrowing, (ii) to be a waiver of any rights the Lender may have under the Loan and Security Agreement, including, without limitation, the right to determine Market Value of the related Mortgage Loan at this time or any future time or (iii) to be a waiver of any eligibility criteria for the related Mortgage Loan pursuant to other eligibility criteria as set forth in the Loan and Security Agreement. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Loan and Security Agreement. IN WITNESS WHEREOF, the Lender has caused this Summary Credit File Review Confirmation to be executed and delivered by its duly authorized officer as of the day and year first above written. MORGAN STANLEY ASSET FUNDING INC. By:___________________________ Name: Title: EXHIBIT J FORM OF BAILEE AGREEMENT ------------------------ ___________, 199__ [NAME OF BAILEE] [ADDRESS OF BAILEE] Attention: ______________________ Re: Bailee Agreement (the "Bailee Agreement") in connection with the ---------------- pledge of certain mortgage loans by Franchise Mortgage Acceptance Company LLC (the "Borrower") to Morgan Stanley Asset Funding Inc. -------- (the "Lender") ------ Gentlemen and Mesdames: In consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Borrower, the Lender and ________________________ (the "Bailee") hereby agree as follows: ------ 1. The Borrower shall deliver to the Bailee in connection with any Mortgage Loans delivered to the Bailee hereunder an Identification Certificate in the form of Exhibit A attached hereto to which shall be attached a Mortgage --------- Loan Schedule identifying which Mortgage Loans are being delivered to the Bailee hereunder. Such Mortgage Loan Schedule shall contain the following fields of information: (a) the mortgage loan identifying number; (b) the mortgagor's name; (c) the mortgaged property's street address, city, state and zip code; (d) the original balance; (e) the current principal balance; (f) the original mortgage interest rate; (g) the original term; (h) the remaining term; (i) insert a code indicating whether the Mortgage Loan is a C-Store Mortgage Loan, a Q-Store Mortgage Loan or a Golf Course Loan; (j) if such Mortgage Loan is a Franchisee Loan, list the Approved Concept; and (k) the date of the last payment made and the due date of such payment. 2. On or prior to the date indicated on the Identification Certificate delivered by the Borrower (the "Funding Date"), the Borrower shall ------------ have delivered to the Bailee, as bailee for hire, the following original documents (collectively, the "Mortgage File") for each mortgage loan (the ------------- "Mortgage Loans") listed in Exhibit A attached hereto (the "Mortgage Loan - --------------- --------- ------------- Schedule"): - -------- (I) With respect to each Eligible Mortgage Loan: -------------------------------------------- (a) The original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of _________ without recourse" and signed in the name of the last endorsee (the "Last Endorsee") by ------------- an authorized Person (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated by the Last Endorsee while doing business under another name, the signature must be in the following form: "[Last Endorsee], formerly known as [previous name]"). (b) The original of the guarantee executed in connection with the Mortgage Note (if any). (c) The original Mortgage with evidence of recording thereon, or a copy thereof together with an Officer's Certificate of the Borrower certifying that such represents a true and correct copy of the original and that such original has been submitted or promptly after closing will be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (d) The originals of all assumption, modification, consolidation or extension agreements relating to the Mortgage with evidence of recording thereon, or copies thereof together with an Officer's Certificate of the Borrower certifying that such represent true and correct copies of the originals and that such originals have each been submitted or promptly after closing will be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (e) The original Assignment of Mortgage in blank for each Mortgage Loan, in form and substance acceptable for recording and signed in the name of the Last Endorsee (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[Last Endorsee], formerly known as [previous name]"). (f) The originals of all intervening assignments of mortgage with evidence of recording thereon, or copies thereof together with an Officer's Certificate of the Borrower certifying that such represent true and correct copies of the originals and that such originals have each been submitted or promptly after closing will be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (g) The original attorney's opinion of title, if any, and abstract of title or the original mortgagee title insurance policy or title report, or open mortgage J-2 search, or if the original mortgagee title insurance policy has not been issued, the irrevocable commitment to issue the same. (h) The original of any security agreement, chattel mortgage or equivalent document executed in connection with the Mortgage Loan. (i) The original assignment of leases and rents, if any, with evidence of recording thereon, or a copy thereof together with an Officer's Certificate of the Borrower certifying that such copy represents a true and correct copy of the original that has been or will, on the Funding Date be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (j) The original assignment of assignment of leases and rents (if applicable), if any, from the Borrower in blank, in form and substance acceptable for recording. (k) A copy of the UCC-1 Financing Statements, certified as true and correct by the Borrower, and all necessary UCC-3 Continuation Statements with evidence of filing thereon or copies thereof certified by the Borrower to have been sent or promptly after closing will be sent for