-----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, VmcpxJ8/+YLM7lFmXr8zKtSliEiHmD6JZ7yT3IbZ+S/hCe3a1DqtSkrqm1kDD4Dy IYvjhI8raQgl00jr0dyjpA== 0000944209-98-001525.txt : 19980817 0000944209-98-001525.hdr.sgml : 19980817 ACCESSION NUMBER: 0000944209-98-001525 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANCHISE MORTGAGE ACCEPTANCE CO CENTRAL INDEX KEY: 0001045007 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954649104 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23283 FILM NUMBER: 98690055 BUSINESS ADDRESS: STREET 1: 1888 CENTURY PARK EAST STREET 2: 3RD FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3102292600 MAIL ADDRESS: STREET 1: 1888 CENTURY PARK EAST STREET 2: 3RD FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NUMBER: 000-23283 FMAC FRANCHISE MORTGAGE ACCEPTANCE COMPANY (Exact name of registrant as specified in its charter) DELAWARE 95-4649104 ----------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization)
1888 CENTURY PARK EAST, THIRD FLOOR LOS ANGELES, CALIFORNIA 90067 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 229-2600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X NO ----- ______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest possible date: Class Shares Outstanding at July 31, 1998 ------------------------------ ----------------------------------- Common Stock, $0.001 par value 28,715,625 FRANCHISE MORTGAGE ACCEPTANCE COMPANY FORM 10-Q TABLE OF CONTENTS -----------------
Part I - Financial Information Page ------------------------------ ---- ITEM 1 Consolidated Financial Statements --------------------------------- Consolidated Balance Sheets June 30, 1998 and December 31, 1997............................ 3 Consolidated Statements of Operations - Three months ended June 30, 1998 and 1997, and six months ended June 30, 1998 and 1997........................................................ 4 Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and 1997............ 5 Notes to Consolidated Financial Statements................................................. 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10 ------------------------------------------------------------------------------------- ITEM 3 Not Applicable.............................................................................. -------------- PART II - OTHER INFORMATION --------------------------- ITEMS 1-5 Not Applicable.............................................................................. -------------- ITEM 6 Exhibits and Reports on Form 8-K............................................................ 15 SIGNATURES.................................................................................. 16 ----------
FORWARD-LOOKING STATEMENTS When used in this Form 10-Q or future filings by Franchise Mortgage Acceptance Company (the "Company") with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. 2 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31, 1998 1997 ------------- --------------- ASSETS Cash and cash equivalents....................................... $ 6,093 $ 7,335 Cash restricted................................................. 7,962 2,744 Securities available for sale................................... 2,255 25,345 Loans and leases held for sale.................................. 591,254 343,200 Retained interest in loan securitizations....................... 22,668 19,177 Purchased and originated servicing rights....................... 24,682 2,213 Premises and equipment net...................................... 5,543 2,518 Goodwill........................................................ 38,758 4,315 Accrued interest receivable..................................... 9,530 2,758 Other assets.................................................... 8,358 12,627 -------- -------- Total assets............................................... $717,103 $422,232 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings...................................................... $505,769 $256,220 Deferred income taxes........................................... 26,714 14,160 Other liabilities............................................... 29,035 13,430 -------- -------- Total liabilities.......................................... 561,518 283,810 -------- -------- Minority interest in subsidiary................................. 110 - Stockholders' equity: Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued and outstanding..................... - - Common stock, $.001 par value; 100,000,000 shares authorized; 28,715,625 shares issued and outstanding........ 29 29 Additional paid in capital .................................. 118,330 118,330 Retained earnings ........................................... 37,116 20,063 -------- -------- Total stockholders' equity .................................. 155,475 138,422 -------- -------- Total liabilities and stockholders' equity .................. $717,103 $422,232 ======== ========
