-----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, TtAuE/I6fk8BGR3mWnP05ePPrhpZvw0MZD+d25K07xZ8UYzDCTvzfcGqfMJbS2LW Vdcbp2TzvX/c7wjgPnuAwg== 0000944209-98-001883.txt : 19981116 0000944209-98-001883.hdr.sgml : 19981116 ACCESSION NUMBER: 0000944209-98-001883 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98746109 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 FORM 10-Q 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 SEPTEMBER 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 OCTOBER 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 September 30, 1998 and December 31, 1997....................... 3 Consolidated Statements of Income - Three months ended September 30, 1998 and 1997, and nine months ended September 30, 1998 and 1997............................................... 4 Consolidated Statements of Cash Flows - Nine months ended September 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 1-6 NOT APPLICABLE -------------- SIGNATURES..................................................................................... 17 ----------
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 PER SHARE DATA)
September 30, December 31, 1998 1997 ------------- ------------ ASSETS Cash and cash equivalents....................................... $ 23,165 $ 7,335 Cash - restricted............................................... 5,751 2,744 Securities available for sale................................... 16,963 22,870 Loans and leases held for sale.................................. 693,464 343,200 Retained interest in loan and lease securitizations............. 21,027 21,652 Purchased and originated servicing rights....................... 25,932 2,213 Premises and equipment - net.................................... 6,161 2,518 Goodwill........................................................ 38,055 4,315 Accrued interest receivable..................................... 4,253 2,758 Other assets.................................................... 16,391 12,627 -------- -------- Total assets............................................... $851,162 $422,232 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings...................................................... $639,327 $256,220 Deferred income taxes........................................... 27,548 14,160 Other liabilities............................................... 27,437 13,430 -------- -------- Total liabilities.......................................... 694,312 283,810 -------- -------- Minority interest in subsidiary................................. 55 - 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............................................. 38,436 20,063 -------- -------- Total stockholders' equity.................................... 156,795 138,422 -------- -------- Total liabilities and stockholders' equity.................... $851,162 $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 Nine Months Ended September 30, September 30, ------------- ------------- 1998 1997 1998 1997 ------- ------- ------- ------- Revenue: Gain on sale of loans and leases................. $ 4,740 $20,690 $43,978 $40,497 ------- ------- ------- ------- Interest income.................................. 17,015 8,180 42,540 18,947 Interest expense................................. 11,038 6,394 28,484 15,788 ------- ------- ------- ------- Net interest income........................... 5,977 1,786 14,056 3,159 ------- ------- ------- ------- Loan servicing income............................ 4,812 854 10,680 2,230 Other income (loss).............................. (16) (588) 563 (588) ------- ------- ------- ------- Total revenue................................. 15,513 22,742 69,277 45,298 ------- ------- ------- ------- Expense: Personnel........................................ 6,949 4,620 20,130 9,285 Professional services............................ 776 616 2,301 1,792 Travel........................................... 809 499 2,307 1,022 Business promotion............................... 1,215 292 3,023 641 Valuation allowances............................. - 700 633 700 Occupancy........................................ 725 167 1,743 444 Goodwill amortization............................ 702 141 1,519 310 General and administrative....................... 2,116 1,005 5,888 2,439 ------- ------- ------- ------- Total expense................................. 13,292 8,040 37,544 16,633 ------- ------- ------- ------- Income before taxes and minority interest........ 2,221 14,702 31,733 28,665 Minority interest in subsidiary.................. (55) - 55 - Income taxes..................................... 956 - 13,305 - ------- ------- ------- ------- Net income.................................... $ 1,320 $14,702 $18,373 $28,665 ======= ======= ======= ======= Basic income per share............................. $ 0.05 $ 0.64 ======= ======= Weighted average shares outstanding................ 28,716 28,716 ======= ======= Diluted income per share........................... $ 0.05 $ 0.64 ======= ======= Weighted average shares outstanding................ 28,742 28,878 ======= ======= Pro forma earnings data: Net income as reported............................ $14,702 $28,665 Pro forma income tax expense...................... 6,104 12,039 ------- ------- Pro forma net income.............................. $ 8,598 $16,626 ======= ======= Pro forma basic and diluted income per share...... $ 0.39 $ 0.76 ======= ======= 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)
