-----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, DAsFD8VNd8Fa7PfvVb0qCzOR25WH/qI/FYDJfq2YcgTE3rHbcr/1KCEjZF6p7VXQ HVUndGDPLmEfSrSkvnRSSw== 0000944209-99-000422.txt : 19990402 0000944209-99-000422.hdr.sgml : 19990402 ACCESSION NUMBER: 0000944209-99-000422 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 000-23283 FILM NUMBER: 99581792 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-K405 1 FORM 10-K FOR PERIOD ENDED 12/31/1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- FORM 10-K ---------------- Mark One [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 or or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 000-23283 ---------------- [LOGO OF FMAC] Franchise Mortgage Acceptance Company (Exact name of registrant as specified in its charter) Delaware 95-4649104 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
---------------- 1888 Century Park East, Third Floor, 90067 Los Angeles, California (Zip Code) (Address of principal executive offices)
---------------- Registrants telephone number, including area code: (310) 229-2600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value NASDAQ National Market ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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 by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this From 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on February 28, 1999 as reported on the NASDAQ National Market System, was approximately $72,734,212. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 1999, registrant had 28,760,557 shares of Common Stock outstanding. The following documents are incorporated by reference into this report: None - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FRANCHISE MORTGAGE ACCEPTANCE COMPANY 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I Item 1. BUSINESS...................................................... 3 Item 2. PROPERTIES.................................................... 16 Item 3. LEGAL PROCEEDINGS............................................. 16 Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS............. 16 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.......................................... 17 Item 6. SELECTED FINANCIAL DATA....................................... 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................... 19 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 26 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 28 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................... 56 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 56 Item 11. EXECUTIVE COMPENSATION........................................ 59 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................... 65 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 66 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- 70 K............................................................
Forward-Looking Statements Certain statements in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements, including, but are not limited to: 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, competition in the Company's existing and potential future lines of business, the ability of the Company to complete, on a timely basis, the necessary actions with respect to Year 2000 computer issues and other factors. Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to materially differ from those 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 Item 1. BUSINESS Franchise Mortgage Acceptance Company (the "Company") is a 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 and such other branded concepts such as service stations or convenience stores. The Company also engages in the business of originating and servicing multi-family income producing property loans. Additionally, the Company's insurance services subsidiary offers insurance products to businesses nationwide. 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"). General Since commencing business in 1991, the Company believes it has become a leading lender to national and regional quick service restaurant ("QSR") franchisees, and the Company has developed a growing presence in the casual dining sector. More recently, the Company has expanded its focus to include financing retail energy licensees (service stations, convenience stores, truck stops, car washes and quick lube businesses), golf operating businesses (golf courses and golf practice facilities), the death care industry (funeral homes and cemeteries), and multi-family income producing properties. The Company originates long-term fixed- and variable-rate loan and lease products and sells such loans and leases either through securitizations or whole loan sales to institutional purchasers on a servicing retained basis. The Company's loan and lease products are attractive investments to institutional investors because of the credit profile of its borrowers ("Borrowers"), relatively long loan and lease terms, call protection through prepayment penalties and appropriate risk-adjusted yields. The Company also periodically makes equity investments or receives contingent equity compensation as part of its core lending and leasing business. The Company originated loans and leases through 35 marketing offices in 20 states at December 31, 1998. From the Company's inception through December 31, 1998, it funded approximately $3.8 billion in loans and leases and at December 31, 1998, had a servicing portfolio, including loans and leases held for sale, of $5.4 billion. The Company's loan and lease originations grew to $2.1 billion in 1998 from $0.8 billion in 1997. At December 31, 1998, the Company's average initial loan balance was $848,000. The Company's focus is to provide funding to industries that have been historically underserved by banks and other traditional sources of financing. This focus requires the Company to develop specific industry expertise in the sectors which it serves in order to provide individualized financial solutions for its Borrowers. The Company believes that its industry expertise, positive market reputation, and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. The Company's Borrowers are generally small business operators or multi-family income producing property owners, with proven operating experience and a history of generating positive operating cash flows. The Company relies primarily upon its assessment of enterprise value, based in part on independent third party valuations, and historical operating cash flows to make credit determinations, as opposed to relying solely on the value of real estate and other collateral. In 1991, the Company began making loans to franchisees of Taco Bell Corp. In 1992 and 1993, loans to other national QSR concepts, such as Burger King, Wendy's, Pizza Hut, KFC and Hardee's, were approved. The Company's principal loan products at that time were fixed rate, 15-year, fully amortizing loans. In 1995, the Company began offering loans to casual dining concepts such as TGI Friday's, Applebee's and Denny's as well as offering its Borrowers adjustable rate loans. Also in 1995, the Company began offering development and construction ("DEVCO") loans to its more experienced Borrowers to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. In 1996, the Company expanded its approved concepts to include strong regional restaurants such as Carl's, Jr., Church's Chicken and Golden Corral and began providing financing to owners and operators of golf courses and golf practice facilities. The Equipment Finance Group also commenced activities in 1996 to provide equipment 3 loans and leases to the sectors which the Company serves and other strategic markets. In February 1997, the Company created its Energy Finance Group to make loans to businesses that distribute retail petroleum products. In the third quarter of 1997, the Company began making loans to funeral home and cemetery owners. 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 National Home Loan Bank lender and servicer. The purchase price paid for the assets 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 Companys 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, FMAC Insurance Services Inc. 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 ("FGFG") which is 50% owned by each of the Company and MLQ and managed by the Company. In connection therewith, a $100 million warehouse line of credit has been established with Goldman Sachs Mortgage Company to provide FGFG with financing. 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 $90 million mandatory capital and the Company contributing the remaining 20%. Contributions of mandatory capital can only be requested with joint consent of both the Company and SFT. As of December 31, 1998, the Company had made capital contributions of $3.1 million. 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. Recent Developments On March 10, 1999, Bay View Capital Corporation ("Bay View") and the Company executed an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") providing for the merger of the Company and Bay View. Following the merger, the Company will operate as a subsidiary of Bay View Bank ("BVB"). In accordance with the terms of the Merger Agreement, Bay View will acquire all of the common stock of the Company for consideration currently valued at approximately $309 million. Each share of the Company's stock will be entitled to receive, at the election of the holder, either $10.25 in cash or .5125 shares of Bay View's common stock. The Company's stockholder elections are subject to the aggregate number of shares of the Company's common stock to be exchanged for Bay View's common stock being equal to 60% of the number of shares of the Company's common stock outstanding immediately prior to closing the transaction and no Company stockholder owning more than 9.99% of Bay View's common stock, on a pro forma basis. The Merger Agreement also provides for an additional payment of up to $30 million by Bay View in connection with the earn-out provision of the Company's April 1998 acquisition of Bankers. 4 Simultaneous with the merger, Bay View will contribute substantially all of the assets and liabilities of the Company to a newly organized and wholly owned subsidiary of BVB. The transaction is expected to close during the third quarter of 1999, subject to approval by both the Company's stockholders and Bay View's shareholders and subject to necessary regulatory approvals. In connection with the merger, BVB has purchased $209.3 million in commercial loans from the Company and additionally may purchase up to another $150 million in commercial loans through the end of the first quarter of 1999. BVB may also purchase additional levels of commercial loans through the closing date of the transaction. A Voting Agreement has been executed with one of the Company's stockholders, Imperial Credit Industries, Inc. ("ICII"), which provides that this stockholder may not sell its Company stock during the term of the Merger Agreement and will vote in favor of the merger. In conjunction with the merger, Wayne Knyal will have an ownership interest in Bay View in excess of 5% and will hold a seat on Bay Views Board of Directors. Consummation of the merger is subject to a number of closing conditions, including approval by both Bay View's shareholders and the Company's stockholders, obtaining necessary regulatory approvals and other closing conditions. Business Strategy The Company's goal is to become a leading national small business lender in each of its target markets. The Company's growth and operating strategy is based on the following key elements: Growth in Existing Sectors. The Company plans to replicate its success in the restaurant sector in other business sectors that it has entered more recently, such as retail energy, golf and death care, through focused product development, customer service and support. The Company forms specialized teams for each sector to assess customer needs, market opportunities, competitive environment, business value, and credit quality; generate customer loyalty; and enhance service and support. Management believes that its industry leadership position, relationships with major Borrowers, franchisors and vendors, and expertise within sectors will assist the Company in increasing its market share. Controlled Expansion into New Sectors. Management believes that substantial opportunities exist to extend the Company's expertise into other business sectors. The Company believes that its experience in lending to restaurant franchisees has allowed it to develop a template for efficiently originating and servicing loans and leases in other industry sectors. The Company's philosophy is to provide complete business solutions to identified industries by developing strategies and financial products which are based on industry characteristics and each Borrower's specific needs. The Company carefully reviews industry data, seeking business sectors with a combination of large funding requirements, proven cash flow generating capabilities, standardized operations, a scarcity of long-term funding sources and characteristics attractive to secondary market investors. Maintenance of Credit Quality. The Company's delinquency and loss experience has been extremely low, due in part to its lending to experienced operators, detailed industry knowledge, relationship with both franchisors and franchisees system wide, active oversight of its existing servicing portfolio, strict underwriting criteria and the Company's ability to locate qualified replacement franchisees / borrowers to assume delinquent loans. 5 The following table sets forth amounts of loans and leases held in the Company's servicing portfolio, including loans and leases held for sale and investment, and the combined delinquency and foreclosure experience for the periods indicated:
As of December 31, ----------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- % of % of % of Loans and Loans and Loans and Balance Leases Balance Leases Balance Leases ------- --------- ------- --------- ------- --------- (Dollars in millions) Loans and leases held in servicing portfolio.... $5,423 100.00% $1,629 100.00% $737 100.00% 30-59 days delinquent... 9 0.16 -- -- -- -- 60-89 days delinquent... 2 0.04 3 0.15 -- -- 90 days or more delinquent............. 58 1.06 13 0.81 -- -- ------ ------ ------ ------ ---- ------ Total delinquencies... $ 69 1.26% $ 16 0.96% $-- -- % ====== ====== ====== ====== ==== ======
Secondary Market Execution. The Company is committed to maintaining effective secondary market execution on loans and leases that it originates and sells. The Company believes that the favorable execution it has experienced to date is primarily the result of the attractive terms and the credit quality of the loans and leases that it originates. Of the $40.1 million in gain on sale, which includes net loan fees, recognized by the Company during 1998, $32.4 million was comprised of cash received by the Company at the time of sale before hedge losses of 31.1 million. As a result, the Company has reduced its exposure to the risks associated with holding large amounts of such retained interests on its balance sheet. For the year ended December 31, 1998, the Company completed five securitizations and one whole loan and lease sale totaling $1.1 billion and $14.4 million, respectively. In all such transactions, the Company has retained the right to service the sold or securitized loans, with the exception of the whole loan and lease sale in December. Diversification of Revenue Sources. Management is committed to developing a diversified revenue base to reduce revenue volatility and enhance profitability. The Company continually monitors and adjusts its loan and lease products and securitization structures to improve the stability of its cash flows. Revenue sources include loan and lease origination points and fees, interest income earned prior to the sale of the loans and leases, whole loan and lease sale profits, securitization profits, loan and lease servicing fees and equity investment returns. Industry Background Franchising A franchise is a business operating pursuant to a franchise agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by a franchisor and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services. Although the term franchise is typically associated with fast food restaurants, a multitude of franchise businesses exist, offering a variety of products and services such as hotels and motels, automotive parts, and cleaning services. Most franchise concepts offer franchisees training and diverse levels of ongoing support and oversight. Business format franchisors provide franchisees with a comprehensive operating system, whereas product distribution arrangements primarily license a trademark and/or logo. According to the International Franchise Association, franchises comprise one out of every twelve businesses in the United States. The Franchise Trade Association has estimated that by the year 2000, over 50% of retail sales, or approximately $1 trillion, will be generated by franchises. The Company believes that its customers' businesses will perform similarly to the typical performance of franchisees in a system. A proven franchise / brand tends to negate some of the risks associated with small businesses. The Food Service Sector According to the National Restaurant Association ("NRA") data, in 1998 the food service industry employed more than nine million people and had estimated sales of $338.4 billion. According to the NRA, full service restaurants, QSRs, commercial cafeterias, social caterers and ice cream and frozen yogurt stands ("Eating 6 Places") represented an estimated $227.4 billion, or 67.2%, of such food service sales in 1998 and are expected to grow by 4.7% to $238.1 billion in 1999. The QSR segment of Eating Places represents those restaurants that offer fast food or take-out, without table service. Most QSR establishments offer food products that lend themselves to quick service, such as pizza, chicken, hamburgers and similar food items. Full service restaurants typically represent casual and fine dining restaurants that accept major credit cards, offer table service and provide full liquor service. The QSR segment represented an estimated $105.6 billion, or 46.4%, of all Eating Places sales in 1998, and is expected to grow by 4.6% to $110.4 billion in 1999. The full service segment represented an estimated $111.8 billion, or 49.2% of all Eating Places sales in 1998, and is expected to grow by 4.9% to $117.3 billion in 1999. Development and maturation of the QSR segment of the food service industry has led to a consolidation of restaurant operators. Increased competition has decreased profit margins which has contributed to the emergence of increasingly large and professionally managed restaurant operating companies. Large operators typically have greater economies of scale and better management systems which allow them to compete more effectively. As size and diversification become increasingly important, many franchise restaurant operators are becoming affiliated with multiple restaurant systems. The Company believes that the maturation of the fast food segment is likely to result in continued and enhanced stability for this industry segment. Chain restaurant consolidation has also created lending opportunities for the Company arising from the demand by restaurant operators for acquisition financing. The Retail Energy Sector The United States retail petroleum sector is composed of service stations, convenience stores, and other related retail establishments which provide branded and independent fuel for motor vehicle consumption. According to industry sources such as the U.S. Federal Highway Administration, Bureau of Labor Statistics and National Petroleum News ("NPN"), retail petroleum sector sales for the year ended December 31, 1997 approximated $235 billion. According to NPN, the service station sector included approximately 183,000 units. The Company believes that these units are generally well located as a result of the early origins of these units relative to convenience stores and other retail merchants. According to the National Association of Convenience Stores (NACS), at December 31, 1997, there were approximately 95,700 domestic convenience stores of which approximately 73% distributed fuel. According to NACS, convenience store industry sales were $156.2 billion, of which $83.8 billion were motor fuel sales. According to the U.S. Federal Highway Administration, 124.3 billion gallons of gasoline were sold in the U.S. in 1997. The strength in demand reflects United States economic growth, the increase in the total vehicle miles traveled and the growing popularity of sport utility vehicles and minivans. The Company believes the retail energy sector is currently underserved by traditional lenders. Increasing sales and profit margins for gasoline retailers, the perceived diminished risk of lender liability for environmental clean-up costs and heightened profitability in multi-profit service stations/convenience store combinations should increase demand for financing. In addition, the Company believes that service station consolidation has also created lending opportunities arising out of the demand for acquisition financing. The Golf Sector In the United States, golf courses handled approximately 547 million rounds in 1997, a compound annual growth rate of 2.4% from 1993. According to the National Golf Foundation (NGF), the overall number of golfers increased 7% to 26.5 million, the highest number of golfers since 1990. Currently, 25% of golfers are over 50 years of age, with 47.2% between the ages of 18 and 39. The National Golf Foundation (NGF) statistics show that golfers in their 50's play three times as much as golfers between the ages of 18 and 39. The number of rounds played should significantly increase as the baby-boomer segment of the population heads toward retirement age. In addition, for the past 10 years, the game has added approximately two million beginners a year, with the 18 to 29 age group producing the largest single sub-segment. In 1997, there was a 51% increase in the number of beginner golfers to three million while the game also recognized a 34% increase in junior golfers (defined as individuals between the ages of 12 and 17). 