See accompanying notes to consolidated financial statements 3 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 1998 1997 1998 1997 ------------- ------------ ------------- ------------ Revenue: Gain on sale of loans and leases................. $ 22,917 $19,821 $ 39,238 $19,808 -------- ------- -------- ------- Interest income.................................. 14,958 7,425 25,525 10,767 Interest expense................................. (11,081) (6,695) (17,446) (9,394) -------- ------- -------- ------- Net interest income........................... 3,877 730 8,079 1,373 -------- ------- -------- ------- Loan servicing income............................ 4,614 736 5,868 1,376 Other income..................................... 201 - 579 - -------- ------- -------- ------- Total revenue................................. 31,609 21,287 53,764 22,557 -------- ------- -------- ------- Expense: Personnel........................................ 8,016 2,067 13,181 4,665 Professional services............................ 929 698 1,525 1,176 Travel........................................... 931 347 1,498 524 Business promotion............................... 1,151 176 1,808 316 Valuation allowances............................. 633 - 633 - Occupancy........................................ 663 161 1,018 277 Goodwill amortization............................ 702 88 817 169 General and administrative....................... 1,509 996 3,772 1,467 -------- ------- -------- ------- Total expense................................. 14,534 4,533 24,252 8,594 -------- ------- -------- ------- Income before taxes and minority interest........ 17,075 16,754 29,512 13,963 Minority interest in subsidiary.................. 110 - 110 - Income taxes..................................... 7,126 - 12,349 - -------- ------- -------- ------- Net income.................................... $ 9,839 $16,754 $ 17,053 $13,963 ======== ======= ======== ======= Basic income per share............................. $0.34 $0.59 ======== ======== Weighted average shares outstanding................ 28,716 28,716 ======== ======== Diluted income per share........................... $0.34 $0.59 ======== ======== Weighted average shares outstanding................ 29,100 28,762 ======== ======== Pro forma earnings data: Net income as reported............................ $16,754 $13,963 Pro forma income tax expense...................... 7,037 5,935 ------- ------- Pro forma net income.............................. $ 9,717 $ 8,028 ======= ======= Pro forma basic and diluted income per share...... $0.44 $0.37 ======= ======= Weighted average shares outstanding............... 21,888 21,888 ======= =======
See accompanying notes to consolidated financial statements 4 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended June 30, ---------------------------------- 1998 1997 --------------- ---------------- Cash flows from operating activities: Net income................................................................. $ 17,053 $ 13,963 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization.......................................... 2,059 388 Increase in accrued interest receivable................................ (6,590) (577) Provision for deferred income taxes.................................... 12,394 -- Increase in other liabilities.......................................... 14,577 2,359 Decrease in other assets............................................... 5,571 931 Loan and lease operations Loans and leases originated.......................................... (879,266) (300,617) Gain on sale of loans and leases..................................... (39,238) (19,808) Loans sold to (purchased from) affiliates............................ 159,513 17,772 Provision for loan and lease losses.................................. 910 -- Proceeds from loan sales and securitizations and principal reductions................................................ 527,842 192,943 --------- --------- Net cash used in operating activities........................................ (185,175) (92,646) --------- --------- Cash flows from investing activities: Purchases of premises and equipment.................................... (2,689) (898) Decrease in interest bearing deposits.................................. (218) (73) Sale of securities available for sale.................................. 22,870 36,367 Proceeds from securities available for sale............................ 398 401 Increase in retained interests in securitizations...................... (3,935) (326) Proceeds from retained interests in securitizations.................... 444 732 Purchase of servicing rights........................................... (1,180) -- Purchase of Bankers Mutual............................................. (63,028) -- Increase in minority interest in subsidiary............................ 