Nine Months Ended September 30, ------------- 1998 1997 ---- ---- Cash flows from operating activities: Net income........................................................................... $ 18,373 $ 28,665 Adjustments to reconcile net income to net cash used in operating activities: Depreciation, amortization and discount accretion................................ 4,054 (464) Increase in accrued interest receivable.......................................... (1,313) (1,015) Provision for deferred income taxes.............................................. 13,228 -- Increase in other liabilities.................................................... 12,979 5,393 Increase (decrease) in other assets.............................................. (2,462) 273 Provision for valuation allowance for retained interests in securitization....... -- 400 Increase in originated mortgage servicing rights................................. (3,577) -- Loan and lease operations Loans and leases originated.................................................. (1,526,308) (507,003) Loans sold to affiliates..................................................... 291,721 11,450 Provision for loan and lease losses.......................................... 633 300 Principal reductions......................................................... 65,208 12,288 Cash proceeds from loan sales and securitizations, net of gain............... 836,277 371,018 ----------- --------- Net cash used in operating activities................................................ (291,187) (78,695) ----------- --------- Cash flows from investing activities: Purchases of premises and equipment.............................................. (3,797) (1,332) Decrease (increase) in interest bearing deposits................................. 1,993 (111) Purchase of securities available for sale........................................ (16,963) -- Sale of securities available for sale............................................ 22,870 36,571 Increase in retained interests in securitizations................................ (12,154) (632) Proceeds from retained interests in securitizations.............................. 13,041 1,453 Sale of servicing rights......................................................... 281 -- Purchase of Bankers Mutual....................................................... (63,028) -- Purchase of Enterprise Financial Group........................................... -- (408) Increase in minority interest in subsidiary...................................... 55 -- ----------- --------- Net cash provided by (used in) investing activities.................................. (57,702) 35,541 ----------- --------- Cash flows from financing activities: Net change in borrowings from Imperial Credit Industries, Inc. .................. -- (28,069) Increase in borrowings........................................................... 364,719 76,578 Member distributions............................................................. -- (6,322) ----------- --------- Net cash provided by financing activities............................................ 364,719 42,187 ----------- --------- Net change in cash..................................................................... 15,830 (967) Cash (book overdraft) at beginning of period........................................... 7,335 (171) ----------- --------- Cash (book overdraft) at end of period................................................. $ 23,165 $ (1,138) =========== =========
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. 6 (4) SECURITIES AVAILABLE FOR SALE Securities available for sale consist of asset-backed securities issued by the Company. For the nine months ended September 30, 1998 and the year ended December 31, 1997, activity in securities available for sale was as follows:
(In thousands) For the Nine Months Ended September 30, 1998 -------------------------------------------- Beginning Bond Cash Discount Hedging Ending Balance Amount Discount Received Accretion (Gain) Loss Sold Balance ------- ------ -------- -------- --------- ----------- ---- ------- 1997-B (2).......... $22,870 $ - $ - $ - $ - $ - $(22,870) $ - 1998-CE (3)......... - 13,090 (2,702) - - - - 10,388 1998-CF (3)......... - 5,610 (2,063) - - - - 3,547 1998-1 (4).......... - 3,311 (283) - - - - 3,028 ------- ------- ------- -------- --------- ----------- -------- ------- Totals.............. $22,870 $22,011 $(5,048) $ - $ - $ - $(22,870) $16,963 ======= ======= ======= ======== ========= =========== ======== =======