7 According to NGF, 429 new golf courses were opened in 1997, of which 285 were new facilities and 144 were expansions of existing facilities. As of December 31, 1997, there were 932 courses under construction, of which 655 were new facilities and 277 were expansions of existing facilities. According to NGF data, there were 719 courses in the planning stages (not yet under construction), of which 576 were new facilities while 143 were expansions of existing facilities. Of the courses under construction at the end of 1997, it is estimated that as many as 485 courses will open in 1998. NGF defines a golf facility as a facility with at least one nine-hole course and that may include different types of courses, such as regulation-length courses, executive- length courses, and par-3 length courses. In 1997, there were 14,602 golf facilities consisting of 16,010 golf courses. Of the total number of facilities in the U.S., 71% were public access. The Company believes that the golf sector has the following similar characteristics to other sectors that the Company currently lends to: positive cash flow from operations, golf course and facility ownership is broad and diverse geographically, and the industry is underserved by traditional lenders. Increased golf usage has driven demand for loans for renovation and construction, while increased dollars spent at golf courses has driven demand for loans for golf course and facilities acquisitions. The Funeral Services Sector The funeral services industry (more generally referred to as the death care industry) includes funeral homes, cemeteries, crematoria and memorial parks, as well as merchandise such as urns, caskets, memorials, and vaults. There are an estimated 23,000 funeral homes and 10,500 private cemeteries in the United States. A funeral home or cemetery builds a customer base that can last for several generations. The industry is highly fragmented and undergoing intense consolidation. Acquisition activity has accelerated dramatically over the past few years both in the U.S. and abroad. Owners of funeral homes and cemeteries have had few alternatives to finance their businesses at their true value and are in general under leveraged. Finance sources have historically consisted primarily of local banks, the Small Business Administration, and other commercial finance lenders. This lack of readily available financing has made it difficult for operators to remain independent. Based on research conducted in the latter half of 1997, the Company has determined that a large portion of funeral home owners desire to remain independent, to have a succession plan for their businesses and to have an alternative to selling out. The number of deaths in the U.S is increasing roughly 1% per year, a rate that is expected to remain fairly steady for the next 10 years. The death rate should begin to accelerate in 15 years with the aging of the baby boomer generation. Essentially, death care is a non-cyclical business, with modest but steady volume growth. A seasonality is present in the industry with deaths increasing during colder months, and death rates can vary by region. According to the 1995 U.S. Census report, average deaths in the U.S. were 8.8 per 1,000 population. Roughly 2.3 million deaths occurred in 1995 which is expected to grow to 2.4 million by 2000, 2.6 million by 2010, and 4.0 million by 2050. In an industry where demand is growing only 1% annually, local market share is the key to growth in profitability, as incremental margins are exceedingly high when fixed costs are covered. In addition, revenue enhancement and opportunities for cost savings are important to profit growth on a "same- store" basis. Data received from the National Funeral Directors Association and supported by a Company survey to the industry suggest that over 95% of funeral home operators own the land and building on which their businesses reside, the average business has been under the same ownership for in excess of 20 years, and death care businesses generate significant amounts of cash flow. The Company believes that the funeral services sector offers similar characteristics to other sectors to which the Company currently lends, including positive cash flow from operations, broad and geographically diverse ownership, and the fact that the industry has been historically underserved by traditional lenders. The Company is actively providing independent operators and small to medium size consolidators with a competitively structured source of debt financing. 8 The Multi-Family Income Property Sector According to the 1997 Housing and Urban Development survey of mortgage lending activity, commercial banks and savings and loan associations originated 68.1% of the multi-family loans in the United States followed by mortgage companies which originated 22.4% for the same period. The National Multi Housing Council ("NMHC") reported that there were 101 million U.S. households in 1997, of which 35 million households rented their units. The NMHC went on to report that apartment properties with 5 or more units make up the single largest category of rental property types, accounting for over 15 million households and 30 million people. The Insurance Services Sector Insurance products can be offered to an assortment of businesses from small organizations to Fortune 1000 companies serving an array of industries from manufacturing to retail to financial services. All of these companies need and require insurance. Insurance products vary from company to company as well, including property, casualty, surety, life, health, and accident. The Company acts only as a broker with respect to the offering of such products to its customers. As a part of its loan origination process, the Company requires its Borrowers to maintain certain types of insurance in order to secure loans. The Company believes that it has an inherent competitive advantage in marketing insurance products to its Borrowers because its target market is identified directly through its loan origination and servicing efforts. Loan Originations Types of Loan 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 loans. Substantially all of the Company's permanent loans are self-amortizing long-term fixed or adjustable rate loans provided for purposes other than development and construction of business units. Permanent loans 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. The Company focuses on the cash flow of the subject business, the continuing ability of the Borrower to operate the business unit in a cash positive manner and the Borrower's ability to repay the loan since neither the real property mortgage nor the franchise or license agreement is generally assignable to secure the loan. In determining enterprise value, in addition to a Borrower's credit profile, the Company focuses on the following factors: . Business Profitability. The Company seeks to lend to Borrowers whose subject business operations provide adequate cash flow to support loan payments. . Strength of Business Concept. The Company emphasizes loans to Borrowers whose subject business has significant national or regional market penetration. . Operating Experience. The Company emphasizes loans to Borrowers having ownership of multiple business units with strong industry backgrounds. . Site Considerations. The Company focuses on a business' location, physical condition and environmental characteristics. Location. The Company lends to Borrowers with business units located in high traffic areas that it believes exhibit strong retail property fundamentals. 9 Physical Condition. The Company loans to Borrowers investing in well- maintained existing properties or in newly constructed properties. Each group uses third party appraisal professionals who conduct physical site inspections of each subject property. Environmental. The Energy Finance Group has an internal environmental department, currently consisting of three experienced environmental professionals. The Company's environmental process does not require either Phase I or Phase II inspections, but a pragmatic detailed questionnaire that requires the attachment of both federal and state documentation and certification. . Collateral. Loans are partially secured by taking a first lien on all available furniture, fixtures and equipment. Where the available collateral includes a building on a ground lease, the Company requires an assignment of the lease in addition to a security interest on the building and on the furniture, fixtures and equipment. If the collateral includes owned real estate, the Company also obtains a first mortgage on the property. Borrowers with additional collateral are generally afforded better credit terms. Depending on the collateral provided, loan to value ratios, up front fees and interest rates are adjusted to properly reflect credit risk. Development and Construction Loans. DEVCO loans are offered to fund the development and construction of new business units. DEVCO 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. Adjustable rate DEVCO loans generally have an 18 month maturity and fixed rate DEVCO loans generally have a 15 year maturity. Both adjustable and fixed rate DEVCO loans generally provide an initial 18 month period necessary for the unit to be constructed and sales to stabilize. Within the initial 18 month period, the unit is appraised and a final loan amount is then determined, using actual unit level performance. After 18 months, the Borrower can apply for a permanent loan which will be re-underwritten, converting the adjustable rate DEVCO to the permanent loan. The Company believes that DEVCO loans create a pipeline for the Company's permanent loans. As a result of fee incentives built into the adjustable rate DEVCO loans, Borrowers generally look to convert into permanent loans on the maturity date. DEVCO loans are secured by the real property mortgage or leasehold interest as well as all available furniture, fixtures and equipment. 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 the Borrower 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. 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. Multi-Family Loans. Substantially all of the Companys 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 years yield maintenance period. Fixed rate loans are tied to the U.S. Treasury rates. Many of the Company's multi-family loans require balloon payments at the maturity date, which facilitates continual refinancing. 10 Lending Groups The Company's focus at inception was to provide secured financing to franchisees of Taco Bell Corp. After establishing an infrastructure and credit expertise, the Company began expanding its QSR concepts, loaning to casual dining concepts and moving into other related lending sectors such as retail energy, golf, 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 Group 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. For the year ended December 31, 1998, this group originated $675 million of loans. From the Company's inception in 1991 through December 31, 1998, the Diversified Finance Group provided approximately $2.1 billion in financing to Borrowers. The following table sets forth the Diversified Finance Group's loan originations for the periods indicated by franchise concept and loan type:
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996 -------------------------------- -------------------------------- -------------------------------- Number Principal % of Number Principal % of Number Principal % of of Loans Amount Total of Loans Amount Total of Loans Amount Total Originated Originated Originated Originated Originated Originated Originated Originated Originated ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Restaurant: QSRs: Taco Bell........... 255 $216,134 32.0% 281 $216,212 38.1% 237 $176,923 40.9% Wendy's............. 78 63,371 9.4 56 43,426 7.7 41 34,249 7.9 Burger King......... 59 46,475 6.9 82 69,881 12.3 105 100,517 23.2 KFC................. 52 29,090 4.3 61 30,306 5.3 19 12,311 2.8 Other QSR(1)........ 89 48,357 7.2 146 66,270 11.7 105 66,450 15.5 --- -------- ----- ---- -------- ----- ----- -------- ----- Total QSR.......... 533 403,427 59.8 6264 26,095 75.1 507 390,450 90.3 Casual Dining: Bojangles'.......... 131 78,000 11.6 -- -- -- -- -- -- Applebee's.......... 55 57,329 8.5 16 21,760 3.8 4,750 3 1.1 Golden Corral....... 12 19,607 2.9 6 10,082 1.8 5 14,450 3.3 Pizza Hut........... 29 18,033 2.7 3 1,919 0.3 16 8,093 1.9 Other Casual Dining(1) 39 33,499 5.0 111 74,409 13.1 10 14,787 3.4 --- -------- ----- ---- -------- ----- ----- -------- ----- Total Casual Dining............ 266 206,468 30.7 136 108,170 19.0 34 42,080 9.7 --- -------- ----- ---- -------- ----- ----- -------- ----- Total Restaurant... 799 609,895 90.5 762 534,265 94.1 541 432,530 100.0 Total Golf......... 5 8,850 1.3 9 33,218 5.9 -- -- -- Total Funeral...... 46 56,361 8.2 -- -- -- -- -- -- --- -------- ----- ---- -------- ----- ----- -------- ----- Grand Total........ 850 $675,106 100.0% 771 $567,483 100.0% 541 $432,530 100.0% === ======== ===== ==== ======== ===== ===== ======== =====
- -------- (1) Concepts represent less than 2.0% of 1998 originations. 11 FMAC Golf Finance Group LLC. FMAC Golf Finance Group LLC ("FGFG") was established in April 1998 to provide loans to national, regional, and local operators of golf courses and golf practice facilities. From its inception through December 31, 1998, FGFG provided approximately $30.0 million in financing to Borrowers. Currently, the Company is not actively originating golf loans and is in the process of winding down its golf operations. 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. For the year ended December 31, 1998, this group originated $466 million of energy loans. From its inception in 1997 through December 31, 1998, the Energy Finance Group provided approximately $647 million in financing to Borrowers. The following table sets forth the Energy Finance Group's loan originations for the periods indicated by franchise concept:
Year Ended December 31, 1998 Year Ended December 31, 1997 -------------------------------- -------------------------------- Number Principal % of Number Principal % of of Loans Amount Total of Loans Amount Total Originated Originated Originated Originated Originated Originated ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Exxon................... 48 $ 77,375 16.6% 84 $ 77,058 42.6% Texaco.................. 46 61,924 13.3 25 29,137 16.1 Citgo................... 97 57,920 12.4 9 8,758 4.8 Amoco................... 65 56,178 12.0 6 3,115 1.7 Chevron................. 59 50,118 10.7 21 16,322 9.0 Other(1)................ 207 162,975 35.0 67 46,444 25.8 --- -------- ----- --- -------- ----- Grand Total........... 522 $466,490 100.0% 212 $180,834 100.0% === ======== ===== === ======== =====
- -------- (1) Concepts represent less than 10.0% of 1998 originations. 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. From its inception in April 1998 through December 31, 1998, the Multi-Family Finance Group funded $887 million in multi-family loans. Loan programs include Fannie Mae DUS, Bankers Capital and Freddie Mac Program Plus. As of December 31, 1998, the multi-family loan servicing portfolio had an unpaid principal balance of $2.8 billion with $4.1 million, or 0.15%, which were 30--59 days delinquent. 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 year ended December 31, 1998, this group originated $85 million of loans and leases. From its inception in 1996 through December 31, 1998, the Equipment Finance Group provided approximately $140 million in financing to Borrowers. 12 The following table sets forth the Company's loan and lease origination activity by sector for the periods indicated:
Year Ended December 31, 1998 Year Ended December 31, 1997 ------------------------------------------------ ------------------------------------------------ % of % of Weighted Principal Principal Weighted Principal Principal Lending Sector Number of Average Amount Amount Number of Average Amount Amount an Type of Originationd Originations Interest Rate Originated Originated Originations Interest Rate Originated Originated - ----------------------- ------------ ------------- ---------- ---------- ------------ ------------- ---------- ---------- (Dollars in thousands) Restaurant Loans: Fixed-rate loans........... 788 8.89% $ 600,847 28.0% 635 10.04% $421,108 52.6% Variable-rate loans........... 11 9.23 9,048 0.4 127 9.55 113,157 14.1 ----- ---------- ----- ----- -------- ----- Total (1)....... 799 8.90 609,895 28.4 762 9.93 534,265 66.7 Golf Loans(2): Fixed-rate loans........... 12 8.82 33,890 1.6 7 10.83 21,030 2.6 Variable-rate loans........... 2 10.17 5,000 0.2 2 9.47 12,188 1.5 ----- ---------- ----- ----- -------- ----- Total (3)....... 14 9.00 38,890 1.8 9 10.33 33,218 4.1 Funeral Loans: Fixed-rate loans........... 42 9.39 53,314 2.5 -- -- -- -- Variable-rate loans........... 4 9.87 3,047 0.1 -- -- -- -- ----- ---------- ----- ----- -------- ----- Total (4)....... 46 9.42 56,361 2.6 -- -- -- -- Retail Energy Loans: Fixed-rate loans........... 498 9.13 432,060 20.2 181 10.08 158,726 19.8 Variable-rate loans........... 24 9.83 34,430 1.6 31 9.84 22,108 2.8 ----- ---------- ----- ----- -------- ----- Total (5)....... 522 9.18 466,490 21.8 212 10.05 180,834 22.6 Multi-Family Loans: Fixed-rate loans........... 102 6.55 798,424 37.3 -- -- -- -- Variable-rate loans........... 5 6.78 88,175 4.1 -- -- -- -- ----- ---------- ----- ----- -------- ----- Total........... 107 6.57 886,599 41.4 -- -- -- -- Equipment Finance: Fixed-rate loans and leases...... 384 10.73 85,079 4.0 254 12.14 52,722 6.6 ----- ---------- ----- ----- -------- ----- Total loan and lease originations.... 1,872 8.09% $2,143,314 100.0% 1,237 10.12% $801,039 100.0% ===== ========== ===== ===== ======== ===== Year Ended December 31, 1996 ------------------------------------------------ % of Weighted Principal Principal Lending Sector Number of Average Amount Amount an Type of Originationd Originations Interest Rate Originated Originated - ----------------------- ------------ ------------- ---------- ---------- Restaurant Loans: Fixed-rate loans........... 292 10.24% $218,765 47.6% Variable-rate loans........... 249 9.31 213,765 46.5 ------------ ---------- ---------- Total (1)....... 541 9.78 432,530 94.1 Golf Loans(2): Fixed-rate loans........... 2 10.95 14,200 3.1 Variable-rate loans........... 3 9.74 10,251 2.2 ------------ ---------- ---------- Total (3)....... 5 10.44 24,451 5.3 Funeral Loans: Fixed-rate loans........... -- -- -- -- Variable-rate loans........... -- -- -- -- ------------ ---------- ---------- Total (4)....... -- -- -- -- Retail Energy Loans: Fixed-rate loans........... -- -- -- -- Variable-rate loans........... -- -- -- -- ------------ ---------- ---------- Total (5)....... -- -- -- -- Multi-Family Loans: Fixed-rate loans........... -- -- -- -- Variable-rate loans........... -- -- -- -- ------------ ---------- ---------- Total........... -- -- -- -- Equipment Finance: Fixed-rate loans and leases...... 16 12.14 2,539 0.6 ------------ ---------- ---------- Total loan and lease originations.... 562 9.83% $459,520 100.0% ============ ========== ==========
- ---- (1) For the year ended December 31, 1998, 88.7% and 11.3% of the Company's restaurant loans consisted of permanent and DEVCO loans, respectively; such percentages were 70.3% and 29.7% at December 31, 1997 and 75.4% and 24.6% at December 31, 1996. (2) Includes loans originated through FGFG. (3) For the years ended December 31, 1998, 1997 and 1996, all of the Company's golf loans were permanent loans. (4) For the year ended December 31, 1998, 94.6% and 5.4% of the Company's funeral loans consisted of permanent and DEVCO loans, respectively. (5) For the year ended December 31, 1998, 94.3% and 5.7% of the Company's retail energy loans consisted of permanent and DEVCO loans, respectively such percentages were 80.9% and 19.1% at December 31, 1997. 13 Geographic Distribution--The following table sets forth by state the number of loans and leases originated by the Company for the periods presented:
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996 ---------------------------------- ---------------------------------- ---------------------------------- Principal % of Principal % of Principal % of Number of Amount Total Number of Amount Total Number of Amount Total Originations Originated Originated Originations Originated Originated Originations Originated Originated ------------ ---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- (Dollars in Thousands) California(1).... 267 $ 971,238 45.3% 182 $114,488 14.3% 42 $ 33,209 7.2% Texas............ 295 185,083 8.6 67 62,054 7.7 42 29,264 6.4 North Carolina... 153 105,277 4.9 78 48,097 6.0 21 23,106 5.0 Nevada........... 17 83,945 3.9 12 14,895 1.9 18 11,284 2.5 Virginia......... 86 70,905 3.3 47 34,883 4.4 17 35,913 7.8 South Carolina... 100 68,726 3.2 23 16,311 2.0 21 17,022 3.7 Tennessee........ 69 63,831 3.0 12 4,231 0.5 15 10,980 2.4 Michigan......... 48 60,580 2.8 64 43,890 5.5 7 4,848 1.1 Georgia.......... 79 52,307 2.4 115 85,281 10.6 11 11,052 2.4 Other States(2)....... 758 481,422 22.6 637 376,909 47.1 368 282,842 61.5 ----- ---------- ----- ----- -------- ----- --- -------- ----- Totals:......... 1,872 $2,143,314 100.0% 1,237 $801,039 100.0% 562 $459,520 100.0% ===== ========== ===== ===== ======== ===== === ======== =====
- -------- (1) The increase in total originations in 1998 for the State of California was primarily attributable to the addition of the Multi-Family Finance Group. (2) Other states represent loan originations that are less than 2.0% of total 1998 originations. Competition The Company faces intense competition in the business of originating and selling loans and leases. Traditional competitors in the financial services business include commercial banks, thrift institutions, diversified finance companies, asset-based lenders, franchise finance companies and real estate investment trusts. Many of these competitors in the commercial finance business are substantially larger and have considerably greater financial, technical and marketing resources than the Company. In addition, many financial service organizations have formed national networks for loan and lease originations substantially similar to the Company's loan and lease programs. Competition can take many forms including convenience in obtaining a loan or lease, customer service, marketing and distribution channels, amount and term of the loan, and interest or credit ratings. In addition, the current level of gains realized by the Company and its competitors on the sale of loans and leases could attract additional competitors into this market with the possible effect of lowering gains on future loan and lease sales due to increased loan and lease origination competition. The Company believes that its industry expertise and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. Regulation Lending Laws Certain aspects of the Company's businesses are subject to regulation and supervision at both the federal and state level. Regulated matters include loan origination, credit activities, maximum interest rates and finance and other charges, disclosure to customers, the collection, foreclosure, repossession and claims handling procedures utilized by the Company, multiple qualification and licensing requirements for doing business in various jurisdictions and other trade practices. Future Laws The laws, rules and regulations applicable to the Company are subject to modifications and change. There can be no assurance that rules and regulations, or other such laws will not be adopted in the future which could make compliance more difficult or expensive, restrict the Company's ability to originate or sell loans, the amount of interest and other charges earned on loans originated or sold by the Company, or otherwise adversely affect the business or prospects of the Company. 14 Government Sponsored Enterprises The Multifamily Finance Group is required to originate, underwrite and service the loans in accordance with the standards as set forth in writing by Government Sponsored Enterprises ("GSEs"). These standards, which are continually updated, are important and allow for continuity in the secondary market for the ultimate investors in the mortgage-backed securities. The Multifamily Finance Group is subject to annual audits by GSEs. There has never been a material finding associated with any audit from the GSEs. Environmental Liability Generally Contamination of real property by hazardous substances may give rise to a lien on that property to assure payment of the cost of clean-up or, in certain circumstances subject the lender to liability. Such contamination may also reduce the value of the business property. Under the laws of some states and under the Comprehensive Environmental Response, Compensation, and Liability Act, a lender may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the property if the lender engages in certain activities. Environmental Laws Affecting Borrowers in Specific Sectors Environmental Regulations Affecting Franchises. The operation and management of franchise businesses (whether pursuant to direct ownership, lease or management contract) may involve the use and limited storage of certain hazardous materials. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Environmental Regulations Affecting Retail Energy Businesses. The operation and management of retail energy businesses (whether pursuant to direct ownership, lease or management contract) involves the use and limited storage of certain hazardous materials. Specifically, the Company's Borrowers in the retail energy sector incur ongoing costs to comply with federal, state and local environmental laws and regulations governing Underground Storage Tanks ("USTs") used in their operations. The Company's loans may be secured by convenience store and gas station locations with USTs and other environmental risks. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Under various federal, state, local and foreign laws, ordinances and regulations, various categories of persons, including owners, operators or managers of real property may be liable for the costs of investigation, removal and remediation of hazardous substances that are or have been released on or in their property even if such releases were by former owners or occupants. In addition, any liability to Borrowers for assessment and remediation activities in connection with releases into the environment of gasoline or other regulated substances from USTs or otherwise at such Borrowers' gasoline facilities could adversely impact the Borrowers' ability to repay their loans from the Company or the value of any pledged collateral. Due to the nature of releases, the actual costs incurred may vary and the ongoing costs of assessment and remediation activities may vary from year to year and may adversely impact such Borrowers' ability to repay their loans. Most states have funds which provide reimbursement to qualified storage tank owners/operators for assessment and remediation costs associated with petroleum releases (after the operator pays a set deductible and co-payment amount). Most funds are supported by annual tank registration fees paid by the station owners and a gasoline fee, included in the price of the gas, which is paid by consumers. There have been an increasing number of UST replacements in recent years. Consequently, some state funds have been drained of reserves. The result is a delay in disbursement until the fund can be replenished with fee collections, the effect of which may have an adverse effect on the borrowers' financial condition and ability to repay its loan. Environmental Regulations Affecting Golf Courses and Facilities. The operation and management of golf courses and golf practice and instruction facilities (whether pursuant to direct ownership, lease or management contract) involve the use and limited storage of certain hazardous materials such as herbicides, pesticides, fertilizers, motor oil, gasoline and paint. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. 15 Impaired Property Insurance Policy The Company will be entitled to the benefit of a Secured Creditor Impaired Property Insurance Policy (the Policy) issued by Commerce and Industry Insurance Company, a member company of American International Group, Inc. (the Insurer) with respect to energy loan mortgaged properties. The following summary describes certain provisions of the Policy. The summary does not purport to be complete and is subject to, and qualified in its entirety by reference to the provisions of the Policy. The Policy will insure the Company, subject to terms of the Policy, against the following claims, expenses, and losses made or incurred during the Policy period which result from existing and known environmental contamination that has been disclosed to the Insurer or environmental contamination that is discovered during the effective period of the Policy of energy loan mortgaged properties: either (i) certain clean-up costs relating to certain pollution conditions required to be paid by the Company with respect to any such mortgaged property, or (ii) loss resulting from a default by a related borrower in an amount equal to the lesser of the outstanding principal balance of the related energy loan and certain clean-up costs with respect to such mortgaged properties where the pollution condition is first discovered by the insured during the Policy period. The maximum recovery under the Policy is $2 million per loss and $25 million overall, with a $10,000 deductible on each loss. The Policy expires in the year 2017. Employees As of February 28, 1999, the Company had approximately 370 employees. Management believes that its relations with these employees are satisfactory. The Company is not party to any collective bargaining agreement. Item 2. PROPERTIES The Company's executive and administrative offices are located in the Century City area of Los Angeles, California. The Diversified Finance Group is headquartered in Englewood, Colorado; the Energy Finance Group is headquartered in Morristown, New Jersey; the Equipment Finance Group is headquartered in Greenwich, Connecticut; the Multi-Family Finance Group is headquartered in Newport Beach, California; and the Insurance Services Group is headquartered in the Company's Century City office. The Company leases 29 additional marketing offices nationwide and owns one office in Columbus, Nebraska which is secured by a promissory note and deed of trust. Management believes these properties are adequate and suitable for the Companys ongoing operations. Item 3. LEGAL PROCEEDINGS The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. On March 25, 1999, the Superior Court entered an order in connection with the action, a portion of which was stayed on March 29, 1999. The stayed portion included, among other things, an order to dissolve Franchise Mortgage Acceptance Co., L.P. ("FMACLP"), a partnership of which FLRT, Inc. is the general partner and which was formed in 1991 to originate and securitize franchise loans, and an order requiring an accounting by FLRT, Inc. and Mr. Knyal to the limited partners of FMACLP. The unstayed portion of the order includes a finding, among other things, that Mr. Knyal and FLRT, Inc. breached the FMACLP partnership agreement and that the limited partners of FMACLP have a right to a portion of the shares of the Company owned by FLRT, Inc. or Mr. Knyal, and of the proceeds realized from any sale of FLRT, Inc.'s or Mr. Knyal's Company shares after November 1997. The order also states that Mr. Knyal and FLRT, Inc. may not dispose of or encumber any shares of the Company held by either of them, and that Mr. Knyal may not dispose of or encumber any shares of FLRT, Inc. held by him. Counsel to the predecessor entity and Mr. Knyal and counsel to FMACLP, which is not a party to the action, believe that the action is without merit, and counsel to the predecessor entity and Mr. Knyal intend to appeal the order and intend to vigorously defend the action. Although the Company is not a party to the action, Imperial Credit Industries, Inc. ("ICII"), Mr. Knyal and FLRT, Inc. have agreed to indemnify the Company against any and all liability that the Company and its stockholders (other than ICII, Mr. Knyal and FLRT, Inc.) may incur as a result of this lawsuit. The Company has been named as a defendant in other legal actions, which legal actions have arisen in the ordinary course of business, none of which management believes to be material. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the NASDAQ National Market System under the symbol FMAX. The following table presents the quarterly high and low bid quotations in the over-the-counter market as reported on the NASDAQ National Market System for the period from November 18, 1997, when public trading of the common stock commenced. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Market Price ------------- High Low ------ ------ 1998 1st Quarter................................................. $26.25 $16.00 2nd Quarter................................................. $28.25 $20.50 3rd Quarter................................................. $27.00 $ 6.25 4th Quarter................................................. $10.19 $ 3.50 1997 1st Quarter................................................. N/A N/A 2nd Quarter................................................. N/A N/A 3rd Quarter................................................. N/A N/A 4th Quarter (beginning November 18)......................... $20.00 $15.88
According to the report of beneficial owners provided by the Depository Trust Company, the approximate number of shareholders of record of the Company's common stock on January 29, 1999 was 102. During the years ended December 31, 1998 and 1997, the company neither declared nor paid any dividends to its stockholders. Item 6. SELECTED FINANCIAL DATA
Predecessor ----------------------- Six Months Six Months Year Year Ended Ended Ended Ended December 31, December 31, June 30, December 31, ------------------------- ------------ ---------- ------------ 1998 1997 1996 1995 1995 1994 ------- ------- ------- ------------ ---------- ------------ (In thousands, except per share data and ratios) Statement of Operations Data: Revenues: Gain on sales of loans and leases(1)........ $40,146 $52,117 $18,671 $ -- $ -- $4,052 Net interest income... 17,119 5,156 1,641 239 154 37 Loan servicing income............... 18,507 3,314 1,191 349 326 306 Loss on transfer of loans to held for investment........... (8,845) -- -- -- -- -- Other income (loss)... 650 (111) 63 -- -- 68 ------- ------- ------- ----- ------- ------ Total revenues...... 67,577 60,476 21,566 588 480 4,463 ------- ------- ------- ----- ------- ------ Expenses: Personnel............. 26,306 13,636 8,270 356 931 1,723 General and administrative....... 8,313 3,826 1,094 294 684 1,804 Other................. 19,147 7,293 2,878 597 776 1,664 ------- ------- ------- ----- ------- ------ Total expenses...... 53,766 24,755 12,242 1,247 2,391 5,191 ------- ------- ------- ----- ------- ------ Income (loss) before income taxes and minority interest in subsidiary........... 13,811 35,721 9,324 (659) (1,911) (728) Minority interest in subsidiary............. (8) -- -- -- -- -- Income taxes(2)......... 5,528 15,001 -- -- -- -- ------- ------- ------- ----- ------- ------ Net income (loss)... $ 8,291 $20,720 $ 9,324 $(659) $(1,911) $ (728) ======= ======= ======= ===== ======= ====== Basic and diluted income per share(3)........... $ 0.29 $ 0.91 ======= =======
17
As of December 31, ------------------------------------------------ Predecessor 1998 1997 1996 1995 1994 -------- -------- -------- -------- ----------- (In thousands) Balance Sheet Data: Cash and cash equivalents.... $ 33,425 $ 7,335 $ -- $ -- $ 102 Securities available for sale........................ 16,818 22,870 39,349 -- 9,541 Loans and leases held for sale........................ 325,727 343,200 98,915 181,254 -- Loans and leases held for investment.................. 162,928 -- -- -- -- Retained interest in loan securitizations............. 29,952 21,652 6,908 -- -- Servicing rights............. 29,905 2,213 -- -- -- Accrued interest receivable.. 2,587 2,758 560 1,108 138 Goodwill..................... 37,353 4,315 4,332 4,226 -- Other assets................. 37,619 17,889 10,112 2,460 467 -------- -------- -------- -------- ------- Total assets............... 676,314 422,232 160,176 189,048 10,248 Payable to Imperial Credit Industries, Inc............. -- -- 17,728 -- -- Overdraft.................... -- -- 171 445 -- Borrowings................... 483,763 256,220 125,240 181,632 13,548 Income taxes(2).............. 19,706 15,001 -- -- -- Other liabilities............ 26,140 12,589 2,580 3,198 1,543 -------- -------- -------- -------- ------- Total liabilities.......... 529,609 283,810 145,719 185,275 15,091 Minority interest in subsidiary.................. (8) Members' equity.............. -- -- $ 14,457 $ 3,773 $(4,843) ======== ======== ======= Total stockholders' equity.................... $146,713 $138,422 ======== ========
Year Ended December 31, ------------------------------------------------------- Predecessor 1998 1997 1996 1995 1994 ---------- ---------- -------- -------- ----------- (In thousands, except ratios) Operating Statistics: Loan originations: Total loan originations......... $2,058,235 $ 748,317 $456,981 $218,742 $109,166 Average initial principal balance per loan................. $ 1,383 $ 761 $ 837 $ 706 $ 635 Number of loans....... 1,488 983 546 310 172 Weighted average interest rate: Fixed rate loans.... 7.98% 10.08% 10.29% 10.12% 10.21% Variable rate loans.............. 7.88% 9.58% 9.34% 8.40% 8.13% Equipment finance originations: Total equipment finance originations......... $ 85,079 $ 52,722 $ 2,539 $ -- $ -- Average principal balance per financing............ $ 222 $ 258 $ 159 $ -- $ -- Number of financings.. 384 250 16 -- -- Weighted average interest rate........ 10.73% 12.14% 12.14% -- % -- % Total loan and lease originations:.......... $2,143,314 $ 801,039 $459,520 $218,742 $109,166 Loan sales: Whole loan sales(1)... 14,394 $ 50,800 $ -- $ -- $ -- Loans sold through securitizations(1)... 1,122,186 483,100 325,088 147,972 105,686 ---------- ---------- -------- -------- -------- Total............... 1,136,580 $ 533,900 $325,088 $147,972 $105,686 Loans and leases held in servicing portfolio(4)........... $5,422,879 $1,629,067 $737,176 $358,579 $180,367 Net charge-offs as a percentage of total servicing portfolio.... 0.001% -- % -- % -- % -- %
- -------- (1) Gain on sale for the years ended December 31, 1998, 1997 and 1996 includes $23.8 million, $54.2 million and $11.5 million of cash gains before hedge gains (losses) of ($31.1) million, ($5.1) million and $0.4 million, of which $13.4 million, $6.1 million and $7.8 million, respectively, represented loan fees. The gain on sale of loans for the December 1995 securitization was not recognized until the first quarter of 1996. (2) From July 1, 1995 through November 18, 1997, the Company qualified to be treated as a limited liability company, which is similar to a partnership, for federal and state income tax purposes. As a result of terminating the Company's LLC status upon completion of the Initial Public Offering, the Company was 18 required to record a one-time non-cash charge of $11.0 million against historical earnings for deferred income taxes. This charge occurred in the quarter ended December 31, 1997 and the year ended December 31, 1997. (3) For the year ended December 31, 1998 and 1997, weighted average basic outstanding shares of 28,715,625 and 22,669,949, respectively, and weighted average diluted outstanding shares of 28,976,111 and 22,669,949, respectively, were used in computing income per share. (4) Delinquencies 90 or more days past due as a percentage of all loans and leases held in the Company's servicing portfolio were 1.06% and 0.8% as of December 31, 1998 and 1997, respectively. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's financial statements and notes thereto appearing elsewhere herein. Results of Operations Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Year Ended December 31, ------------------ 1998 1997 -------- -------- (In thousands) Revenues: Gain on sale of loans and leases.......................... $ 40,146 $ 52,117 Interest income........................................... 55,439 26,758 Interest expense.......................................... (38,320) (21,602) -------- -------- Net interest income..................................... 17,119 5,156 Loan servicing income..................................... 18,507 3,314 Loss on transfer of loans to held for investment.......... (8,845) -- Other income (loss)....................................... 650 (111) -------- -------- Total revenues.......................................... 67,577 60,476 -------- -------- Expenses: Personnel................................................. 26,306 13,636 Professional services..................................... 4,057 2,416 Travel.................................................... 3,517 1,585 Business promotion........................................ 4,203 1,251 Provision for losses...................................... 2,644 933 Occupancy................................................. 2,504 683 Goodwill amortization..................................... 2,222 425 General and administrative................................ 8,313 3,826 -------- -------- Total expenses.......................................... 53,766 24,755 -------- -------- Income before tax and minority interest in subsidiary..... 13,811 35,721 Minority interest in subsidiary........................... (8) -- Income taxes.............................................. 5,528 15,001 -------- -------- Net income.............................................. $ 8,291 $ 20,720 ======== ========