110 -- --------- --------- Net cash provided by (used in) investing activities.......................... (47,228) 36,203 --------- --------- Cash flows from financing activities: Net change in borrowings from Imperial Credit Industries, Inc.......... -- (7,731) Increase in borrowings................................................. 231,161 70,682 Member distributions................................................... -- (6,322) --------- --------- Net cash provided by financing activities.................................... 231,161 56,629 --------- --------- Net change in cash............................................................ (1,242) 186 Cash (book overdraft) at beginning of period.................................. 7,335 (171) --------- --------- Cash at end of period......................................................... $ 6,093 $ 15 ========= =========
See accompanying notes to consolidated financial statements 5 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION Unless the context indicates otherwise, all references hereinafter to the Company refer to Franchise Mortgage Acceptance Company, a Delaware corporation along with all its predecessor entities, including Franchise Mortgage Acceptance Company LLC ("Franchise Mortgage LLC"). On November 18, 1997, the Company completed its initial public offering (the "Offering") pursuant to which 10,000,000 shares of common stock were sold to the public at a price of $18.00 per share. On November 28, 1997, 890,625 additional shares of common stock were sold to the public at the sale price of $18.00 per share. Immediately prior to the Offering, Franchise Mortgage LLC merged into Franchise Mortgage Acceptance Company, a Delaware corporation that was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC. As part of the initial public offering, Imperial Credit Industries Inc. ("ICII") and FLRT, Inc. collectively sold to the public 4,062,500 shares of Company common stock at $18.00 per share. Subsequent to the sales of common stock described above, ICII owned 38.4% and FLRT, Inc. owned 21.6% of the Company's outstanding shares of common stock. (2) BASIS OF PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated 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 loans and leases held for sale, securities available for sale and retained interest in loan securitizations. Actual results could differ significantly from those estimates. The consolidated financial statements include the accounts of FMAC Golf Finance Group LLC. All significant inter- company accounts and transactions have been eliminated in consolidation. (3) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) No. 133, "Accounting for Derivatives Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is in the process of determining what effect, if any, adoption of SFAS No. 133 will have on the Company's financial condition and results of operations. (4) SECURITIES AVAILABLE FOR SALE Securities available for sale consist of asset-backed securities issued by the Company. For the six months ended June 30, 1998 and the year ended December 31, 1997, activity in securities available for sale was as follows: 6
(In thousands) For the Six Months Ended June 30, 1998 -------------------------------------- Beginning Cash Discount Hedging Ending Balance Purchased Received Accretion (Gain) Loss Sold Balance --------- --------- --------- --------- ----------- ----------- ------- 1994-A (1).......... $ 1,599 $ - $(266) $116 $ - $ - $1,449 1995-A (1).......... 876 - (132) 62 - - 806 1997-B (3).......... 22,870 - - - - (22,870) - ------- --------- ----- ---- ----------- --------- ------ Totals.............. $25,345 $ - $(398) $178 $ - $( 22,870) $2,255 ======= ========= ===== ==== =========== ========= ======
(In thousands) For the Year Ended December 31, 1997 ------------------------------------ Beginning Cash Discount Hedging Ending Balance Purchased Received Accretion (Gain) Loss Sold Balance --------- --------- --------- --------- ----------- ---------- -------- 1994-A (1).......... $ 1,814 $ - $(474) $259 $ - $ - $ 1,599 1995-A (1).......... 964 - (224) 136 - - 876 1991-A (2).......... 36,571 - - - - (36,571) - 1997-B (3).......... - 22,752 - - 118 - 22,870 ------- ------- ----- ---- ---- -------- ------- Totals.............. $39,349 $22,752 $(698) $395 $118 $(36,571) $25,345 ======= ======= ===== ==== ==== ======== =======