(In thousands) For the Year Ended December 30, 1997 ------------------------------------ Beginning Bond Cash Discount Hedging Ending Balance Amount Discount Received Accretion (Gain) Loss Sold Balance ------- ------ -------- -------- --------- ----------- ---- ------- 1991-A (1).......... $36,571 $ - $ - $ - $ - $ - $(36,571) $ - 1997-B (2).......... - 22,752 - - - 118 - 22,870 ------- ------- -------- -------- --------- ---- -------- ------- Totals.............. $36,571 $22,752 $ - $ - $ - $118 $(36,571) $22,870 ======= ======= ======== ======== ========= ==== ======== =======
- -------------------- (1) 1991-A was purchased from Greenwich in August 1996, and included a $1.5 million premium. This security was sold in January 1997. (2) 1997-B is an interest-only strip that was purchased from CS First Boston in December 1997 and was subsequently sold in March 1998. (3) 1998-CE and 1998-CF represent the Class E and F certificates that were purchased by the Company as part of the 1998-C securitization. (4) 1998-1 is the Class C certificate that was purchased by the Company as part of the 1998-1 equipment finance securitization. (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 September 30, 1998 and December 31, 1997, loans and leases held for sale consisted of the following:
September 30, December 31, (In thousands) 1998 1997 ------------- ------------ Permanent commercial loans................................................................ $354,070 $149,699 Short-term commercial loans............................................................... 149,012 177,536 Multi-family loans........................................................................ 136,203 - Loans in process.......................................................................... 247 - Equipment loans and leases................................................................ 44,460 19,500 Allowance for loan and lease losses....................................................... (2,599) (998) Reserve fund deposits with Southern Pacific Bank.......................................... 277 187 Net deferred loan fees.................................................................... (183) (2,530) Unearned lease income..................................................................... (11,527) (5,520) Lease residuals........................................................................... 276 301 Margin and deferred net losses on futures contracts used to hedge loans and leases held for sale........................................................................... 23,228 5,025 -------- -------- Loans and leases held for sale......................................................... $693,464 $343,200 ======== ========
7 Loans and leases held for sale were pledged as collateral for the borrowings of the Company. Non-accrual loans, including impaired loans, totaled $7.6 million at September 30, 1998 and $4.0 million at December 31, 1997. (6) RETAINED INTEREST IN LOAN AND LEASE SECURITIZATIONS Activity in retained interest in loan and lease transactions was as follows for the nine months ended September 30, 1998 and the year ended December 31, 1997:
(In thousands) For the Nine Months Ended September 30, 1998 -------------------------------------------- Beginning Bond Cash Discount Reserve Valuation Ending Balance Amount Received Accretion Fund Deposit Allowance Balance ------- ------ -------- --------- ------------ --------- ------- 1994-A.............. $ 1,599 $ - $ (432) $171 $ - $ - $ 1,338 1995-A.............. 876 - (187) 91 - - 780 1996-A.............. 6,226 - (718) - - - 5,508 1996-B.............. 331 - - - - - 331 1997-A.............. 344 - - - - - 344 1997-B.............. 306 - - - - - 306 1997-C.............. 266 - - - - - 266 1997-1 (1).......... 11,704 - (11,704) - - - - 1998-A.............. - 283 - - 1,989 (1,989) 283 1998-B.............. - 3,652 - - 100 (100) 3,652 1998-C.............. - 5,796 - - 100 (100) 5,796 1998-1 (1).......... - 2,423 - - 1,424 (1,424) 2,423 ------- ------- -------- --------- ------ ------- ------- Totals.............. $21,652 $12,154 $(13,041) $262 $3,613 $(3,613) $21,027 ======= ======= ======== ========= ====== ======= =======
(In thousands) For the Year Ended December 31, 1997 ------------------------------------ Beginning Bond Cash Discount Reserve Valuation Ending Balance Amount Received Accretion Fund Deposit Allowance Balance ------- ------ -------- --------- ------------ --------- ------- 1994-A.............. $1,814 $ - $ (474) $ 259 $ - $ - $ 1,599 1995-A.............. 964 - (224) 136 - - 876 1996-A.............. 6,908 - (1,034) 752 - (400) 6,226 1996-B.............. - 331 - - - - 331 1997-A.............. - 326 - 18 1,586 (1,586) 344 1997-B.............. - 306 - - 1,852 (1,852) 306 1997-C.............. - 266 - - 1,523 (1,523) 266 1997-1 (1).......... - 11,704 - - - - 11,704 ------ ------- ------- ------ ------ ------- ------- Totals.............. $9,686 $12,933 $(1,732) $1,165 $4,961 $(5,361) $21,652 ====== ======= ======= ====== ====== ======= =======