filing, and UCC-3 Assignments executed by the Borrower in blank, which UCC-3 Assignments shall be in form and substance acceptable for filing. (l) An environmental indemnity agreement (if any). (m) A general assignment of loan documents with the assignee in blank, assigning all of the Borrower's right, title and interest in the Mortgage Loan, including but not limited to, the Mortgage Note, the Mortgage, the Security Agreement, the Ground Lease (if any), and the franchise agreement, as applicable. (n) A disbursement letter from the Mortgagor to the original mortgagee (if any). (o) Mortgagor's certificate or title affidavit (if any). (p) A survey of the Mortgaged Property (if any). (q) A copy of the Mortgagor's Opinion of Counsel (if any). (II) With respect to each Eligible Mortgage Loan which is a Franchisee Loan ---------------------------------------------------------------------- (as identified on the Mortgage Loan Schedule): - ---------------------------------------------- (a) The documents listed in Section 2(I) above. (b) The franchise agreement (if any), certified by the Borrower as a true, correct and complete copy of the original. provided, however, that as to certain Mortgages or assignments thereof which - -------- ------- have been delivered or are being delivered to recording offices for recording and have not been returned to the Borrower in J-3 time to permit their delivery hereunder at the time of such transfer, in lieu of delivering such original documents, the Borrower shall deliver to the Custodian a true copy thereof with a certification by the Borrower on the face of such copy substantially as follows: "certified true and correct copy of original which has been transmitted for recordation". The Borrower will deliver such original documents, together with any related policy of title insurance not previously delivered, on behalf of the Borrower to the Custodian promptly after they are received. 3. The Bailee shall issue and deliver to the Lender and the Custodian prior to 11:00 a.m., New York City time, on the Funding Date by facsimile (i) in the name of the Lender, an initial trust receipt and certification in the form of Exhibit B hereto (the "Bailee Trust Receipt") which --------- -------------------- Bailee Trust Receipt shall state that the Bailee has received the documents comprising each Mortgage File as listed in Paragraph 2 hereof for each Mortgage Loan listed on the Mortgage Loan Schedule except for such documents listed on the Mortgage Loan Schedule and Exception report attached thereto and (ii) a copy of the executed document listed in Paragraph 2(I)(a) and a settlement statement for each related Mortgage Loan. For purposes of this Bailee Agreement: (a) the "Mortgage Loan Schedule and Exception Report" shall mean a ------------------------------------------- list of Mortgage Loans delivered by the Bailee to the Lender on the Funding Date, reflecting the Mortgage Loans held by the Bailee for the benefit of the Lender, which includes a list of any Exceptions with respect to each Mortgage Loan listed thereon. Each Mortgage Loan Schedule and Exception Report shall set forth (a) the Mortgage Loans being pledged to the Lender on the Funding Date and held by the Bailee under this Bailee Agreement, and (b) all Exceptions with respect thereto, with any updates thereto from the time last delivered; and (b) an "Exception" shall mean, with respect to any Mortgage Loan, any --------- of the following: (i). the variances from the requirements of Section 1 hereof with respect to the Mortgage Files (giving effect to the Borrower's right to deliver certified copies in lieu of original documents in certain circumstances), and (ii) any Mortgage Loan with respect to which the Bailee receives written notice or has actual knowledge of a lien subject or security interest in favor of a person other than the Lender with respect to such Mortgage Loan. 4. On the applicable Funding Date, in the event that the Lender fails to make a Loan to the Borrower secured by the Mortgage Loans identified in the related Identification Certificate, the Lender shall deliver by facsimile to the Bailee at ( ) ____-______ to the attention of ______________ an authorization (the "Facsimile Authorization") to release the Mortgage Files with ----------------------- respect to the Mortgage Loans identified therein to the Borrower. Upon receipt of such Facsimile Authorization, the Bailee shall release the Mortgage Files to the Borrower in accordance with the Borrower's instructions. 5. Following the Funding Date, the Bailee shall forward the Mortgage Files to U.S. Bank National Association d/b/a First Bank National Association, 180 East 5th Street, St. Paul, Minnesota 55101, Attention: Lynn Steiner (the "Custodian") by insured overnight courier for receipt by the Custodian no later - ---------- than five (5) business days following the applicable Funding Date (the "Delivery -------- Date"). - ---- J-4 6. From and after the applicable Funding Date until the time of receipt of the Facsimile Authorization or the applicable Delivery Date, as applicable, the Bailee (a) shall maintain continuous custody and control of the related Mortgage Files as bailee for the Lender and (b) is holding the related Mortgage Loans as sole and exclusive bailee for the Lender unless and until otherwise instructed in writing by the Lender. 7. The Bailee and the Borrower each hereby represents, warrants and covenants that the Bailee is not an affiliate of or otherwise controlled by the Borrower. 8. The agreement set forth in this Bailee Agreement letter may not be modified, amended or altered, except by written instrument, executed by all of the parties hereto. 9. This Bailee Agreement may not be assigned by the Borrower or the Bailee without the prior written consent of the Lender. 