Total revenues increased 11.7% to $67.6 million for the year ended December 31, 1998 from $60.5 million for the comparable period in 1997. During the same periods, the Company's total expenses increased 117.2% to $53.8 million from $24.8 million. As a result, net income decreased 60.0% to $8.3 million for the year ended December 31, 1997 as compared to $20.7 million in 1996. 19 The increase in revenues was primarily attributable to a $12.0 million decrease in gain on sale of loans and leases, a $12.0 million increase in net interest income, a $15.2 million increase in servicing income, and $8.8 million of losses associated with the transfer of loans to held for investment. For the year ended December 31, 1998, the Company sold approximately $1.1 billion of loans and leases in five securitizations and one whole loan and lease sale for a gain on sale of $31.5 million (of which $23.8 million was cash, before hedge losses of $31.1 million) as compared to $533.9 million of loans sold in three securitizations and five whole loan sales for a gain on sale of $50.1 million (of which $54.2 million was cash, before hedge losses of $5.1 million) for the year ended December 31, 1997. Additionally, $8.6 million in net loan fees was recognized in 1998 as compared to $2.0 million in 1997. The decreased gain on sale of loans was due to several factors, including the composition of loans in the securitizations and whole loan sales, the structure of the securitizations, as well as market conditions at the time of the securitization transactions. The most significant reason for the decrease in gain on sale was the amount of hedge losses, approximately $31.1 million for the year ended December 31, 1998, sustained primarily as a result of unanticipated changes in market conditions during the third and fourth quarters of 1998. Net interest income contributed to the increase in revenues, increasing 232.0% to $17.1 million for the year ended December 31, 1998 as compared to $5.2 million for the same period in 1997. This increase is due to the significant increase in loans and leases held for sale which resulted from increased loan and lease originations as well as the addition of the Multi- Family Finance Group. Loan servicing income increased 458.4% to $18.5 million for the year ended December 31, 1998 as compared to $3.3 million for the same period in 1997. This was due to an increase in loans and leases serviced which resulted from the securitization of $1.1 billion in loans and leases during 1998 with servicing rights retained by the Company as well as an increase of $2.8 billion in loans directly related to the addition of Multi-Family Finance Group. The losses incurred as a result of transferring loans from held for sale to held for investment were primarily related to hedge losses sustained as a result of unanticipated changes in market conditions during the third and fourth quarters of 1998. Total expenses increased 117.2% to $53.8 million for the year ended December 31, 1998 as compared to $24.8 million for the same period of the prior year primarily due to infrastructure additions needed to fund increased loan and lease originations as well as the addition of the Multi-Family Finance Group. Personnel expenses increased 92.9% to $26.3 million, professional services increased 67.9% to $4.1 million, travel increased 121.9% to $3.5 million, business promotion increased 236.0% to $4.2 million, provision for losses increased 183.4% to $2.6 million, occupancy increased 266.6% to $2.5 million, goodwill amortization increased 422.8% to $2.2 million and general and administrative expenses increased 117.3% to $8.3 million for the year ended December 31, 1998 as compared to the year ended December 31, 1997. 20 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Pro Forma Year Ended Year Ended December 31, December 31, 1997 1996 ------------ ------------ (In thousands) Revenues: Gain on sale of loans and leases.................... $ 52,117 $ 18,671 Interest income..................................... 26,758 16,130 Interest expense.................................... (21,602) (14,489) -------- -------- Net interest income............................... 5,156 1,641 Loan servicing income............................... 3,314 1,191 Other income (loss)................................. (111) 63 -------- -------- Total revenues.................................... 60,476 21,566 -------- -------- Expenses: Personnel........................................... 13,636 8,270 Professional services............................... 2,416 1,093 Travel.............................................. 1,585 614 Business promotion.................................. 1,251 450 Provision for losses................................ 933 -- Occupancy........................................... 683 310 Goodwill amortization............................... 425 411 General and administrative.......................... 3,826 1,094 -------- -------- Total expenses.................................... 24,755 12,242 -------- -------- Income before taxes................................. 35,721 9,324 Income taxes(1)..................................... 15,001 3,873 -------- -------- Net income(1)..................................... $ 20,720 $ 5,451 ======== ========
- -------- (1) Income tax and net income for 1996 are presented on a pro forma basis as if the Company had been taxed as a corporation, for comparative purposes. Total revenues increased 180.4% to $60.5 million for the year ended December 31, 1997 from $21.6 million for the comparable period in 1996. During the same periods, the Company's total expenses increased 102.2% to $24.8 million from $12.2 million. As a result, net income increased 280.1% to $20.7 million for the year ended December 31, 1997 as compared to pro forma net income of $5.5 million in 1996. The increase in revenues was primarily attributable to a $33.4 million increase in gain on sale of loans and leases. For the year ended December 31, 1997, the Company sold $533.9 million of loans sold in three securitizations and five whole loan sales for a gain on sale of $50.1 million (of which $54.2 million was cash, before hedge losses of $5.1 million) as compared to $430.3 million of loans sold in three securitizations for a gain on sale of $18.7 million (of which $11.5 million was cash, before hedge gains of $0.4 million) for the year ended December 31, 1996. Additionally, $2.0 million in loan fees was recognized in 1997 which was previously deferred due to the sales and securitizations of loans and leases. The increased gain on sale of loans was due to several factors, including the composition of loans in the securitizations and whole loan sales, the structure of the securitizations, market conditions at the time of the securitization transactions, and the fact that the Company was successful in selling all classes of securitization interests. 21 Net interest income also contributed to the increase in revenues, increasing 214.2% to $5.2 million for the year ended December 31, 1997 as compared to $1.6 million for the same period in 1996, primarily due to the significant increase in loans and leases held for sale which resulted from increased loan and lease originations. Additionally, loan servicing income increased 178.3% to $3.3 million for the year ended December 31, 1997 as compared to $1.2 million for the same period in 1996. This was due to an increase in loans and leases serviced which resulted from the securitization of $483.1 million in loans and leases during 1997 with servicing rights retained by the Company. Total expenses increased 102.2% to $24.8 million for the year ended December 31, 1997 as compared to $12.2 million for the same period of the prior year primarily due to infrastructure additions needed to fund increased loan and lease originations. Personnel expenses increased 64.9% to $13.6 million, professional services increased 121.0% to $2.4 million and general and administrative expenses increased 249.7% to $3.8 million for the year ended December 31, 1997 as compared to the year ended December 31, 1996. 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 December 31, 1998 and December 31, 1997 consisted of the following:
December 31, 1998 December 31, 1997 ---------------------- ---------------------- Expiration Commitment Principal Commitment Principal Lender Date Amount Outstanding Amount Outstanding ------ ---------- ---------- ----------- ---------- ----------- (In thousands) Credit Suisse First Boston(1)(2)........... 12/31/99 $ 300,000 $122,356 $300,000 $127,249 Morgan Stanley(1)....... 12/30/99 300,000 -- 200,000 94,031 Banco Santander(1)...... 08/31/99 50,000 34,669 50,000 21,649 Sanwa Bank(1)........... 06/30/99 25,000 14,369 25,000 4,506 Goldman Sachs Mortgage Company(1) (3)......... 04/30/99 100,000 46,989 -- -- Residential Funding Corporation(1) (4)..... 09/30/99 200,000 124,763 -- -- Bank of America(1) (5).. 01/29/99 35,000 18,776 -- -- Residential Funding Corporation............ 05/31/99 50,000 31,432 -- -- Other Borrowings(6)..... -- 90,409 -- 8,785 ---------- -------- -------- -------- Totals................ $1,060,000 $483,763 $575,000 $256,220 ========== ======== ======== ========
- -------- (1) The above borrowings are collateralized by the Company's loans and leases held for sale and investment. (2) The agreement with Credit Suisse First Boston requires the Company to obtain a capital infusion of $100 million by May 31, 1999. (3) The warehouse line of credit with Goldman Sachs Mortgage Company is used to fund loans through FMAC Golf Finance Group LLC. (4) The Residential Funding Corporation line of credit was temporarily increased from $100 million to $200 million until January 31,1999. (5) The Bank of America line of credit has subsequently been renewed until May 28, 1999. (6) Other borrowings includes $55.3 million of sold loans that have been accounted for as a financing at December 31, 1998, $29.0 million dollars of loans that have been financed through FMAC Star Fund, LLP as of December 31, 1998, a $6.1 million repurchase agreement with Deutsche Bank as of December 31, 1998 for which the 1998-CE and 1998-CF certificates were pledged as collateral, 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 minimum deposit requirements are maintained. The weighted average interest rate on the outstanding principal balances of these facilities was 6.96% and 8.23% at December 31, 1998 and 1997, respectively. 22 The Company also has a master purchase and sale agreement with Southern Pacific Bank ("SPB"), a wholly owned subsidiary of Imperial Credit Industries, Inc. ("ICII) 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 year ended December 31, 1998, loans originated for SPB (and not repurchased), including participations, totaled approximately $26.5 million. The Company's sources of operating cash flow include: (i) loan origination income and fees; (ii) net interest income on loans and leases held for sale and investment; (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. For the year ended December 31, 1998, net cash provided by operating activities was $11.3 million. This excludes cash used in net loan origination activities of $126.3 million, which was primarily attributable to the Company's increased loan origination volume. For the year ended December 31, 1997, net cash provided by operating activities was $39.1 million, exclusive of cash used in net loan origination activities of $246.0 million. For the year ended December 31, 1998, net cash used in investing activities was $68.0 million, which was primarily attributable to the purchase of Bankers, the purchase of the E and F certificates relating to the 1998-C securitization as well as an increase in retained interests in securitizations of $21.8 million relating to the Company's 1998 securitizations, offset by the sale of a $22.9 million security, which was related to the Company's 1997-B securitization and proceeds from retained interests of $13.6 million. For the year ended December 31, 1997, net cash used in investing activities was $2.1 million, which was primarily attributable to the sale of a $36.6 million security related to the restructuring of the Company's 1991-A securitization, offset by the purchase of a $22.9 million security, which was related to the Company's 1997-B securitization and an increase in retained interests in securitizations of $12.9 million relating to the Company's 1997 securitizations. For the year ended December 31, 1998, net cash provided by financing activities was $209.2 million, which was primarily attributable to increased amounts of warehouse line borrowings resulting from increased loan and lease originations during the period. For the year ended December 31, 1997, net cash provided by financing activities was $216.5 million, which was primarily attributable to an increase of $131.0 million in borrowings from warehouse lines of credit and proceeds from the issuance of common stock of $112.6 million, offset by a decrease of $17.8 million in borrowings from ICII and member distributions of $9.3 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. Year 2000 Computer Issue The Year 2000 ("Y2K") computer issue affects virtually all companies and organizations. Many currently installed computer systems were designed to use only a two-digit date field. This can cause problems in the systems distinguishing a 21st century date (i.e. 20--) from a 20th century date (i.e. 19--). Until the date fields are updated, systems or programs could fail or give erroneous results when referencing dates following December 31, 1999. The Company is committed to ensuring that all of its computer systems, operations, business partners, and supply chains are Y2K ready. The Company has established its Year 2000 Readiness and Compliance Project ("Y2K Project") as a major project internally, and as such has full support from the Company's senior 23 management and Board of Directors. Project awareness is continuously being performed through meetings and documented communications. The Company is committing the necessary internal and external resources along with the necessary budgets to ensure successful completion of the Y2K Project. The Company has organized a Y2K Project Steering Committee that includes members of all Company operations groups. There is a dedicated Y2K Project Core Team made up of full time internal and external resources to perform all necessary project tasks. In addition, the Company has retained the services of an outside independent consulting firm to assist on the project and provide objective guidance. The committee meets regularly to review progress. The Company has developed a comprehensive strategic plan for its Y2K Project. The plan consists of the following three major phases: Phase I covers awareness and impact assessment, which commenced in September 1998 and is scheduled to conclude in March 1999; Phase II covers testing of all systems, which commenced in January 1999 and is projected to conclude in April 1999; Phase III covers remediation, which commenced in December 1998 and is projected to conclude in July 1999. The Company's plan is comprehensive, including an assessment and compliance review of the following: .Internal hardware and software systems, including data interchange with external systems .Business partners and value chain participants .Business infrastructure (facilities) .Customers, including Y2K readiness of potential new customers Phase I of the Y2K Project is over 80% complete. All internal software and hardware systems have been inventoried and are currently being reviewed for compliance status. All mission and operations critical systems have been clearly identified along with their current Y2K status. Business partner, business infrastructure and customer assessments are concurrently taking place. Remediation and testing efforts on mission critical infrastructure hardware systems have taken place for most all systems with the remaining to be completed by the end of March 1999. All Company servers have been tested and meet all Y2K compliance standards. Testing for the identified mission and operations critical software systems, both third-party and in-house developed, is currently in process. The Company anticipates completion of this testing by the end of April 1999. The Company has established dedicated budgets for its Y2K Project. There is a defined budget for Phase I and preliminary budgets for Phases II and III. The final budgets for Phases II and III will be determined after Phase I is completed. Currently, the projected total cost of the Y2K Project is approximately $900,000 but is subject to change if any unanticipated situations arise. Any expenses related to Y2K issues are being expensed as incurred. As of February 28, 1999, the Company has incurred approximately $177,000 in Y2K Project related expenditures. The Company has completed a preliminary assessment of internal computer systems and believes that there is an effective program in place to resolve the Y2K issue in an accurate and timely manner. Consequently, the Company anticipates that the costs associated with Y2K compliance of internal systems will not be material. However, the Company has not yet determined the materiality of its relations with third parties and therefore cannot yet determine costs that will result as a consequence of the Companys external operations. At this time, the risks associated with the Company's Y2K issues, both internally and as related to third party business partners and suppliers are not completely known. Through the Company's Awareness and Impact Assessment phase, it expects to identify substantially all of its Y2K related risks. Although the risks have not been completely identified, the Company believes that the most realistic worst case scenario would be that the Company would suffer from full or intermittent power outages at some or all of its sites. Depending upon the sites affected and estimated duration, this would entail recovery of the main application server systems at other sites and/or the move to manual processes. Manual processes will have been developed as part of the overall 24 contingency plan. In relation to this, complete system data dumps will have taken place prior to the millennium date change to ensure access to all Company mission critical data should any system not be accessible due to power failures. The Company is incorporating and encompassing the Y2K area as part of the Company's Business Continuity Plan. While the efforts to assess and correct the Company's Y2K issues are expected to be complete prior to related forecasted failure horizons, the Company is taking steps to develop the necessary contingency plans. A formal process is being developed to assess business critical functions and create action plans that will describe the communications, operations and information technology activities that will be conducted if the contingency plan must be executed, due to any possible Y2K non-compliance issues. The Company's Y2K efforts are continual and the Project is anticipated to evolve, as new information becomes available. Inflation The impact of inflation is reflected in the increased costs of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company's operations are monetary in nature. As a result, interest rates have a greater impact on the Company's operations' performance than do the effects of general levels of inflation. Inflation affects the Company's operations primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. During periods of significantly increasing interest rates, demand for loans may be adversely affected. Accounting Considerations 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. 25 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Management Quantitative Information about Interest Rate Risk The following table presents the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity and the instruments' fair values at December 31, 1998:
Total Fair 1999 2000 2001 2002 2003 Thereafter Balance Value -------- ------- ------- ------ ------- ---------- -------- -------- (Dollars in thousands) Interest-sensitive assets: Loans held for sale Permanent commercial loans................. $ 20,017 $ 2,667 $ 5,090 $ -- $ 631 $120,817 $149,222 $149,222 Average interest rate.. 10.03% 9.45% 9.53% -- 10.46% 9.34% 9.45% Multi-family loans..... -- -- -- -- -- 119,599 119,599 119,599 Average interest rate.. 6.27% 6.27% Equipment loans and leases................ -- 37 779 2,245 5,493 37,283 45,837 45,837 Average interest rate.. -- 10.69% 11.50% 12.52% 12.00% 10.57% 10.86% Loans held for investment Permanent commercial loans................. -- -- -- -- 1,310 6,872 8,182 8,182 Average interest rate.. -- -- -- -- 11.6% 10.65% 10.81% Short-term commercial loans................. 109,106 15,067 -- -- -- 6,254 130,427 130,427 Average interest rate.. 9.48% 8.78% -- -- -- 9.18% 9.39% Multi-family loans..... -- -- -- -- -- 25,233 25,233 25,233 Average interest rate.. -- -- -- -- -- 6.81% 6.81% Equipment loans and leases................ -- -- -- 114 126 239 478 478 Average interest rate.. -- -- -- 12.75% 10.75% 14.49% 13.09% Securities available for sale(1)................ 2,249 2,047 1,746 1,412 1,330 8,034 16,818 16,818 Retained interest in loan securitizations(2)..... 4,281 3,262 2,573 2,051 1,555 16,230 29,952 29,952 Servicing rights........ 3,739 3,585 3,240 2,924 2,801 13,616 29,905 29,905 -------- ------- ------- ------ ------- -------- -------- -------- Total interest-sensitive assets................. $139,392 $26,665 $13,428 $8,745 $13,246 $354,176 $555,653 $555,653 ======== ======= ======= ====== ======= ======== ======== ======== Interest-sensitive liabilities: Borrowings.............. $483,763 $ -- $ -- $ -- $ -- $ -- $483,763 $483,763 Average interest rate.. 6.96% -- -- -- -- -- 6.96% -------- ------- ------- ------ ------- -------- -------- -------- Total interest-sensitive liabilities............ $483,763 $ -- $ -- $ -- $ -- $ -- $483,763 $483,763 ======== ======= ======= ====== ======= ======== ======== ========
- -------- (1) As of December 31, 1998, the weighted average interest rate on securities held for sale was 8.83%. (2) Future cash flows from retained interest are dependent upon actual credit losses and prepayment speed of the loans underlying the security. The Company applies a discount rate to the expected cash flows of each retained interest which includes estimated credit losses, prepayment speed and time value of money. As of December 31, 1998, the weighted average discount rate used on the retained interests was 18.0% with 8.96% weighted average accretion of income. Financial instruments include loans and leases held for sale, loans and leases held for investment, securities available for sale, retained interest in loan securitizations, servicing rights and borrowings. Fair value estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The carrying values of interest-bearing deposits approximate fair value due to their short-term nature. The fair value of securities available for sale was based on discounted cash flow. The fair value of loans and leases held for sale and loans and leases held for investment are estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such loans. The fair value of retained interest 26 in loan securitizations was estimated by discounting future cash flows using rates that an unaffiliated third-party purchaser would require on instruments with similar terms and remaining maturities. The fair values of borrowings were estimated by discounting cash flows at interest rates for debt having similar credit ratings and maturities. Qualitative Information about Interest Rate Risk The following discussion about the Company's risk management activities includes "forward-looking statements" that involve risk and uncertainties. The Company's profits depend, in part, on the difference, or "spread," between the effective rate of interest received by the Company on the loans it originates or purchases and the interest rates payable by the Company under its warehouse financing facilities or for securities issued in its securitizations. The spread can be adversely affected because of interest rate increases during the period from the date the loans are originated or purchased until the closing of the sale or securitization of such loans. The Company is required by its warehouse lending facilities to hedge all of its fixed-rate principal loan balance securing such facilities. The Company's hedging strategy normally includes selling U.S. Treasury futures in such amounts and maturities as to effectively hedge the interest rate volatility of its portfolio. The Company does not maintain naked or leveraged hedge positions. In addition, the Company from time to time may use various other hedging strategies to provide a level of protection against interest rate risks on its fixed-rate loans. These strategies may include forward sales of loans or loan- backed securities, interest rate caps and floors and buying and selling of futures and options on futures. The Company's management determines the nature and quantity of hedging transactions based on various factors, including market conditions and the expected volume of loan originations and purchases. While the Company believes its hedging strategies are cost-effective and provide some protection against interest rate risks, no hedging strategy can completely protect the Company from such risks. Further, the Company does not believe that hedging against the interest rate risks associated with variable- rate loans is cost-effective, and does not utilize the hedging strategies described above with respect to its variable-rate loans. 27 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Independent Auditors' Report............................................ 29 Consolidated Balance Sheets............................................. 30 Consolidated Statements of Income....................................... 31 Consolidated Statements of Changes in Stockholders or Members' Equity... 32 Consolidated Statements of Cash Flows................................... 33 Notes to Consolidated Financial Statements.............................. 34
Schedules are omitted because they are either inapplicable or the required information is included in the consolidated financial statements or notes thereto. 28 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Franchise Mortgage Acceptance Company: We have audited the accompanying consolidated balance sheets of Franchise Mortgage Acceptance Company as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders or members' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Franchise Mortgage Acceptance Company as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Los Angeles, California January 19, 1999, except as to Notes 22, 23, and 20 to the Consolidated Financial Statements, which are as of February 16, 1999, March 10, 1999 and March 29, 1999, respectively. 29 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, ------------------ 1998 1997 -------- -------- ASSETS Cash and cash equivalents................................... $ 33,425 $ 7,335 Interest bearing deposits--restricted....................... 5,757 2,744 Securities available for sale............................... 16,818 22,870 Loans and leases held for sale.............................. 325,727 343,200 Loans and leases held for investment........................ 162,928 -- Retained interest in loan securitizations................... 29,952 21,652 Servicing rights............................................ 29,905 2,213 Premises and equipment, net................................. 6,854 2,518 Goodwill.................................................... 37,353 4,315 Accrued interest receivable................................. 2,587 2,758 Other assets................................................ 25,008 12,627 -------- -------- Total assets............................................ $676,314 $422,232 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings.................................................. $483,763 $256,220 Current income taxes payable................................ 1,661 841 Deferred income taxes....................................... 18,045 14,160 Other liabilities........................................... 26,140 12,589 -------- -------- Total liabilities....................................... 529,609 283,810 -------- -------- Commitments and contingencies Minority interest in subsidiary............................. (8) -- 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......................................... 28,354 20,063 -------- -------- Total stockholders' equity.............................. 146,713 138,422 -------- -------- Total liabilities and stockholders' equity.............. $676,314 $422,232 ======== ========
See accompanying notes to consolidated financial statements. 30 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except earnings per share)
Year Ended December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Revenue: Gain on sale of loans.............................. $40,146 $52,117 $18,671 ------- ------- ------- Interest income.................................... 55,439 26,758 16,130 Interest expense................................... 38,320 21,602 14,489 ------- ------- ------- Net interest income.............................. 17,119 5,156 1,641 ------- ------- ------- Loan servicing income.............................. 18,507 3,314 1,191 Loss on transfer of loans to held for investment... (8,845) -- -- Other income (loss)................................ 650 (111) 63 ------- ------- ------- Total revenue.................................... 67,577 60,476 21,566 ------- ------- ------- Expense: Personnel.......................................... 26,306 13,636 8,270 Professional services.............................. 4,057 2,416 1,093 Travel............................................. 3,517 1,585 614 Business promotion................................. 4,203 1,251 450 Provision for losses............................... 2,644 933 -- Occupancy.......................................... 2,504 683 310 Goodwill amortization.............................. 2,222 425 411 General and administrative......................... 8,313 3,826 1,094 ------- ------- ------- Total expense.................................... 53,766 24,755 12,242 ------- ------- ------- Income before income taxes and minority interest in subsidiary 13,811 35,721 9,324 Minority interest in subsidiary.................... (8) -- -- Income taxes....................................... 5,528 15,001 -- ------- ------- ------- Net income....................................... $ 8,291 $20,720 $ 9,324 ======= ======= ======= Basic and diluted income per share................... $ 0.29 $ 0.91 ======= ======= Unaudited pro forma earnings data: Net income as reported............................. $ 9,324 Pro forma income taxes............................. 3,873 ------- Pro forma net income............................... $ 5,451 ======= Pro forma basic and diluted income per share....... $ 0.25 =======
See accompanying notes to consolidated financial statements. 31 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' OR MEMBERS' EQUITY (In thousands)
(Accumulated Number of Additional Deficit) Total Shares Members' Common Paid-In Retained Stockholders' Outstanding Capital Stock Capital Earnings Equity ----------- -------- ------ ---------- ------------ ------------- Balance, December 31, 1995................... -- $4,432 $-- $ -- $ (659) $ 3,773 Net income.............. -- -- -- -- 9,324 9,324 Members' contribution-- ICII................... -- 1,360 -- -- -- 1,360 ------ ------ ---- -------- ------- -------- Balance, December 31, 1996................... -- 5,792 -- -- 8,665 14,457 Tax distribution--ICII.. -- -- -- -- (4,215) (4,215) Tax distribution-- Knyal.................. -- -- -- -- (2,107) (2,107) Members' distribution-- ICII................... -- -- -- -- (2,000) (2,000) Members' distribution-- Knyal.................. -- -- -- -- (1,000) (1,000) Issuance of common stock, net of offering costs.................. 28,716 (5,792) 29 118,330 -- 112,567 Net income.............. -- -- -- -- 20,720 20,720 ------ ------ ---- -------- ------- -------- Balance, December 31, 1997................... 28,716 -- 29 118,330 20,063 138,422 Net income.............. -- -- -- -- 8,291 8,291 ------ ------ ---- -------- ------- -------- Balance, December 31, 1998................... 28,716 $ -- $ 29 $118,330 $28,354 $146,713 ====== ====== ==== ======== ======= ========
See accompanying notes to consolidated financial statements. 32 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, --------------------------------- 1998 1997 1996 ----------- --------- --------- Cash flows from operating activities: Net income................................ $ 8,291 $ 20,720 $ 9,324 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization........... 5,457 1,417 2,883 Decrease (increase) in accrued interest receivable............................. 353 (2,198) 548 Provision for deferred income taxes..... 3,651 14,160 -- Increase in current income taxes payable................................ 894 841 -- Increase (decrease) in other liabilities and accrued interest payable........... 11,554 10,009 (618) Increase in other assets................ (11,079) (6,271) (7,027) Increase in valuation allowance for retained interest in loan securitizations........................ 1,050 400 -- Increase in originated mortgage servicing rights....................... (8,878) -- -- Loan and lease operations Loans and leases originated........... (2,143,314) (801,039) (459,520) Loans sold to (purchased from) affiliates........................... 786,878 (3,455) 220,434 Provision for loan and lease losses... 3,156 811 -- Principal reductions.................. 90,357 23,766 5,302 Cash proceeds from loan sales and securitizations...................... 1,136,580 533,900 325,088 ----------- --------- --------- Net cash provided (used) by operating activities............................... (115,050) (206,939) 96,414 ----------- --------- --------- Cash flows from investing activities: Purchases of premises and equipment..... (5,268) (1,781) (1,190) Decrease (increase) in interest bearing deposits............................... 1,987 (150) (2,594) Purchase of securities available for sale................................... (16,953) (22,870) (41,704) Sale of securities available for sale... 22,870 36,571 -- Proceeds from securities available for sale................................... 135 -- -- Increase in retained interests in securitizations........................ (21,820) (12,933) (9,691) Proceeds from retained interests in securitizations........................ 13,582 1,732 726 Sale (purchase) of servicing rights..... 488 (2,213) -- Changes in assets and liabilities due to acquisition of Bankers Mutual and Bankers Mutual Mortgage, Inc Increase in interest bearing deposits--restricted................. (5,000) -- -- Increase in loans held for sale....... (17,957) -- -- Increase in servicing rights.......... (21,933) -- -- Increase in other assets.............. (2,454) -- -- Increase in borrowings................ 18,388 -- -- Increase in other liabilities......... 1,188 -- -- Goodwill.............................. (35,260) -- -- Purchase of other investments........... -- (408) (4,383) Decrease in minority interest........... (8) -- -- ----------- --------- --------- Net cash used by investing activities..... (68,015) (2,052) (58,836) ----------- --------- --------- Cash flows from financing activities: Repayment of bonds...................... -- -- (111,995) Net change in borrowings from Imperial Credit Industries, Inc................. -- (17,728) 17,728 Increase in borrowings.................. 209,155 130,980 55,603 Proceeds from issuance of common stock.. -- 112,567 -- Member (distributions) contributions.... -- (9,322) 1,360 ----------- --------- --------- Net cash provided (used) by financing activities............................... 209,155 216,497 (37,304) ----------- --------- --------- Net change in cash.......................... 26,090 7,506 274 Cash (book overdraft) at beginning of year.. 7,335 (171) (445) ----------- --------- --------- Cash (book overdraft) at end of year........ $ 33,425 $ 7,335 $ (171) =========== ========= =========
See accompanying notes to consolidated financial statements. 33 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998, 1997 and 1996 (1) Organization 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 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, and December 3, 1997, 890,625 and 609,378 additional shares of common stock were sold to the public, respectively, at the sale price of $18.00 per share. Net proceeds to the Company after offering costs of $1.7 million were $112.6 million. Immediately prior to the Offering, Franchise Mortgage LLC merged into Franchise Mortgage Acceptance Company, a Delaware corporation which was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC. As 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. 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 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 Banker's liabilities. 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 Goldman Sachs Mortgage Company to provide FMAC Golf Finance Group LLC with financing. The line is a twelve-month facility with interest based on London Interbank Offered Rate (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 $90 million mandatory capital and the Company contributing the remaining 20%. Contributions of mandatory capital can only be requested with joint consent of both the Company and SFT. As of December 31, 1998, the Company had made capital contributions of $3.1 million. (2) Basis of Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The consolidated financial statements include the financial statements of Franchise Mortgage Acceptance Company and FMAC Golf Finance Group LLC. All significant intercompany balances and 34 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) transactions have been eliminated in consolidation. 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 securities available for sale, loans and leases held for sale, loans and leases held for investment, retained interest in loan securitizations and servicing rights. Actual results could differ significantly from those estimates. Certain reclassifications were made to the prior year balances to conform with the current year presentation. (3) Summary of Significant Accounting Policies Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments with maturities of three months or less at date of acquisition to be cash equivalents. Securities The Company classifies securities as held to maturity or available for sale at the time of acquisition. Held to maturity investments are reported at amortized cost. Available for sale securities are reported at fair value with unrealized gains and losses included as a separate component of stockholders equity. Discounts and premiums on such securities are amortized to income using the interest method over the life of the securities. Realized gains and losses on securities available for sale are included in income at the time of sale using the specific identification method for determining the cost of securities sold. Loans and Leases Held for Sale Loans and leases held for sale are carried at the lower of aggregate amortized cost or market value. Interest on loans and leases held for sale is credited to income as earned. Interest is only credited if deemed collectible. Loan origination fees and related incremental direct loan origination costs are deferred and recognized as an adjustment to the gain on sale of loans and leases when the related loans and leases are sold. Loans and Leases Held for Investment Loans and leases held for investment are recorded at cost, net of deferred fees and costs and the allowance for loan and lease losses. Loan origination fees and related incremental direct loan origination costs are deferred and recognized as an adjustment of the yield of the related loan. The accrual of interest on loans and leases held for investment is discontinued when, in management's opinion, the borrower may not be able to meet the payments as they become due, generally this occurs when the loan or lease becomes ninety or more days past due. Accrued interest on loans that are ninety or more days past due is reversed and charged against interest income. Interest income is subsequently recognized only to the extent cash payments are received and the principal balance is expected to be recovered. Such loans are restored to an accrual status only if the loan is brought current and the borrower has demonstrated the ability to make future principal and interest payments. The allowance for loan and lease losses is maintained at an amount management deems adequate to cover estimated losses. The allowance is increased by charges to income and decreased by charge-offs (net of recoveries). In determining the allowance for loan and lease losses, management evaluates its allowance on an individual loan and lease basis, including an analysis of the creditworthiness, cash flows and financial status of the borrower, and the condition and estimated value of the underlying collateral. In the opinion of management, and in accordance with the loan and lease loss allowance methodology, the present allowance is considered adequate to absorb estimable and probable loan and lease losses. 