(1) 1994-A and 1995-A are interest-only strips that were purchased from Greenwich Capital Markets, Inc. in June 1996. (2) 1991-A was purchased from Greenwich in August 1996, and included a $1.5 million premium. This security was sold in January 1997. (3) 1997-B is an interest-only strip that was purchased from CS First Boston in December 1997 and was subsequently sold in March 1998. (5) LOANS AND LEASES HELD FOR SALE The Company offers permanent commercial loans, short-term commercial loans (DEVCO and Seasoning loans), multi-family and equipment loans and leases to those sectors in which it operates. Substantially all of the Company's permanent commercial loans are self-amortizing long-term fixed or adjustable rate loans provided for purposes other than development and construction of business units. DEVCO loans are short-term, interest-only loans offered to fund the development and construction of new business units. Seasoning loans are short-term, interest-only loans offered to fund the acquisition of new business units or the conversion of existing business units into a different franchise concept. Multi- family loans are generally fixed rate loans amortized over 30 years. Equipment loans are fixed rate products tied to U.S. Treasury rates that generally have a maximum term of up to 10 years. The Company's equipment leases generally range in term from 5 to 7 years and are substantially made up of "direct financing" leases. At June 30, 1998 and December 31, 1997, loans and leases held for sale consisted of the following:
June 30, December 31, (In thousands) 1998 1997 ---------- ------------- Permanent commercial loans................................................................ $271,834 $149,699 Short-term commercial loans............................................................... 202,162 177,536 Multi-family loans........................................................................ 62,846 Equipment loans and leases................................................................ 69,588 19,500 Allowance for loan and lease losses....................................................... (2,599) (998) Reserve fund deposits with Southern Pacific Bank.......................................... 277 187 Net deferred loan fees.................................................................... (1,046) (2,530) Unearned lease income..................................................................... (20,046) (5,520) Lease residuals........................................................................... 286 301 Margin and deferred net losses on futures contracts used to hedge loans and leases held for sale........................................................................... 7,952 5,025 -------- -------- Loans and leases held for sale......................................................... $591,254 $343,200 ======== ========
Loans and leases held for sale were pledged as collateral for the borrowings of the Company. Non-accrual loans, including impaired loans, totaled $5.8 million at June 30, 1998 and $4.0 million at December 31, 1997. There were three restructured loans totaling $827,000 at June 30, 1998 and three restructured loans totaling $844,000 at December 31, 1997, which were accruing interest. 7 (6) RETAINED INTEREST IN LOAN SECURITIZATIONS Activity in retained interest in loan securitizations was as follows for the six months ended June 30, 1998 and the year ended December 31, 1997:
(In thousands) 1998 1997 ------------ ---------- Balance, January 1.................................. $19,177 $ 6,908 Additions........................................... 5,543 17,895 Accretion........................................... - 770 Cash received....................................... (444) (1,034) Valuation allowance................................. (1,608) (5,362) ------- ------- Balance, end of period.............................. $22,668 $19,177 ======= =======
The components of retained interest in loan securitizations were as follows at the dates indicated:
June 30, December 31, (In thousands) 1998 1997 ---------------- ----------------- Overcollateralization amounts........................ $21,914 $18,152 Cash reserve deposit--restricted..................... 7,902 6,781 Residual interests................................... 124 132 Valuation allowance.................................. (7,272) (5,888) ------- ------- Balance.............................................. $22,668 $19,177 ======= =======
(7) Borrowings Warehouse lines of credit, repurchase facilities and working capital lines of credit at June 30, 1998 and December 31, 1997 consisted of the following:
(In thousands) June 30, 1998 December 31, 1997 ------------------------- ------------------------ - --------------------------------------- Expiration Commitment Principal Commitment Principal Lender Date Amount Outstanding Amount Outstanding - --------------------------------------- ---------- ----------- ----------- ---------- ----------- Credit Suisse First Boston............. 12/31/98 $ 300,000 $172,587 $300,000 $127,249 Morgan Stanley......................... 09/30/98 500,000 198,340 200,000 94,031 Banco Santander........................ 04/30/98 - - 50,000 21,649 Sanwa Bank............................. 06/30/99 25,000 24,993 25,000 4,506 Goldman Sachs(1)....................... 04/30/99 100,000 28,985 - - Residential Funding Corporation........ 08/31/98 35,000 25,300 - - Bank of America........................ 07/31/98 35,000 - - - Residential Funding Corporation........ 05/31/99 50,000 - - - Other Borrowings(2)(3)................. - 55,564 - 8,785 ---------- -------- -------- -------- $1,045,000 $505,769 $575,000 $256,220 ========== ======== ======== ========
(1) The warehouse line of credit with Goldman Sachs is used to fund loans through FMAC Golf Finance Group LLC. (2) Other borrowings include a $55.6 million sale of loans that has been accounted for as a financing at June 30, 1998. (3) Other borrowings include a $6.4 million sale of loans that has been accounted for as a financing and a $2.4 million loan from Goldman Sachs Mortgage Company to finance a golf loan at December 31, 1997. The above facilities have variable interest rates based on London Interbank Offered Rate ("Libor"). The weighted average interest rate on the outstanding principal balances of these facilities was 7.12% and 8.23% at June 30, 1998 and December 31, 1997, respectively. (8) Recent Developments On April 1, 1998, the Company acquired substantially all of the assets and assumed the liabilities of Bankers Mutual and Bankers Mutual Mortgage, Inc. (together, "Bankers"). The acquisition was made pursuant to an Asset Purchase Agreement dated March 9, 1998 by and among the Company, Bankers, and the holders of the 8 outstanding shares of Bankers. Bankers is a Federal National Mortgage Association and Federal Home Loan Bank lender and servicer. The purchase price paid for the assets was the result of arms-length negotiations and consisted of the following: (i) payment by the Company to Bankers of $61.5 million in cash, (ii) delivery of a promissory note in the principal amount of $5.0 million, (iii) contingent cash payments of up to $30.0 million over three years dependent upon the achievement of certain operating results, and (iv) the Company's assumption of Bankers' liabilities. The source of funds used for the acquisition was cash on hand. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Franchise Mortgage Acceptance 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, other branded concepts such as service stations or convenience stores and multi-family income producing properties. Unless the context indicates otherwise, all references hereinafter to the Company refer to Franchise Mortgage Acceptance Company, along with all its predecessor entities, including Franchise Mortgage Acceptance Company LLC ("Franchise Mortgage LLC"). On April 1, 1998, the Company acquired substantially all of the assets and assumed the liabilities of Bankers Mutual and Bankers Mutual Mortgage, Inc. (together, "Bankers"). The acquisition was made pursuant to an Asset Purchase Agreement dated March 9, 1998 by and among the Company, Bankers, and the holders of the outstanding shares of Bankers. Bankers is a Federal National Mortgage Association and Federal Home Loan Bank lender and servicer. The purchase price paid for the assets was the result of arms-length negotiations and consisted of the following: (i) payment by the Company to Bankers of $61.5 million in cash, (ii) delivery of a promissory note in the principal amount of $5.0 million, (iii) contingent cash payments of up to $30.0 million over three years dependent upon the achievement of certain operating results, and (iv) the Company's assumption of Bankers' liabilities. The source of funds used for the acquisition was cash on hand. In April 1998, the Company formed a wholly owned insurance brokerage subsidiary, FMAC Insurance Services Inc., which offers property, casualty, and employee benefits policies and programs to businesses nationwide. In this business, the Company acts only as a broker, taking no insurance risks. In April 1998, the Company finalized a joint venture with MLQ Investors, LP ("MLQ") pursuant to which all loan and lease activities of the Company's Golf Finance Group will be exclusively conducted by the new entity known as FMAC Golf Finance Group LLC which is 50% owned by each of the Company and MLQ and managed by the Company. In connection therewith, a $100.0 million warehouse line of credit has been established with a major investment banking firm to provide FMAC Golf Finance Group LLC with financing. The line is a twelve-month facility with interest based on Libor. LOAN AND LEASE ORIGINATIONS Types of Loan and Lease Products The Company offers permanent commercial loans, short-term commercial loans (DEVCO and Seasoning loans), multi-family loans, and equipment loans and leases to those sectors in which it operates. Permanent Commercial Loans. Substantially all of the