10. For the purpose of facilitating the execution of this Bailee Agreement letter as herein provided and for other purposes, this Bailee Agreement letter may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute and be one and the same instrument. J-5 11. THIS BAILEE AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. Very truly yours, FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC Borrower By:___________________________ Name:_________________________ Title:________________________ ACCEPTED AND AGREED: ______________________________, Bailee By:___________________________ Name:_________________________ Title:________________________ ACCEPTED AND AGREED: MORGAN STANLEY ASSET FUNDING INC., Lender By:___________________________ Name:_________________________ Title:________________________ J-6 EXHIBIT A --------- IDENTIFICATION CERTIFICATE On this _____ day of _____________ 199_, FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC (the "Borrower"), under that certain Bailee Agreement, dated as of -------- _____________ __, 1997 (the "Bailee Agreement"), among the Borrower, ---------------- ________________, (the "Bailee"), and MORGAN STANLEY ASSET FUNDING INC., as ------ Lender, does hereby instruct the Bailee to hold, in its capacity as Bailee, the Mortgage Files with respect to the Mortgage Loans listed on Attachment A hereto, ------------ which Mortgage Loans shall be subject to the terms of the Bailee Agreement as of the date hereof. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Bailee Agreement. IN WITNESS WHEREOF, the Borrower has caused this Identification Certificate to be executed and delivered by its duly authorized officer as of the day and year first above written. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By:___________________________ Name: Title: -1- EXHIBIT B --------- TRUST RECEIPT AND CERTIFICATION _________, 199__ Morgan Stanley Mortgage Capital Inc. 1585 Broadway New York, New York 10036 Attention: Mr. Peter Mozer Re: Bailee Letter, dated as of ________, 199__ (the "Bailee ------ Agreement") among Franchise Mortgage Acceptance Company LLC (the --------- "Borrower"), Morgan Stanley Asset Funding Inc. (the "Lender") and -------- ------ _______________ (the "Bailee") ------ Gentlemen and Mesdames: In accordance with the provisions of Paragraph 3 of the above- referenced Bailee Letter, the undersigned, as the Bailee, hereby certifies that as to each mortgage loan described in the mortgage loan schedule (Exhibit A), a --------- copy of which is attached hereto, it has reviewed the Mortgage File and has determined that except as expressly set forth on Exhibit A (i) all documents --------- listed in Paragraph 2 of the Bailee Agreement are in its possession and (ii) such documents have been reviewed by it and appear regular on their face and relate to such mortgage loan, and (iii) based on its examination, the foregoing documents on their face satisfy the requirements set forth in Paragraph 2 of the Bailee Agreement. The Bailee hereby confirms that it is holding each such Mortgage File as agent and bailee for the exclusive use and benefit of the Lender pursuant to the terms of the Bailee Agreement. All initially capitalized terms used herein shall have the meanings ascribed to them in the above-referenced Bailee Agreement. _____________________________ BAILEE By:__________________________ Name:________________________ Title:_______________________ -1- EXHIBIT C --------- FORM OF NOTICE OF PLEDGE J-1 EXHIBIT K --------- THE REORGANIZATION In connection with the public offering of Franchise Mortgage Acceptance Company, the Borrower will merge into Franchise Mortgage Acceptance Company, a Delaware corporation which was incorporated in August 1997 for the purpose of succeeding to the business of the Borrower (the "Reorganization"). As a result of the Reorganization, Imperial Credit Industries, Inc., a California corporation will own 66.7%, and FLRT, Inc., a California corporation, will own 33.3%, respectively, of the outstanding shares of common stock of Franchise Mortgage Acceptance Company. J-1 EXHIBIT L [CUSTODIAN] [ADDRESS] Attention: Telecopier No.: Telephone No.: REQUEST FOR RELEASE - OVERCOLLATERALIZATION Re: Master Loan and Security Agreement, dated as of September 30, 1997. (the "Loan Agreement"), among Franchise Mortgage Acceptance -------------- Company LLC ("Borrower"), and Morgan Stanley Mortgage Capital -------- Inc. ("Lender"). ------ Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed thereto in that certain Custodial Agreement dated as of September __, 1997, by and between Borrower, Lender and LaSalle National Bank ("Custodian") (the "Custodial Agreement") or, if not so defined therein, --------- ------------------- then in the Loan Agreement. In connection with the administration of the Eligible Mortgage Loans held by you as the Custodian for the Lender, in accordance with Section 2.08 of the Loan Agreement we request the release of the Mortgage File for the Eligible Mortgage Loans described below in connection with the release of excess Collateral, as follows: Mortgagor's Name, Address and Zip Code: __________________ Eligible Mortgage Loan Number: __________________ Eligible Mortgage Loan to be released: $__________________ Borrowing Base, as reported $__________________ Unpaid Principal Balance of Eligible Mortgage Loans as of date hereof $__________________ This Request for Release - Overcollateralization is dated __________. Franchise Mortgage Acceptance Company LLC, Borrower By:____________________________ Name: Title: RELEASE CONSENTED TO: Morgan Stanley Mortgage Capital Inc., as Lender By:___________________________ Name: Title: Date: _____________________ -3- EX-23.1 10 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Managers Franchise Mortgage Acceptance Company LLC: We consent to the use of our report included herein and to the reference to our Firm under the heading "Selected Financial Data" and "Experts" in the Prospectus. KMPG Peat Marwick LLP Los Angeles, California November , 1997 -----END PRIVACY-ENHANCED MESSAGE-----