35 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Retained Interest in Loan Securitizations Retained interests in securitizations of loans and leases are recorded as a result of the sale of loans and leases through securitization. When the Company sells loans and leases in securitizations, it may retain one or more subordinated bonds, interest only strips, collateral (loans and leases sold in securitization) in excess of the bonds and certificates issued and in some cases cash reserve accounts, all of which are retained interests in securitizations. Securitizations are generally structured as follows: First, the Company sells a portfolio of loans and or leases either directly to a securitization trust or to a special purpose entity established for the sole purpose of purchasing and reselling the loans and leases to a securitization trust. Next, the securitization trust then issues either bonds or certificates collateralized by the loans and leases transferred to the securitization trust. These bonds and certificates reflect the full spectrum of bond credit ratings and the proceeds received from these bonds and certificates are used to purchase the loans and leases from the Company. The gain on the sale of loans and leases is recognized to the extent that the proceeds received exceeds the carrying value of loans and leases sold based on the estimated relative fair value of the assets transferred (loans and leases), assets obtained (retained interest in securitizations) and liabilities incurred. Subsequent to the sales, retained interests in securitizations are recorded at estimated fair value, with unrealized gains or loss included in equity. The Company generally structures these retained interests as a first loss certificate at a substantial discount from unpaid principal balance of the residual collateral. The Company is not aware of an active market for the purchase and sale of these retained interests at this time, accordingly, the Company estimates the fair value of the retained interest by calculating the present value of the estimated expected future cash flows received by the Company after being released by the Trust, using a discount rate commensurate with the risks involved. Each loan securitization has specific credit enhancement cash flow requirements that must be met before the Company receives any cash on its retained interest. Retained interests in loan securitizations are accounted for as available for sale securities and income is amortized using the interest method. To the extent that actual future performance results are less than the Company's original performance estimates, the Company's retained interest in loan securitizations will be written down through a charge to equity in that period. Such retained interests are reviewed for permanent impairment. Any permanent impairment would be recognized through a charge to operations in that period. Servicing Rights The total cost of the loans acquired through either purchase or origination is allocated to the servicing rights and the loans (without the servicing rights) based on their relative fair values. The Company also capitalizes the cost of servicing rights acquired from third parties based on the purchase price of the servicing rights. The amount capitalized does not exceed the fair value of those rights. The Company recognizes a servicing asset where the specified contractual servicing fee exceeds the fee that would be required from a substitute servicer. Should the specified contractual servicing fee be less than the fee that would be required from a substitute servicer, a servicing liability would be recognized. Capitalized servicing rights are assessed for impairment based on the fair value of those rights. The Company estimates fair value of the servicing rights using quoted market prices (if available) or a discounted cash flow analysis incorporating prepayment, default, cost to service and interest rate assumptions that market participants use for similar instruments. At December 31, 1998 and 1997, the carrying value of servicing rights approximates their estimated fair value. Impairment is to be recognized through a valuation allowance. In determining impairment, the servicing portfolio is stratified into the predominant risk characteristics of the underlying loans. The Company has determined those risk characteristics to be loan type and interest rate. These strata within the portfolio were then valued using the same assumptions that were used to determine the fair 36 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) value. Servicing rights are amortized in proportion to, and over the period of, the estimated net servicing income. Servicing fees are earned on the cash flow streams from various pools of sold or securitized loans and leases serviced for others. Servicing fees are recognized as income when received. Loan and Lease Sales and Related Gain or Loss Loans and leases are sold through either securitizations or whole loan sales with servicing generally retained by the Company. Securitizations typically require credit enhancements in the form of cash reserves or overcollateralization, some of which may be reflected as retained interest in loan securitizations on the Company's consolidated balance sheet. Sales are recognized when the transaction settles and the risks and rewards of ownership are legally transferred to the purchaser. Gain is recognized to the extent that the selling price exceeds the carrying value of the loans or leases sold based on the estimated relative fair values of the assets transferred, assets obtained and liabilities incurred. The assets obtained in a sale include, generally, retained interest in securitizations, servicing assets, and call options. Liabilities incurred in a sale include, generally, recourse obligations, and servicing liabilities. In the securitizations completed to date, the Company retained call options giving it the right to repurchase loans sold when the outstanding amount of such loans is 1% to 10% or less of the original amount sold, depending on the terms of the related securitization. As these call options are equivalent to a cleanup call, the Company has ascribed no value to them. Recourse obligations are included in the retained interests through discounting. The securitizations completed to date had no put option features. In determining the estimated fair values of the retained interest in loan and lease securitizations, the Company estimates the cash flows to be released to the Company and discounts such cash flows at interest rates determined by management to be rates market participants would use in similar circumstances, the overall discount rate on retained interests was 18.0% at December 31, 1998. In estimating the present value of the cash flows, the Company considers default and prepayment rates in the overall discount rate applied to the cash flows. Management does, however, continually review the credit loss assumption and makes changes to the assumptions based on portfolio trends and risks associated with new products. Management believes the discount rate adequately reflects a rate market participants would use in determining fair value plus an appropriate discount for anticipated credit losses and future prepayments. Historically, the Company has used zero prepayment and loss rates assumptions because a prepayment penalty contained in the lending documents has deterred borrower prepayments significantly and the Company has experienced nominal losses to date. Loan and lease Origination Fees Origination fees received on loans and leases held for sale, net of direct costs related to the origination of the loans and leases, are deferred as an adjustment to the carrying value of loans and leases held for sale. At the time of sale of the related loans and leases, such deferred fees are taken into income and included with the gain or loss on sale of loans and leases. Premises and Equipment, Net Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets (three to seven years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. 37 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Taxes Prior to the Offering, the Company was organized as a Limited Liability Company under the Internal Revenue Code and the corresponding state tax laws. Accordingly, income was taxed directly to the members for Federal income and state franchise tax purposes. In addition, the California Franchise Tax Board imposed the minimum tax as well as an annual fee not to exceed $4,500 for years ended prior to 1997. The Company converted its tax filing status from an LLC to a C Corporation on November 18, 1997. Income taxes are provided by the Company based on taxable income and are adjusted for the change in deferred tax assets and liabilities which are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over its estimated useful life of generally 15 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Income Per Share Income Per Share Basic and diluted income per common share are computed based on the weighted average number of shares outstanding during the year plus common stock equivalents deemed to be dilutive. The number of shares used in computations are given retroactive effect for stock dividends and splits, if any, for all periods presented. The following table reconciles the number of shares used in computing basic and diluted income per share for the years ended December 31, 1998 and 1997:
1998 1997 ---------- ---------- Weighted average common shares outstanding during the year used to compute basic income per share.... 28,715,625 22,669,949 Assumed common shares issued on exercise of stock options............................................ 260,486 -- ---------- ---------- Number of common shares used to compute diluted income per share................................... 28,976,111 22,669,949 ========== ==========
Stock Option Plan The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Deferred Compensation Plan In January 1998, the Company implemented a non-qualified deferral plan for highly compensated employees. The plan allows certain employees to defer a portion of their compensation for tax purposes. Compensation deferrals are recorded through a charge to operations and the related liability is reflected in other liabilities. 38 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Hedging Program The Company regularly securitizes and sells fixed- and variable-rate loans. To mitigate the risk of the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling United States Treasury futures contracts. Unrealized and realized gains and losses on such positions are deferred as an adjustment to the carrying value of loans and leases held for sale and included in income as gain or loss on sale of loans when the related loans are sold. Management has determined that hedge accounting is appropriate for the Company's hedging program because the hedged loans expose the Company to price risk, the futures contracts reduce that risk and are designated as hedges, and at the inception of the hedge and throughout the hedge period where there is a high correlation between the price of the futures contracts and the fair value of the loans being hedged. In the event correlation does not remain high, the futures contracts will cease to be accounted for as hedges and a gain or loss will be recognized to the extent the futures results have not been offset by the price changes of the hedged loans. Recent Accounting Pronouncements On January 1, 1998, the Company adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under SFAS 131, management believes that the Company meets all of the requirements to aggregate its Restaurant, Energy and Multi-Family operating segments into a single operating segment because these operating segments have similar economic characteristics and are similar in each of the following areas: (a) nature of products and services, (b) nature of production processes, (c) type or class of customer for their products or services, (d) methods used to distribute their products or provide their services, and (e) the nature of the regulatory environment. In June 1998, the FASB issued 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) Supplemental Disclosure of Cash Flow Information Cash paid for interest for the years ended December 31, 1998, 1997 and 1996 was $35.2 million, $21.0 million and $15.6 million, respectively. During 1996, ICII contributed $1.4 million to the Company by decreasing the balances of the outstanding payable to ICII by the amount of the contribution. Cash paid for taxes for the year ended December 31, 1998 was $0.8 million. For the years ended December 31, 1997 and 1996, the Company did not make any tax payments because it was treated as a limited liability company for federal and state income tax purposes. During the year ended December 31, 1998, the Company transferred $163.0 million of loans from held for sale to held for investment and recognized a pre-tax loss on the transfer of $8.8 million. 39 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (5) Securities Available for Sale Securities available for sale consist of asset-backed securities issued by the Company. For the year ended December 31, 1998 and 1997, activity in securities available for sale was as follows:
For the Year Ended December 31, 1998 ------------------------------------------------------------------ Beginning Face Cash Hedging Ending Balance Amount Discount Received (Gain) Loss Sold Balance --------- ------- -------- -------- ----------- -------- ------- (In thousands) 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)............... -- 3,301 (283) (135) -- -- 2,883 ------- ------- ------- ----- ---- -------- ------- Totals.................. $22,870 $22,001 $(5,048) $(135) $-- $(22,870) $16,818 ======= ======= ======= ===== ==== ======== =======
For the Year Ended December 31, 1997 ----------------------------------------------------------------- Beginning Face Cash Hedging Ending Balance Amount Discount Received (Gain) Loss Sold Balance --------- ------- -------- -------- ----------- -------- ------- (In thousands) 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 Capital Financial Products, Inc. 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 Credit Suisse 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. (6) Loans and Leases Held for Sale The Company offers permanent commercial 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. 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. Loans and leases held for sale were pledged as collateral for the borrowings of the Company. 40 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 1998 and 1997, loans and leases held for sale consisted of the following:
December 31, ------------------ 1998 1997 -------- -------- (In thousands) Permanent commercial loans........................... $149,222 $149,699 Short-term commercial loans.......................... -- 177,723 Multi-family loans................................... 119,599 -- Loans in process..................................... 7,410 -- Equipment loans and leases........................... 63,671 19,801 Unearned lease income................................ (17,834) (5,520) Allowance for loan and lease losses.................. (445) (998) Net deferred loan (fees) costs....................... 2,198 (2,530) Margin and deferred net losses on futures contracts used to hedge loans and leases held for sale(1)..... 1,906 5,025 -------- -------- Loans and leases held for sale..................... $325,727 $343,200 ======== ========
- -------- (1) For the year ended December 31, 1998, the deferred hedge loss related to loans financed as part of FMAC Golf Finance Group LLC. Non-accrual loans, including impaired loans, totaled $0 million and $4.0 million at December 31, 1998 and 1997, respectively. Activity in valuation allowances for loans and leases held for sale for the years ended December 31, 1998 and 1997 was as follows:
1998 1997 ------- ---- (In thousands) Balance, January 1.......................................... $ 998 $-- Provisions.................................................. 1,699 998 Charge-offs................................................. -- -- Transfer of allowance to loans held for investment.......... (2,252) -- ------- ---- Balance, December 31........................................ $ 445 $998 ======= ====
As of December 31, 1998, the future minimum lease payments to be received for each of the five succeeding fiscal years are represented in the table below. Since the Company intends to sell its leases, there is no guarantee that these lease payments will continue to be received.
Future Lease Year Payments ---- -------------- (In thousands) 1999........................................................ $10,289 2000........................................................ 10,289 2001........................................................ 10,085 2002........................................................ 9,634 2003........................................................ 8,451 Thereafter.................................................. 14,923 ------- Total..................................................... $63,671 =======
41 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (7) Loans and Leases Held for Investment The Company offers short-term commercial loans (DEVCO and Seasoning loans) to those sectors in which it operates. 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. The Company's permanent commercial loans, multi-family loans, and equipment loans and leases that are classified as held for investment are classified as such because they are not immediately salable for reasons such as unique loan terms or delinquency status. The Company had no loans and leases held for investment at December 31, 1997. At December 31, 1998, loans and leases held for investment consisted of the following:
December 31, 1998 -------------- (In thousands) Permanent commercial loans.................................. $ 9,639 Short-term commercial loans................................. 130,357 Multi-family loans.......................................... 25,233 Equipment loans and leases.................................. 598 Allowance for loan and lease losses......................... (2,988) Net deferred loan costs..................................... 89 -------- Loans and leases held for sale............................ $162,928 ========
Non-accrual loans, including impaired loans, totaled $17.1 million at December 31, 1998. Activity in valuation allowances for loans and leases held for investment for the year ended December 31, 1998 was as follows:
1998 -------------- (In thousands) Balance, January 1.......................................... $ -- Provisions.................................................. 736 Charge-offs................................................. -- Transfer of allowance from loans held for sale.............. 2,252 ------ Balance, December 31........................................ $2,988 ======
42 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (8) Retained Interest in Loan Securitizations Activity in retained interest in loan securitizations was as follows for the years ended December 31, 1998 and 1997:
For the Year Ended December 31, 1998 ---------------------------------------------------------- Beginning Bond Cash Discount Valuation Ending Balance Amount Received Accretion(2) Allowance Balance --------- ------- -------- ------------ --------- ------- (In thousands) 1994-A.................. $ 1,599 $ -- $ (541) $ 223 $ -- $ 1,281 1995-A.................. 876 -- (241) 119 -- 754 1996-A.................. 6,626 -- (430) -- -- 6,196 1996-B.................. 331 -- -- -- -- 331 1997-A.................. 344 -- -- 35 -- 379 1997-B.................. 306 -- -- 32 -- 338 1997-C.................. 266 -- -- 29 -- 295 1997-1(1)............... 11,704 -- (11,704) -- -- -- 1998-A.................. -- 283 -- 22 -- 305 1998-B.................. -- 3,652 (386) 362 -- 3,628 1998-C.................. -- 5,796 (280) 290 -- 5,806 1998-1(1)............... -- 2,423 -- -- -- 2,423 1998-D.................. -- 9,666 -- -- -- 9,666 Valuation Allowance..... (400) -- -- -- (1,050) (1,450) ------- ------- -------- ------ ------- ------- Totals................ $21,652 $21,820 $(13,582) $1,112 $(1,050) $29,952 ======= ======= ======== ====== ======= ======= For the Year Ended December 31, 1997 ---------------------------------------------------------- Beginning Bond Cash Discount Valuation Ending Balance Amount Received Accretion(2) Allowance Balance --------- ------- -------- ------------ --------- ------- (In thousands) 1994-A.................. $ 1,814 $ -- $ (474) $ 259 $ -- $ 1,599 1995-A.................. 964 -- (224) 136 -- 876 1996-A.................. 6,908 -- (1,034) 752 -- 6,626 1996-B.................. -- 331 -- -- -- 331 1997-A.................. -- 326 -- 18 -- 344 1997-B.................. -- 306 -- -- -- 306 1997-C.................. -- 266 -- -- -- 266 1997-1(1)............... -- 11,704 -- -- -- 11,704 Valuation Allowance..... -- -- -- -- (400) (400) ------- ------- -------- ------ ------- ------- Totals................ $ 9,686 $12,933 $ (1,732) $1,165 $ (400) $21,652 ======= ======= ======== ====== ======= =======
- -------- (1) Equipment Finance transaction. (2) The weighted average discount rate on retained interests was 18.0% and 19.2% at December 31, 1998 and 1997, respectively. (9) Acquisition 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 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 43 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $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 following table presents unaudited pro forma results of operations of the Company for the years ended December 31, 1998 and 1997 as if the acquisition of Bankers had been effective at the beginning of each year presented. The unaudited pro forma summary of operations is intended for informational purposes only and is not necessarily indicative of the future operating results of the Company or of the operating results of the Company that would have occurred had the Bankers acquisition been in effect for the years presented. Unaudited Pro Forma Combined Summary of Operations (In thousands, except per share data)