- ----------------- (1) Equipment Finance transaction. The components of retained interest in loan securitizations were as follows at the dates indicated:
September 30, December 31, (In thousands) 1998 1997 ---- ---- Overcollateralization amounts......................... $20,495 $20,627 Cash reserve deposit--restricted...................... 9,629 6,781 Residual interests.................................... 120 132 Valuation allowance................................... (9,217) (5,888) ------- ------- Balance............................................... $21,027 $21,652 ======= =======
8 (7) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest for the nine months ending September 30, 1998 and 1997 was $27.2 million and $15.2 million, respectively. Cash paid for income taxes for the nine months ending September 30, 1998 was $0.8 million. There was no cash paid for income taxes in the nine months ending September 30, 1997 as the Company had been treated as a partnership for federal and state income tax purposes. The components associated with the acquisition of Bankers were as follows:
(In thousands) Fair value of assets acquired............. $ 82,604 Cash paid................................. (63,028) Note payable to Bankers................... (5,000) -------- Liabilities assumed..................... $ 14,576 ========
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. In July 1998, the Company finalized a joint venture with SFT Venturer, LLC ("SFT") to form FMAC Star Fund, LLP. The purpose of this entity is to engage in the activity of financing the Company's loans. Each party has a 50% ownership position with SFT contributing 80% of the mandatory capital and the Company contributing the remaining 20%. On November 9, 1998, the Company entered into a purchase and sale agreement with Global Alliance Finance Company, LLC, an affiliate of Deutsche Bank Securities, Inc. ("GAFCO"). Under this agreement, the Company will sell certain franchise loans to GAFCO at par value. When GAFCO sells or securitizes such loans, GAFCO and the Company share equally in the resulting profits or losses up to 30% of par value. There is no specified commitment by either party, and the agreement may be terminated by either party on or after November 30, 1999. 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 September 30, 1998, the Diversified Finance Group originated loans through a network of 5 offices in 5 states. For the nine months ended September 30, 1998, this group originated $599 million of loans. From inception in 1991 through September 30, 1998, the Diversified Finance Group provided approximately $2.1 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 September 30, 1998, the FMAC Golf Finance Group, LLC originated loans through a network of 4 offices in 3 states. From its inception through September 30, 1998, the FMAC Golf Finance Group, LLC provided approximately $30 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 September 30, 1998, the Energy Finance Group originated loans through a network of 9 offices in 7 states. For the nine months ended September 30, 1998, this group originated $450 million 11 of energy loans. From its inception in 1997 through September 30, 1998, the Energy Finance Group provided approximately $632 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 six months ended September 30, 1998, the Multi- Family Finance Group funded $467 million in multi-family loans, which included $85 million in loans that were funded without the use of a credit facility. Loan programs include Fannie Mae, Bankers Capital and Freddie Mac Program Plus. As of September 30, 1998, the multi-family loan servicing portfolio had an unpaid principal balance of $2.5 billion with no delinquencies. The Multi-Family Finance Group originates business through its in-house origination team located in five 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 nine months ended September 30, 1998, this group originated $60 million of loans and leases. From its inception in 1996 through September 30, 1998, the Equipment Finance Group provided approximately $116 million in financing to borrowers. RESULTS OF OPERATIONS Three and Nine Months Ended September 30, 1998 Compared to Three and Nine Months Ended September 30, 1997 For comparative purposes, the following discussion presents the pro forma statement of operations for the three and nine months ended September 30, 1997 as if the Company had been taxed as a corporation for those periods. Total revenues decreased 31.8% to $15.5 million for the three months ended September 30, 1998 from $22.7 million for