Company's permanent commercial loans are self-amortizing long-term fixed or adjustable rate loans provided for purposes other than development and construction of business units. These loans generally have a maximum term and amortization of up to 20 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. Commercial Development and Construction Loans. DEVCO loans are offered to fund the development and construction of new business units. These loans generally provide an interest-only period of up to 18 months that gives the Borrower the opportunity to construct the unit, stabilize business unit performance, and achieve a higher cash flow in the short-term. Fixed rate DEVCO loans are tied to U.S. Treasury rates, while adjustable rate DEVCO loans are tied to LIBOR. 10 Commercial Seasoning Loans. Seasoning loans are offered to fund the acquisition of new business units or the conversion of existing business units into a different franchise concept. Seasoning loans generally provide an interest-only period of up to 18 months that gives borrowers the opportunity to stabilize business unit performance and achieve a higher cash flow in the short- term. Generally, other terms and conditions are similar to those of DEVCO loans. Multi-Family Loans. Substantially all of the Company's multi-family loans are long-term fixed rate loans provided for purposes of financing multi-family income producing properties. Multi-family loans generally have a maximum term and amortization of up to 30 years with a 9 1/2 years yield maintenance period. Fixed rate loans are tied to the U.S. Treasury rates. 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 generally have a maximum term of up to 10 years. In addition, the Company originates equipment leases with terms that generally range from 5 to 7 years. 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. 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 quick service restaurant concepts, loaning to casual dining concepts and moving into other related lending sectors such as retail energy, golf, death care, multi-family finance, 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 Diversified Finance, FMAC Golf Finance, LLC, Energy Finance, Multi-Family 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. Diversified Finance Group. During the first quarter of 1998, the Company organized the Diversified Finance Group by combining its Restaurant, Golf, and Funeral Divisions. As of June 30, 1998, the Diversified Finance Group originated loans through a network of 5 offices in 5 states. For the six months ended June 30, 1998, this group originated $371.4 million of loans. From inception in 1991 through June 30, 1998, the Diversified Finance Group provided approximately $1.8 billion in financing to borrowers. FMAC Golf Finance Group, LLC. FMAC Golf Finance Group, LLC was established in April 1998 to provide loans to national, regional, and local operators of golf courses and golf practice facilities. As of June 30, 1998, the FMAC Golf Finance Group, LLC originated loans through a network of 4 offices in 3 states. From its inception through June 30, 1998, the FMAC Golf Finance Group, LLC provided approximately $9.5 million in financing to borrowers. Energy Finance Group. The Energy Finance Group was organized 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. As of June 30, 1998, the Energy Finance Group originated loans through a network of 9 offices in 7 states. For the six months ended June 30, 1998, this group originated $282.4 million of energy 11 loans. From its inception in 1997 through June 30, 1998, the Energy Finance Group provided approximately $465.0 million in financing to borrowers. Multi-Family Finance Group. Multi-family loans from $250,000 to $3.0 million are provided through the Company's Multi-Family Mid-Market Division. Loans from $3.0 million to $50.0 million are provided through the Company's Multi-Family Major Loan Division. For the three months ended June 30, 1998, the Multi-Family Finance Group funded $244.9 million in multi-family loans, which included $72.8 million in loans that were funded without the use of a credit facility. Loan programs include Fannie Mae DUS, Bankers Capital and Freddie Mac Program Plus. As of June 30, 1998, the multi-family loan servicing portfolio had an unpaid principal balance of $2.3 billion with no delinquencies. The Multi-Family Finance Group originates business through its in-house origination team located in four production offices. Equipment Finance Group. The Equipment Finance Group was organized to provide equipment financing to experienced owners and operators in sectors in which the Company operates and other strategic complementary businesses. For the six months ended June 30, 1998, this group originated $37.5 million of loans and leases. From its inception in 1996 through June 30, 1998, the