the comparable period in 1997. During the same periods, the Company's total expenses increased 65.3% to $13.3 million from $8.0 million. As a result, net income decreased to $1.3 million for the three months ended September 30, 1998 as compared to pro forma net income of $8.6 million in the same period of 1997. Total revenues increased 52.9% to $69.3 million for the nine months ended September 30, 1998 from $45.3 million for the comparable period in 1997. During the same periods, the Company's total expenses increased 125.7% to $37.5 million from $16.6 million. As a result, net income increased to $18.4 million for the nine months ended September 30, 1998 as compared to pro forma net income of $16.6 million in the same period of 1997. The decrease in revenues for the three months ended September 30, 1998 was attributable to a $16.0 million decrease in gain on sale of loans. The decrease was due primarily to two factors. . A $16.8 million hedge loss associated with the $349 million of loans sold in ---------------------------------------------------------------------------- a securitization in the third quarter of 1998. A significant portion of this ---------------------------------------------- is estimated to have been related to abnormal market influences. This loan securitization resulted in a $0.5 million gain on sale as compared to a $18.9 million gain on sale for the $185.2 million securitization in the three months ended September 30, 1997. For accounting purposes, hedge gains and losses associated with loans held for sale are deferred until sale of the loans, and are included in the computation of the gain on sale of the loans. The Company hedges these loans with treasury futures, which have correlated to a high degree with the gross gain on sale of the securitized loans, due to the fact that the Company prices its fixed-rate loans based on treasury rates with similar maturities. Effectively, when treasury rates decline or rise, increasing or decreasing the gain on sale of the securitized loans, the treasury futures have an opposite result, thus protecting the Company from interest rate risk. During the third quarter of 1998, market anomalies caused a divergence from correlation on a number of days, resulting in losses on those days which were not offset to the same degree with gains on the 12 securitized loans. Notwithstanding the aforementioned anomalies, management believes that these treasury futures hedges have had and will continue to have a high degree of correlation with the gross gain on sale of the Company's loans throughout the hedging period. On September 30, 1998, the Company had approximately $23.2 million in deferred hedge losses related to the remaining loans and leases held for sale. Such loans and leases held for sale are carried at the lower of cost or market value and include the deferred hedge loss in the cost basis of the loans and leases. Losses deferred will be recognized at the time of the sale of loans and leases to which they are related. . A difference in market conditions between the third quarters of 1998 and 1997. ----------------------------------------------------------------------------- Demand for commercial asset-based securities was very high in the third quarter of 1997 as compared to the low demand experienced in the market in the third quarter of 1998. In the third quarter of 1998, market conditions caused a movement by investors to liquid investments, resulting in a lower demand for securitized assets. The Company also sold in a securitization $38.3 million of equipment loans and leases, for a gain of $0.8 million. These loans and leases were also encumbered by hedge losses due to market conditions, totaling $1.7 million. The $349 million securitization in the three months ended September 30, 1998 resulted in a cash gain of $11.5 million, before hedge loss of $16.8 million. As part of the transaction, the Company purchased two subordinated bonds for $13.9 million. This compared to the $185.1 million securitization in the three months ended September 30, 1997 which resulted in a cash gain of $23.4 million, before hedge loss of $3.7 million. The increase in revenues for the nine months ended September 30, 1998 was attributable to a $3.5 million increase in gain on sale of loans and leases. For the nine months ended September 30, 1998, the Company sold approximately $836.3 million of loans and leases in four loan and lease securitizations for a gain on sale of $44.0 million, which resulted in a cash gain of $46.0 million, before hedge loss of $21.4 million as compared to $371.8 million of loans and leases sold in two loan securitizations and three whole loan and lease sales for a gain on sale of $40.5 million, which resulted in a cash gain of $44.0 million, before hedge loss of $4.2 million for the nine months ended September 30, 1997. Net interest income also contributed to the change in revenues, increasing 234.7% to $6.0 million for the three months ended September 30, 1998 as compared to $1.8 million for the same period in 1997. For the nine months ended September 30, 1998, revenues increased 345.0% to $14.1 million as compared to $3.2 million for the same period in 1997. These increases were 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 463.5% to $4.8 million for the three months ended September 30, 1998 as compared to $0.9 million for the same period in 1997. Loan servicing income increased 378.9% to $10.7 million for the nine months ended September 30, 1998 as compared to $2.2 million for the same period in 1997. These increases were 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 $5.1 billion as of September 30, 1998 from $1.2 billion as of September 30, 1997. Total expenses increased 65.3% to $13.3 million for the three months ended September 30, 1998 as compared to $8.0 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. Total expenses as a percentage of loan and lease originations were 2.0% for the third quarter of 1998 compared to 3.8% for the same period of 1997. Personnel expenses increased 50.4% to $6.9 million, business promotions increased 316.1% to $1.2 million, occupancy increased 334.1% to $0.7 million and goodwill amortization increased 397.9% to $0.7 million for the three months ended September 30, 1998 as compared to the same period in 1997. 13 Total expenses increased 125.7% to $37.5 million for the nine months ended September 30, 1998 as compared to $16.6 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. Total expenses as a percentage of loan and lease originations were 2.3% for the nine months ended September 30, 1998 compared to 3.3% for the same period of 1997. Personnel expenses increased 116.8% to $20.1 million, business promotions increased 371.6% to $3.0 million, occupancy increased 292.6% to $1.7 million and goodwill amortization increased 390.0% to $1.5 million for the nine months ended September 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. Warehouse lines of credit, repurchase facilities and working capital lines of credit at September 30, 1998 and December 31, 1997 consisted of the following:
(In thousands) September 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 $169,811 $300,000 $127,249 Morgan Stanley(1)...................... 11/13/98 500,000 191,747 200,000 94,031 Banco Santander........................ 08/31/99 50,000 18,145 50,000 21,649 Sanwa Bank............................. 06/30/99 25,000 17,061 25,000 4,506 Goldman Sachs(2)....................... 04/30/99 100,000 48,114 - - Residential Funding Corporation........ 09/30/99 100,000 58,390 - - Bank of America........................ 01/29/99 35,000 5,380 - - Residential Funding Corporation........ 05/31/99 50,000 17,000 - - Other Borrowings(3).................... - 113,679 - 8,785 ---------- -------- -------- -------- $1,160,000 $639,327 $575,000 $256,220 ========== ======== ======== ========
- ----------------- (1) Consists of $300 million committed and $200 million uncommitted. (2) The warehouse line of credit with Goldman Sachs is used to fund loans through FMAC Golf Finance Group LLC. (3) Other borrowings includes $63.3 million of sold loans that have been accounted for as a financing at September 30, 1998, $50.4 million dollars of loans that have been financed through FMAC Star Fund, LLP as of September 30, 1998, a $6.4 million sale of loans that has been accounted for as a financing at December 31, 1997, and a $2.4 million loan from Goldman Sachs Mortgage Company to finance a golf loan at December 31, 1997. The above facilities, with the exception of Bank of America, have variable interest rates based on London Interbank Offered Rate ("Libor"). The line of credit with Bank of America has a fixed interest rate of 1.00% when Bankers maintains minimum deposit requirements. The weighted average interest rate on the outstanding principal balances of these facilities was 6.92% and 8.23% at September 30, 1998 and December 31, 1997, respectively. The Company's warehouse line of credit with Morgan Stanley has been extended to November 13, 1998 from its original expiration date of September 30, 1998. The Company is currently negotiating renewal of this warehouse line of credit, which may include restructuring of funding arrangements. 14 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 nine months ended September 30, 1998, loans originated for SPB (and not repurchased), including particpations, totaled approximately $26.8 million. 