Equipment Finance Group provided approximately $92.8 million in financing to borrowers. RESULTS OF OPERATIONS Three and Six Months Ended June 30, 1998 Compared to Three and Six Months Ended June 30, 1997 For comparative purposes, the following discussion presents the pro forma statement of operations for the three and six months ended June 30, 1997 as if the Company had been taxed as a corporation for that period. Total revenues increased 48.5% to $31.6 million for the three months ended June 30, 1998 from $21.3 million for the comparable period in 1997. During the same periods, the Company's total expenses increased 220.6% to $14.5 million from $4.5 million. As a result, net income increased to $9.8 million for the three months ended June 30, 1998 as compared to pro forma net income of $9.7 million in the same period of 1997. Total revenues increased 138.3% to $53.8 million for the six months ended June 30, 1998 from $22.6 million for the comparable period in 1997. During the same periods, the Company's total expenses increased 182.2% to $24.3 million from $8.6 million. As a result, net income increased to $17.1 million for the six months ended June 30, 1998 as compared to pro forma net income of $8.0 million in the same period of 1997. The increase in revenues for the three months ended June 30, 1998 was attributable to a $3.1 million increase in gain on sale of loans and leases. For the three months ended June 30, 1998, the Company sold approximately $265.6 million of loans and leases in a loan securitization for a gain on sale of $22.9 million (of which $19.2 million was comprised of cash) as compared to $158.6 million of loans and leases sold in a loan securitization and a whole loan sale for a gain on sale of $19.8 million (of which $19.5 million was comprised of cash) for the three months ended June 30, 1997. During the three months ended June 30, 1998, the Company recognized $4.5 million in loan fees related to the sales of loans and leases held for sale as compared to recognized loan fees of $2.4 million for the same period in 1997. The increase in revenues for the six months ended June 30, 1998 was attributable to a $19.4 million increase in gain on sale of loans and leases. For the six months ended June 30, 1998, the Company sold approximately $449.0 million of loans and leases in two loan securitizations for a gain on sale of $39.2 million (of which $35.2 million was comprised of cash) as compared to $173.9 million of loans and leases sold in a loan securitization and and a whole loan sale for a gain on sale of $19.8 million (of which $19.5 million was comprised of cash) for the six months ended June 30, 1997. During the six months ended June 30, 1998, the Company recognized $6.4 million in loan fees related to the sales of loans and leases held for sale as compared to recognized loan fees of $2.4 million for the same period in 1997. 12 Net interest income also contributed to the increase in revenues, increasing 431.1% to $3.9 million for the three months ended June 30, 1998 as compared to $0.7 million for the same period in 1997, primarily due to the significant increase in loans and leases held for sale which resulted from increased loan and lease originations as well as the acquisition of Bankers. Net interest income also contributed to the increase in revenues, increasing 488.4% to $8.1 million for the six months ended June 30, 1998 as compared to $1.4 million for the same period in 1997, primarily due to the significant increase in loans and leases held for sale which resulted from increased loan and lease originations as well as the acquisition of Bankers. Loan servicing income increased 526.9% to $4.6 million for the three months ended June 30, 1998 as compared to $0.7 million for the same period in 1997. Loan servicing income increased 326.5% to $5.9 million for the six months ended June 30, 1998 as compared to $1.4 million for the same period in 1997. This was due to an increase in loans and leases serviced for other institutions which resulted from the sales and securitization of loans and leases with servicing rights retained by the Company as well as the acquisition of Bankers. A $2.5 billion servicing portfolio was acquired with the Bankers' purchase. The Company's loan servicing portfolio increased to $4.5 billion as of June 30, 1998 from $1.0 billion as of June 30, 1997. Total expenses increased 220.6% to $14.5 million for the three months ended June 30, 1998 as compared to $4.5 million for the same period of the prior year primarily due to infrastructure needs to support the increase in loan and lease originations and the expenses relating to the Multi-Family Finance Group resulting from the acquisition of Bankers. Personnel expenses increased 287.8% to $8.0 million, business promotions increased 554.0% to $1.2 million, occupancy increased 311.8% to $0.7 million and goodwill amortization increased 697.7% to $0.7 million for the three months ended June 30, 1998 as compared to the same period in 1997. Total expenses increased 182.2% to $24.3 million for the six months ended June 30, 1998 as compared to $8.6 million for the same period of the prior year primarily due to infrastructure needs to support the increase in loan and lease originations and the expenses relating to the Multi-Family Finance Group resulting from the acquisition of Bankers. Personnel expenses increased 182.6% to $13.2 million, business promotions increased 472.2% to $1.8 million, occupancy increased 267.5% to $1.0 million and goodwill amortization increased 383.4% to $0.8 million for the six months ended June 30, 1998 as compared to the same period in 1997. 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, 1998, the Company had warehouse lines of credit with total commitment amounts of $1.0 billion on which $505.8 million was outstanding. The Company also has a master purchase and sale agreement with Southern Pacific Bank, a wholly owned subsidiary of ICII ("SPB") to originate loans for SPB under mutual agreement, and subject to SPB 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 SPB. There is no specified commitment by either party, and each individual sale is negotiated separately as to pricing. This agreement has no expiration date. For the six months ended June 30, 1998, loans originated for SPB (and not repurchased), including particpations, totaled approximately $25.2 million. The Company also has an equipment finance sale facility in place with Greenwich Capital Markets, Inc. ("Greenwich"), which is used to fund equipment loans and leases. Under the terms of the facility, the Company sells loans and future lease payment streams to Franchise Lease Funding Corporation II ("FLF2"), and FLF2 simultaneously borrows funds from Greenwich. The facility is for $100.0 million expiring in September 1998. 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) 13 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"). For the six months ended June 30, 1998, net cash provided by operating activities was $45.1 million. This excludes cash used in net loan origination activities of $230.2 million, which was primarily attributable to the Company's increased loan origination volume. For the six months ended June 30, 1997, net cash provided by operating activities was $17.1 million, exclusive of cash used in net loan origination activities of $109.7 million. For the six months ended June 30, 1998, net cash used in investing activities was $47.2 million, which was primarily attributable to the purchase of Bankers and the sale of a $22.9 million security, which was related to the Company's 1997-B securitization. For the six months ended June 30, 1997, net cash provided by investing activities was $36.2 million, which was primarily attributable to the sale of securities related to the restructuring of the Company's 1991-A securitization. For the six months ended June 30, 1998, net cash provided by financing activities was $231.2 million, which was primarily attributable to increased amounts of warehouse line borrowings resulting from increased loan and lease originations during the period. For the six months ended June 30, 1997, net cash provided by financing activities was $56.6 million, which was primarily attributable to an increase of $63.0 million in borrowings from warehouse lines of credit and repurchase facilities and ICII as well as member distributions of $6.3 million. The Company anticipates that its current cash, 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. 14 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. On April 1, 1998, Franchise Mortgage Acceptance Company (the "Company") acquired substantially all of the assets and assumed the liabilities of Bankers Mutual and Bankers Mutual Mortgage, Inc. as reported in the Company's Form 8-K and Form 8-K/A filed on April 13, 1998 and June 4, 1998, respectively. b. On April 6, 1998, Thomas J. Shaughnessy, Clinton V. Barrow, Kent M. Davis, Courtney Stephens, and Pierette Newman resigned as reported in the Company's Form 8-K filed on April 13, 1998. c. Exhibit 27 - Financial Data Schedule 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANCHISE MORTGAGE ACCEPTANCE COMPANY Date: August 13, 1998 By: /s/ Raedelle Walker -------------------------------- Raedelle Walker Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 14,055 14,055 24,923 24,923 600,784 600,784 0 0 0 0 639,762 639,762 7,361 7,361 (1,818) (1,818) 717,103 717,103 561,518 561,518 0 0 0 0 0 0 29 29 155,446 155,446 717,103 717,103 31,609 53,764 31,609 53,764 0 0 0 0 14,534 24,252 0 0 0 0 17,075 29,512 7,126 12,349 9,839 17,053 0 0 0 0 0 0 9,839 17,053 0.34 0.59 0.34 0.59
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