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"). For the nine months ended September 30, 1998, net cash provided by operating activities was $41.3 million. This excludes cash used in net loan origination activities of $332.5 million, which was primarily attributable to the Company's increased loan origination volume. For the nine months ended September 30, 1997, net cash provided by operating activities was $33.3 million, exclusive of cash used in net loan origination activities of $111.9 million. For the nine months ended September 30, 1998, net cash used in investing activities was $57.7 million, which was primarily attributable to the purchase of Bankers as well as the purchase of the E and F certificates relating to the 1998-C securitization, offset by the sale of a $22.9 million security, which was related to the Company's 1997-B securitization. For the nine months ended September 30, 1997, net cash provided by investing activities was $35.5 million, which was primarily attributable to the sale of securities related to the restructuring of the Company's 1991-A securitization. For the nine months ended September 30, 1998, net cash provided by financing activities was $364.7 million, which was primarily attributable to increased amounts of warehouse line borrowings resulting from increased loan and lease originations during the period. For the nine months ended September 30, 1997, net cash provided by financing activities was $42.2 million, which was primarily attributable to an increase of $76.6 million in borrowings from warehouse lines of credit, offset by a decrease of $28.1 million in borrowings from ICII and 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. However, the Company is dependent upon its ability to access warehouse lines of credit and repurchase facilities to fund new loan originations. The Company currently expects to be able to maintain existing warehouse lines of credit and repurchase facilities as current arrangements expire or become fully utilized; however, there can be no assurance that such financing will be available on favorable terms, if at all. INFLATION The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with Generally Accepted Accounting Principles, 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 cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of 15 inflation. Inflation affects the Company 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 increasing interest rates, demand for loans and a borrower's ability to qualify for mortgage financing in a purchase transaction may be adversely affected. During periods of decreasing interest rates, borrowers are more likely to refinance their existing loans, which may negatively impact the Company's investments in securitization related assets and interest-only securities. YEAR 2000 COMPLIANCE The Year 2000 issue affects virtually all companies and organizations. Many currently installed computer systems and software systems were designed to use only a two-digit date field. These date code fields will need to accept four digit entries to distinguish 21/st/ century dates from 20/th/ century dates. Until the date fields are updated, the systems or programs could fail or give erroneous results when referencing dates following December 31, 1999. The Company has developed a formal strategic plan which includes an awareness and impact assessment, system testing, and remediation. This plan is projected to be completed by June 1999. After reviewing the Company's initial assessment of its internal systems, management believes that the costs associated with Year 2000 compliance should not be material. The risks associated with the Company's Year 2000 issues are currently being identified and have been determined to include, but are not limited to, the Company's internal systems as well as third party business partners, vendors, and suppliers. The Company is incorporating and encompassing the Year 2000 area as part of the Company's Business Continuity Plan. While the efforts to assess and correct the Company's Year 2000 issues are expected to be complete prior to related forecasted failure horizons, the Company is taking definite measures to assess risks and develop specific contingency plans. The Company's Year 2000 efforts are on going and its overall project will continue to evolve, as new information becomes available. RECENT DEVELOPMENTS Effective October 30, 1998, G. Louis Graziadio, III, resigned as a member of the Company's Board of Directors. The Board of Directors has appointed Brad Plantiko, Chief Financial Officer of Imperial Credit Industries, Inc., the Company's largest stockholder, to replace Mr. Graziadio as a member of the Board. 16 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: November 10, 1998 By: /s/ Raedelle Walker -------------------- Raedelle Walker Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JUL-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 28,916 28,916 37,990 37,990 697,717 697,717 0 0 0 0 764,623 764,623 8,469 8,469 (2,308) (2,308) 851,162 851,162 666,764 666,764 0 0 0 0 0 0 29 29 156,766 156,766 851,162 851,162 4,740 43,978 15,513 69,277 0 0 0 0 13,292 37,544 0 0 0 0 2,276 31,678 956 13,305 1,320 18,373 0 0 0 0 0 0 1,320 18,373 0.05 0.64 0.05 0.64
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