Year Ended December 31, ------------------------ 1998 1997 ----------- ----------- Revenues: Gain on sale of loans and leases................... $ 41,730 $ 58,760 Interest income.................................... 56,223 30,705 Interest expense................................... (38,638) (23,873) ----------- ----------- Net interest income.............................. 17,585 6,832 Loan servicing income.............................. 20,611 12,291 Loss on transfer of loans to held for investment... (8,845) -- Other income (loss)................................ 832 750 ----------- ----------- Total revenues................................... 71,913 78,633 ----------- ----------- Expenses: Personnel and commission........................... 29,069 24,969 General and administrative......................... 28,254 15,983 ----------- ----------- Total expenses................................... 57,323 40,952 ----------- ----------- Income before taxes and minority interest in subsidiary........................................ 14,590 37,681 Minority interest in subsidiary.................... (8) -- Income taxes....................................... 5,839 15,826 ----------- ----------- Net income....................................... $ 8,759 $ 21,855 =========== =========== Basic and diluted earnings per share................. $ 0.30 $ 0.96 Weighted average shares outstanding: Basic............................................ 28,716 22,670 Diluted.......................................... 28,976 22,670
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 ========
44 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (10) Servicing Rights Activity in servicing rights for the years ended December 31, 1998 and 1997 was as follows:
1998 1997 ------- ------ (In thousands) Balance, January 1........................................ $ 2,213 $ -- Originated................................................ 8,190 -- Purchased................................................. 6 2,213 Amortization.............................................. (2,291) -- Acquired as a result of Bankers acquisition............... 21,787 -- ------- ------ Balance, December 31...................................... $29,905 $2,213 ======= ======
(11) Premises and Equipment Premises and equipment consisted of the following at December 31, 1997 and 1996:
1998 1997 ------- ------ (In thousands) Land...................................................... $ 30 $ -- Buildings................................................. 213 -- Furniture, fixtures and equipment......................... 6,945 2,359 Leasehold improvements.................................... 1,584 255 Construction in progress.................................. 1,128 453 ------- ------ Total premises and equipment............................ 9,900 3,067 Accumulated depreciation and amortization................. (3,046) (549) ------- ------ Balance, December 31...................................... $ 6,854 $2,518 ======= ======
(12) Goodwill Goodwill activity for the years ended December 31, 1998 and 1997 was as follows:
(In thousands) Balance, December 31, 1996.................................. $ 4,332 Purchase of Enterprise Financial Group.................... 408 Amortization.............................................. (425) ------- Balance, December 31, 1997.................................. $ 4,315 Purchase of Bankers....................................... 35,260 Amortization.............................................. (2,222) ------- Balance, December 31, 1998.................................. $37,353 =======
(13) Hedging As of December 31, 1998 and 1997, the Company had open positions of $50.5 million and $240.4 million, respectively, related to United States Treasury futures contracts used to hedge loans and leases held for sale. At December 31, 1998 and 1997, the Company's deferred unrealized and realized net losses on future contracts were $1.9 million and $5.0 million, respectively. 45 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (14) Borrowings Borrowings consisted of the following at December 31, 1998 and 1997 (dollars in thousands):
December 31, 1998 December 31, 1997 ------------------------------- ------------------------------- Interest Commitment Principal Interest Commitment Principal Warehouse Expiration Date Index Rate(7) Amount Outstanding Rate(7) Amount Outstanding --------- ------------------ --------------------------- -------- ---------- ----------- -------- ---------- ----------- Credit Suisse December 31, 1999 One-month LIBOR plus 130 to 6.38% to $ 300,000 $122,356 7.32% to $300,000 127,249 First 150 basis points 6.58% 8.07% Boston(1)(2)..... Morgan December 30, 1999 One-month LIBOR plus 150 to 6.58% to 300,000 -- 6.67% to 200,000 94,031 Stanley(1)....... 175 basis points 6.83% 7.27% Banco August 31, 1999 One-month LIBOR plus 175 6.83% 50,000 34,669 7.32% 50,000 21,649 Santander(1)..... basis points Sanwa Bank(1).... June 30, 1999 One-month LIBOR plus 160 6.68% 25,000 14,369 6.88% 25,000 4,506 basis points Goldman Sachs April 30, 1999 One-month LIBOR plus 100 6.08% 100,000 46,989 -- -- -- Mortgage basis points Company(1)....... Residential September 30, 1999 One-month LIBOR plus 100 6.08% 200,000 124,763 -- -- -- Funding basis points Corporation(3)... Bank of January 29, 1999 Fixed rate 1.00% 35,000 18,776 -- -- -- America(1)(4).... Residential May 31, 1999 One-month LIBOR plus 225 7.33% 50,000 31,432 -- -- -- Funding basis points Corporation(5)... Other -- -- 90,409 -- -- 8,785 borrowings(6).... ---------- -------- -------- -------- Totals.......... $1,060,000 $483,763 $575,000 $256,220 ========== ======== ======== ========
- ---- (1) The above borrowings are collateralized by franchise loans and leases held for sale and investment. (2) The agreement with Credit Suisse First Boston requires the Company to obtain a capital infusion of $100 million by May 31, 1999. (3) The Residential Funding Corporation line of credit was temporarily increased from $100,000 to $200,000 until January 31,1999. (4) The Bank of America line of credit has a fixed interest rate of 1.00% when the Company maintains minimum deposit requirements. (5) The Residential Funding Corporation line of credit is collateralized by the Company's loan servicing portfolio. (6) Other borrowings includes $55.3 million of sold loans that have been accounted for as a financing at December 31, 1998, $29.0 million dollars of loans that have been financed through FMAC Star Fund, LLP as of December 31, 1998, a $6.1 million repurchase agreement with Deutsche Bank as of December 31, 1998 for which the 1998-CE and 1998-CF certificates were pledged as collateral, 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. (7) The weighted average interest rate on borrowings was 6.96% and 8.23% at December 31, 1998 and 1997, respectively. 46 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (15) Income Taxes The provision for income taxes for the year ended December 31, 1998 and 1997 was as follows:
1998 1997 ------ ------- (In thousands) Current: Federal..................................................... $ 788 $ 609 State....................................................... 855 232 ------ ------- 1,643 841 ------ ------- Deferred: Federal..................................................... 3,551 10,665 State....................................................... 334 3,495 ------ ------- 3,885 14,160 ------ ------- Total....................................................... $5,528 $15,001 ====== =======
Actual income taxes differ from the amount determined by applying the statutory Federal rate of 34% and 35% for the year ended December 31, 1998 and 1997, respectively, as follows:
1998 1997 ------ ------- (In thousands) Computed expected income taxes.................... $4,698 $ 3,508 Income tax related to conversion from LLC to C Corporation.............. -- 10,997 State tax, net of federal benefit.................. 785 736 Other..................... 45 (240) ------ ------- Total................... $5,528 $15,001 ====== =======
The components of the deferred tax liability at December 31, 1998 and 1997 were as follows:
1998 1997 -------- -------- (In thousands) Deferred tax assets: Depreciation......................................... $ 202 $ -- Provision for losses................................. 808 317 State taxes.......................................... 1,546 1,220 -------- -------- 2,556 1,537 Deferred tax liabilities: Deferred loan fees................................... (718) (1,002) Depreciation......................................... -- (4) Gain on sale of loans and leases deferred for income tax purposes........................................ (19,410) (14,691) Other................................................ (473) -- -------- -------- (20,601) (15,697) -------- -------- Total net deferred tax liability....................... $(18,045) $(14,160) ======== ========
47 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (16) Employee Benefits Plans Profit Sharing and 401(k) Plans The Company's employees participate in a 401(k) plan sponsored by FMAC. Under the plan, employees may elect to enroll at the beginning of any month after which the employee has been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the employee's contribution up to 4% of the employee's compensation. The Company may also make a discretionary contribution on an annual basis to be allocated to participants who have contributed in excess of 4% of their compensation. The allocation is based upon a formula set by the plan and requires a five- year vesting period. All forfeitures are allocated to the remaining participants in the plan. Distribution of vested benefits to a terminated participant in the 401(k) is made in accordance with the contribution allocation form signed by the employee. Distributions are made, by election of the participant, in either certificates of deposit, FMAC common stock, stock or bond mutual funds, or a combination thereof. The Company contributed approximately $323,000, $163,000, and $88,000 to the 401(k) plan for the years ended December 31, 1998, 1997 and 1996, respectively. 1997 Stock Option, Deferred Stock and Restricted Stock Plan The Company's Board of Directors has adopted and its stockholders have approved the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which provides for the grant of qualified incentive stock options ("ISOs") that meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), stock options not so qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights awards ("Awards"). The Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the Stock Option Plan may not be less than 100% (or 110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the Stock Option Plan was November 18, 1997, the effective date of the Company's initial public offering. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock outstanding after the Company's initial public offering, but not less than 2,700,000 shares. The number of shares reserved for issuance under the Stock Option Plan is subject to anti-dilution provisions for stock splits, stock dividends and similar events. If an option granted under the Stock Option Plan expires or terminates, or an Award is forfeited or canceled, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the Stock Option Plan. Under the Stock Option Plan, the Company may make loans available to stock option holders, subject to the Committee's approval, in connection with the exercise of stock options granted under the Stock Option Plan. If shares of Common Stock are pledged as collateral for such indebtedness, such shares may be returned to the Company in satisfaction of such indebtedness. If so returned, such shares shall again be available for issuance in connection with future stock options and Awards under the Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the Stock Option Plan ten years after the effective date of the Offering. Options vest under this plan at 20% on each anniversary from the date of grant for the Company's officers and employees and 100% on the first anniversary of the date of grant for the Company's directors. 48 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the years ended December 31, 1998 and 1997, stock option activity and prices were as follows:
1998 1997 -------------------- ------------------- Weighted Weighted Average Average Number of Option Number of Option Shares Price Shares Price ---------- -------- --------- -------- Options outstanding, January 1..... 1,464,500 $17.71 -- $ -- Options granted.................... 3,118,755 $15.11 1,466,300 $17.71 Options exercised.................. -- $ -- -- $ -- Options canceled................... (2,204,158) $19.82 (1,800) $18.00 ---------- --------- Options outstanding, December 31... 2,379,097 $12.35 1,464,500 $17.71 ========== ========= Options exercisable................ 266,000 $17.84 -- $ --
The Company adopted the disclosure requirements of SFAS 123 and continues to measure its employee stock-based compensation arrangements under the provisions of APB 25. Accordingly, no compensation expense has been recognized for the stock option plan. Had compensation expense for the Companys stock option plan been determined based on the fair value at the grant date for awards in 1998 and 1997 consistent with provisions of SFAS 123, the Company's net income and income per share would have been adjusted to the pro forma amounts indicated below:
Year Ended December 31, ---------------------- 1998 1997 ---------------------- (In thousands, except per share data) Net income: As reported........................................ $ 8,291 $ 20,720 Pro forma.......................................... $ 254 $ 20,280 Basic and diluted income per share: As reported........................................ $ 0.29 $ 0.91 Pro forma.......................................... $ 0.01 $ 0.89
The weighted average fair value at date of grant of options granted during 1998 and 1997 was $9.19 and $13.73 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following assumptions:
Year Ended December 31, -------------- 1998 1997 ------ ------ Expected life (years)....................................... 5.57 5.00 Interest rate(1)............................................ 4.55% 5.73% Volatility.................................................. 96.30% 52.11% Dividend yield.............................................. 0.00% 0.00%
- -------- (1) Based on 5-year U.S. Treasury rate at the dates indicated. 49 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (17) Transactions with Affiliates In the ordinary course of business, the Company has conducted transactions with affiliated companies. In the opinion of management all such transactions are conducted at "arm's length" in accordance with the Company's policies. The Company purchased $15.5 million in franchise loans at par value from Southern Pacific Bank ("SPB") on June 26, 1997. These franchise loans were purchased at par value by SPB from the Company in 1996 and 1997. The Company purchased $45.1 million in franchise loans at par value from SPB on December 24, 1997. These franchise loans were purchased at par value by SPB from the Company in 1996 and 1997. On December 30, 1997, the Company sold $1.8 million of participation loans at par value to SPB. The Company also has a master purchase and sale agreement with 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 year ended December 31, 1998 and 1997, loans originated for SPB (and not repurchased), totaled approximately $26.5 million and $7.4 million, respectively. No cash was paid to SPB for interest for the years ended December 31, 1998 and 1997 and approximately $10.3 million was paid in the year ended December 31, 1996. (18) Equity Investments The Company periodically makes equity investments which are included in other assets. These investments represent interests in limited liability companies ("LLCs") or limited partnerships (collectively, the "investees") which were formed to own and operate restaurant franchise concepts, and are owned through investor LLCs, the members of which consist of the Company, the Company's chief executive officer, and ICII. Member ownership percentages in the investor LLCs range from 50% to 100% for the Company, from 0% to 0.33% for the chief executive officer, and from 0.67% to 50% for ICII. The Company consolidates all investor LLCs in which it has a greater than 50% ownership interest because the terms of the operating agreements vest control with the Company. The investor LLC in which the Company has a 50% ownership interest is accounted for under the equity method because the operating agreement provides for joint and equal management by the Company and the other 50% owner. These investments are accounted for by the Company under the equity method as the terms of the investment agreements do not place the investor LLCs or the Company in a position of control over the investees. A director of the Company owns 60% of one investee and the investor LLC owns 40%; such investor LLC is owned 50% by the Company and 50% by ICII. 50 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Companys activity in equity investments was as follows:
For the Year Ended December 31, 1998 -------------------------------------------------------------------- Additional Investment FMAC Investment Beginning Additional Income Ending Date Interest Obligation Balance Investment (Loss) Balance ---------- -------- ---------- --------- ---------- ------- ------- (In thousands) Summerwood Ltd.......... 6/10/96 40.0% $ -- $1,285 $2,000 $ (834) $2,451 Restaurant Management of Carolina(1)............ 11/19/96 32.5 2,000 889 -- (889) -- Family Eats............. 12/20/96 49.0 -- 1,644 1,550 (174) 3,020 Atlanta Franchise Development(2)......... 3/24/97 39.6 -- 144 -- (144) -- Hot 'N Now.............. 4/16/97 20.0 -- 6 -- 139 145 Pate Restaurant Enterprises(3)......... 4/29/97 40.0 -- (63) -- 63 -- Park Meadows(4)......... 6/26/97 30.0 -- -- -- -- -- ------ ------ ------ ------- ------ Totals................ $2,000 $3,905 $3,550 $(1,839) $5,616 ====== ====== ====== ======= ======
For the Year Ended December 31, 1997 ------------------------------------------------------------------- Additional Investment FMAC Investment Beginning Additional Income Ending Date Interest Obligation Balance Investment (Loss) Balance ---------- -------- ---------- --------- ---------- ------ ------- (In thousands) Summerwood Ltd.......... 6/10/96 40.0% $2,000 $2,000 $-- $(715) $1,285 Restaurant Management of Carolina............... 11/19/96 32.5 2,000 933 -- (44) 889 Family Eats............. 12/20/96 49.0 1,550 1,450 -- 194 1,644 Atlanta Franchise Development............ 3/24/97 39.6 -- -- -- 144 144 Hot 'N Now.............. 4/16/97 20.0 -- -- -- 6 6 Pate Restaurant Enterprises............ 4/29/97 40.0 -- -- -- (63) (63) Park Meadows............ 6/26/97 30.0 -- -- -- -- -- ------ ------ ---- ----- ------ Totals................ $5,550 $4,383 $-- $(478) $3,905 ====== ====== ==== ===== ======
- -------- (1) Loss on Restaurant Management of Carolina includes a writedown of $624,000. (2) Additional losses of $700,000 have been posted as an allowance against the related loan included in loans held for investment. (3) Additional losses of $133,000 have been posted as an allowance against the related loan included in loans held for investment. (4) Additional losses of $445,000 have been posted as an allowance against the related loan included in loans held for sale. The December 31, 1998, unpaid balances of loans to the investees made by the Company total approximately $263.6 million, of which $227.3 million has been securitized and sold and $25.8 million is included in loans held for sale and $10.5 million is included in loans held for investment. The December 31, 1997, unpaid balances of loans to the investees made by the Company total approximately $110.2 million. As of December 31, 1997, $96.3 million of these loans had been securitized and sold and $13.9 million was included in loans held for sale. At December 31, 1998 and 1997, none of these loans were past due. 51 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (19) Fair Value of Financial Instruments Financial instruments include interest bearing deposits, securities available for sale, loans and leases held for sale, loans and leases held for investment, futures contracts used to hedge loans held for sale, retained interest in loan securitizations, and borrowings. Fair value estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The carrying values of interest-bearing deposits approximate fair value due to their short-term nature. The fair value of securities available for sale was based on discounted cash flow. The fair value of loans and leases held for sale and loans and leases held for investment are estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such loans. The fair value of retained interest in loan securitizations was estimated by discounting future cash flows using rates that an unaffiliated third-party purchaser would require on instruments with similar terms and remaining maturities. The fair values of borrowings were estimated by discounting cash flows at interest rates for debt having similar credit ratings and maturities. The estimated fair values of the Company's financial instruments as of December 31, 1998 and 1997 are as follows:
1998 1997 ------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- (In thousands) Assets: Interest bearing deposits........ $ 5,757 $ 5,757 $ 2,744 $ 2,744 Securities available for sale.... 16,818 16,818 22,870 22,870 Loans and leases held for sale... 325,727 325,727 343,200 343,200 Loans and leases held for investment...................... 162,928 162,928 -- -- Retained interest in loan securitizations................. 29,952 29,952 21,652 21,652 Liabilities: Borrowings....................... 483,763 483,763 256,220 256,220 Off Balance Sheet: Deferred hedge losses............ 1,906 1,906 5,025 5,025
(20) Commitments and Contingencies Leases Minimum rental commitments under noncancelable operating leases at December 31, 1998, were as follows (in thousands):
Year ended December 31, ----------------------- 1999............................................................... $ 2,917 2000............................................................... 2,921 2001............................................................... 2,770 2002............................................................... 2,386 2003............................................................... 2,229 Thereafter......................................................... 3,423 ------- Total............................................................ $16,646 =======
52 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rent expense for the year ended December 31, 1998, 1997 and 1996 was $2.2 million, $0.6 million, and $0.3 million, respectively. Litigation The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. On March 25, 1999, the Superior Court entered an order in connection with the action, a portion of which was stayed on March 29, 1999. The stayed portion included, among other things, an order to dissolve Franchise Mortgage Acceptance Co., L.P. ("FMACLP"), a partnership of which FLRT, Inc. is the general partner and which was formed in 1991 to originate and securitize franchise loans, and an order requiring an accounting by FLRT, Inc. and Mr. Knyal to the limited partners of FMACLP. The unstayed portion of the order includes a finding, among other things, that Mr. Knyal and FLRT, Inc. breached the FMACLP partnership agreement and that the limited partners of FMACLP have a right to a portion of the shares of the Company owned by FLRT, Inc. or Mr. Knyal, and of the proceeds realized from any sale of FLRT, Inc.'s or Mr. Knyal's Company shares after November 1997. The order also states that Mr. Knyal and FLRT, Inc. may not dispose of or encumber any shares of the Company held by either of them, and that Mr. Knyal may not dispose of or encumber any shares of FLRT, Inc. held by him. Counsel to the predecessor entity and Mr. Knyal and counsel to FMACLP, which is not a party to the action, believe that the action is without merit, and counsel to the predecessor entity and Mr. Knyal intend to appeal the order and intend to vigorously defend the action. Although the Company is not a party to the action, Imperial Credit Industries, Inc. ("ICII"), Mr. Knyal and FLRT, Inc. have agreed to indemnify the Company against any and all liability that the Company and its stockholders (other than ICII, Mr. Knyal and FLRT, Inc.) may incur as a result of this lawsuit. The Company has been named as a defendant in other legal actions, which legal actions have arisen in the ordinary course of business, none of which management believes to be material. Loan Servicing Related fiduciary funds held in trust for investors in non-interest bearing accounts at unaffiliated financial institutions totaled approximately $6.4 million as of December 31, 1998. These funds are segregated in special bank accounts and are held as deposits in such financial institutions. At December 31, 1998 and 1997, the Company serviced loans and leases of $5.1 billion and $1.3 billion, respectively for affiliates and others. Loan Commitments As of December 31, 1998, the Company had open short-term lending commitments amounting to approximately $70.1 million in process subject to credit approval. There is no exposure to credit loss in this type of commitment until the loans are funded. Interest rate risk is mitigated by the use of hedging strategies applied to each loan at the time of funding. 53 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (21) Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data are presented below by quarter for the years ended December 31, 1998 and 1997:
December 31 September 30, June 30, March 31, 1998 1998 1998 1998 ----------- ------------- -------- --------- (In thousands, except per share amounts) Revenues: Gain (loss) on sale of loans and leases................. $ (3,832) $ 4,320 $22,917 $16,741 Interest income............. 3,063 5,977 3,877 4,202 Loan servicing income....... 7,827 4,812 4,614 1,254 Insurance income............ 720 -- -- -- Loss on transfer of loans to held for investment........ (8,845) -- -- -- Other income (loss)......... (633) 404 201 (42) -------- ------- ------- ------- Total revenues............ (1,700) 15,513 31,609 22,155 Expenses: Total operating expenses.... 16,222 13,292 14,534 9,718 -------- ------- ------- ------- Income (loss) before taxes and minority interest in subsidiary................... (17,922) 2,221 17,075 12,437 Minority interest in subsidiary................... (63) (55) 110 -- Income taxes.................. (7,777) 956 7,126 5,223 -------- ------- ------- ------- Net income (loss)......... $(10,082) $ 1,320 $ 9,839 $ 7,214 ======== ======= ======= ======= Basic and diluted income (loss) per share............. $ (0.35) $ 0.05 $ 0.34 $ 0.25 ======== ======= ======= =======
December 31 September 30, June 30, March 31, 1997 1997 1997 1997 ----------- ------------- -------- --------- (In thousands, except per share amounts) Revenues: Gain (loss) on sale of loans and leases................. $11,619 $20,690 $19,821 $ (13) Interest income............. 1,998 1,786 730 642 Loan servicing income....... 1,084 854 736 640 Other income (loss)......... 477 (588) -- -- ------- ------- ------- ------- Total revenues............ 15,178 22,742 21,287 1,269 Expenses: Total operating expenses.... 8,122 8,040 4,533 4,060 ------- ------- ------- ------- Income (loss) before taxes.... 7,056 14,702 16,754 (2,791) Income taxes.................. 15,001 -- -- -- ------- ------- ------- ------- Net income (loss)......... $(7,945) $14,702 $16,754 $(2,791) ======= ======= ======= ======= Basic and diluted income (loss) per share............. $ (0.32) $ 0.67 $ 0.77 $ (0.13) ======= ======= ======= =======
(22) Subsequent Event Restricted Stock Grant, Options Grant and Options Cancellation On February 16, 1999, the Company's Board of Directors approved a grant of 1,197,000 shares of restricted stock and options to purchase 380,000 shares of stock at $7.00 per share to the Company's employees. The closing stock price on the date of grant was $6.31. Along with these stock grants, the Board of Directors approved the cancellation of options to purchase 1,240,500 shares of stock at a weighted average share price of 54 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $11.30. The restricted stock grants vest over a period of eight years and the vesting is accelerated contingent upon the occurrence of certain events. Deferred compensation expense of $7.6 million will be amortized over the vesting period of the stock award. Upon stockholder approval of change of control of the Company, the stock awards will immediately vest and any unamortized deferred compensation will be charged to operations. All of these grants and cancellations were transacted in accordance with the Companys 1997 Stock Option, Deferred Stock and Restricted Stock Plan. (23) Subsequent Event Merger with Bay View Capital Corporation On March 10, 1999, Bay View Capital Corporation ("Bay View") and the Company executed an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") providing for the merger of the Company and Bay View. Following the merger, the Company will operate as a subsidiary of Bay View Bank ("BVB"). In accordance with the terms of the Merger Agreement, Bay View will acquire all of the common stock of the Company for consideration currently valued at approximately $309 million. Each share of the Company's stock will be entitled to receive, at the election of the holder, either $10.25 in cash or .5125 shares of Bay View's common stock. The Company's stockholder elections are subject to the aggregate number of shares of the Company's common stock to be exchanged for Bay View's common stock being equal to 60% of the number of shares of the Company's common stock outstanding immediately prior to closing the transaction and no Company stockholder owning more than 9.99% of Bay View's common stock, on a pro forma basis. The Merger Agreement also provides for an additional payment of up to $30 million by Bay View in connection with the earn-out provision of the Company's April 1998 acquisition of Bankers. Simultaneous with the merger, Bay View will contribute substantially all of the assets and liabilities of the Company to a newly organized and wholly owned subsidiary of BVB. The transaction is expected to close during the third quarter of 1999, subject to approval by both the Company's stockholders and Bay View's shareholders and subject to necessary regulatory approvals. In connection with the merger, BVB has purchased $209.3 million in commercial loans from the Company and additionally may purchase up to another $150 million in commercial loans through the end of the first quarter of 1999. BVB may also purchase additional levels of commercial loans through the closing date of the transaction. A Voting Agreement has been executed with one of the Company's stockholders, ICII, which provides that this stockholder may not sell its Company stock during the term of the Merger Agreement and will vote in favor of the merger. In conjunction with the merger, Wayne Knyal will have an ownership interest in Bay View in excess of 5% and will hold a seat on Bay View's Board of Directors. Consummation of the merger is subject to a number of closing conditions, including approval by both Bay View's shareholders and the Company's stockholders, obtaining necessary regulatory approvals and other closing conditions. 55 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Board of Directors The Board of Directors of the Company consists of eight members. Directors are elected annually to serve until the next annual meeting and until their, successors are elected and qualified. As of February 28, 1999, the Company's Board of Directors consisted of the following individuals: Name, Age and Year First Principal Occupation, Business Experience Became a Director and Other Directorships - ------------------------ ----------------------------------------- H. Wayne Snavely* (58).................... Mr. Snavely has been Chairman of the Board of the 1997 Company since its inception. He was a Manager of Franchise Mortgage LLC from its inception in June 1995 until November 1997, at which time the Company was formed to succeed to the business of Franchise Mortgage LLC. Mr. Snavely has been Chairman of the Board and Chief Executive Officer of Imperial Credit Industries, Inc. ("ICII") since December 1991 and President of ICII since February 1996. From 1986 to February 1992, Mr. Snavely served as Executive Vice President of Imperial Bancorp and Imperial Bank. From 1983 through 1986, Mr. Snavely was employed as Chief Financial Officer of Imperial Bancorp and Imperial Bank. Mr. Snavely served as a Director of Imperial Bank from 1975 to 1983. Mr. Snavely is also Chairman of the Board of Imperial Credit Commercial Mortgage Holdings, Inc. Wayne L. "Buz" Knyal (52).................... Mr. Knyal has been the President, Chief Executive 1997 Officer and a Director of the Company since its inception and was the President, Chief Executive Officer and a Manager of Franchise Mortgage LLC from its inception in June 1995 until November 1997. Prior to founding the Company's predecessor in 1991, Mr. Knyal founded and owned CBI Insurance Services, Inc. and concurrently served as President of CBI Mortgage Company, a residential mortgage banker. From 1968 to 1980, Mr. Knyal was an Executive Vice President of Krupp/Taylor Advertising and served clients in the fast food industry. Mr. Knyal is also a Director of New Riders, Inc., a restaurant company. Ronald V. Davis** (52).................... Mr. Davis has been a Director of the Company since 1997 its inception and was a Manager of Franchise Mortgage LLC from its inception in June 1995 until November 1997. Mr. Davis is the Chairman of the Board of Davis Capital LLC, a private equity investment company. From 1980 to 1994, Mr. Davis was the President and Chief Executive Officer of the Perrier Group of America, Inc. Mr. Davis is also a Director of Celestial Seasonings and Staff Leasing, Inc. Mr. Davis is on the Foundation Board and Chairman of Guardian Scholars at California State University, Fullerton. 56 Name, Age and Year First Principal Occupation, Business Experience Became a Director and Other Directorships - ------------------------ -------------------------------------------------- Perry A. Lerner** (56).................... Mr. Lerner has been a Director of the Company since 1997 its inception and was a Manager of Franchise Mortgage LLC from its inception in June 1995 until November 1997. He has been a principal in the investment firm of Crown Capital Group, Inc. since 1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 through 1996, having been a partner with the firm from 1984 through 1996. Mr. Lerner was an Attorney- Advisor of the International Tax Counsel of the United States Treasury Department from 1973 to 1976. Mr. Lerner is also a Director of ICII and Vista 2000, Inc. Richard J. Loughlin* (66).................... Mr. Loughlin has been a Director of the Company since 1997 its inception. Mr. Loughlin co-founded Century 21 Real Estate of Northern California, Inc. in 1973 and served as President and Regional Director until 1981, when he was appointed President and Chief Executive Officer of Century 21 Real Estate Corporation. He held that position until November 1995 when he retired and was appointed President Emeritus to serve as a consultant and spokesperson. Mr. Loughlin is a Director of Inspectech Corporation. Mr. Loughlin's prior affiliations include Chairman of Western Relocation Management, Inc., Chairman of the Real Estate National Networks, Director of the National Easter Seal Society, Director of the Housing Roundtable, Director of the National Association of Realtors and member of the Policy Advisory Board of the Center for Real Estate and Urban Economics for the University of California at Berkeley. Mr. Loughlin is a founding partner of the National Football League's Carolina Panthers. John E. Martin* (53).... Mr. Martin has been a Director of the Company since 1997 its inception. Mr. Martin served as Chairman and Chief Executive Officer of Taco Bell Worldwide from 1983 through October 1986, and then as Chairman and Chief Executive Officer of PepsiCo Casual Restaurants until June of 1997. In November 1997, Mr. Martin was appointed Chairman of Diedrich Coffee. In addition, he became Chairman of Easyriders, Inc. in September 1998 and is the majority partner and Chairman of Culinary Adventures Incorporated formed in November of 1998. Mr. Martin also serves as a Director of The Good Guys! Inc. and Williams-Sonoma, Inc. Michael L. Matkins** (53).................... Mr. Matkins has been a Director of the Company since 1997 its inception and was a manager of Franchise Mortgage LLC from its inception in June 1995 until November 1997. Mr. Matkins is a founding partner with the law firm of Allen, Matkins, Leck, Gamble & Mallory LLP. Mr. Matkins has advised institutional investors, lenders, property owners and developers in all aspects of purchase, sale, financing, leasing and construction of real estate properties ranging from office and retail to recreational and mixed-use projects for more than 25 years. He has also represented institutional investors in the restructuring of investments in real property as well as institutional developers in acquiring, entitling and developing master-planned communities. Mr., Matkins is a member of the Executive Committee of the Urban Land Institute. 57 Name, Age and Year First Principal Occupation, Business Experience Became a Director and Other Directorships - ------------------------ ------------------------------------------ Brad S. Plantiko*(43)... Mr. Plantiko became a Director of the Company in 1998 November 1998, replacing G. Louis Graziadio, III after his resignation. Mr. Plantiko has been Executive Vice President and Chief Financial Officer of ICII since July 1998. From October 1980 to July 1998, Mr. Plantiko was with KPMG LLP where he was partner in-charge of its finance company services for the western United States. Mr. Plantiko has over 17 years of experience serving banks, thrifts, mortgage banks and finance companies. He serves on the Board of Visitors of the Graduate School of Business Management at Pepperdine University and holds a Bachelor's of Science Degree from California State University, Long Beach. Mr. Plantiko is a member of the American Institute and the California Society of Certified Public Accountants. - -------- * Member of Compensation Committee* Member of Compensation Committee ** Member of Audit Committee The business and affairs of the Company are managed under the direction of its Board of Directors. Directors are elected annually to serve until the next Annual Meeting of stockholders and until their successors are elected and qualified. Directors will not be able to stand for reelection unless they have attended at least 75% of Board meetings and committee meetings, as applicable. No family relationships exist between any of the executive officers or directors of the Company. Executive Officers The following table sets forth certain information as of February 28, 1999 with respect to each person who is an executive officer of the Company:
Name Age Position ---- --- -------- Wayne L. "Buz" Knyal.. 52 President, Chief Executive Officer and Director Kevin T. Burke........ 41 Executive Vice President, Capital Markets Thomas P. Kaplan...... 33 Executive Vice President, Corporate Development Peter A. Mozer........ 36 Executive Vice President and Chief Credit Officer Executive Vice President and Chief Financial Raedelle Walker....... 44 Officer
All officers of the Company are elected or appointed by the Board of Directors and shall hold office until their successors are elected or appointed, except that the Board of Directors may remove any officer at anytime at its discretion. Wayne L. "Buz" Knyal is President, Chief Executive Officer, Director, and founder of the Company. Prior to founding the Company's predecessor in 1991, Mr. Knyal founded and owned CBI Insurance Services, Inc. and concurrently served as President of CBI Mortgage Company, a residential mortgage banker. From 1968 to 1980, Mr. Knyal was an Executive Vice President of Krupp/Taylor Advertising and served clients in the fast food industry. Mr. Knyal is a Director of New Riders, Inc., a restaurant company. Kevin T. Burke, Executive Vice President, Capital Markets, has been with the Company since March of 1997. Mr. Burke served as a consultant for Koll Real Estate from November 1996 to February 1997. Mr. Burke was a Managing Director at McNeil Capital from July 1996 to November 1996 and the Director of Treasury Operations at ICN Pharmaceuticals, Inc. from July 1995 to June 1996. From September 1994 to June 1995, Mr. Burke was a Vice President at Merrill Lynch. From August 1993 to September 1994, Mr. Burke was a Senior Vice President at O'Connor & Company, an investment banking firm. Thomas P. Kaplan, Executive Vice President, Corporate Development, has been with the Company since October of 1997. Mr. Kaplan was a Senior Vice President in the Asset-Backed Finance group at Greenwich Capital Markets from September 1995 to October 1997. From 1990 to 1995, Mr. Kaplan was a Director at Credit Suisse First Boston, where he was a trader for the firm's subordinate mortgage- and asset-backed securities and asset-backed whole loan positions. 58 Peter A. Mozer, Executive Vice President and Chief Credit Officer, has been with the Company since May 1998. From July 1994 until May 1998, Mr. Mozer served as a Vice President within the Fixed Income division at Morgan Stanley Dean Witter & Company working as a mortgage portfolio manager and within the third-party financing group. From June 1989 until July 1994, Mr. Mozer served as Deputy Treasurer of Dime Savings Bank, a New York savings and loan. Raedelle Walker, Executive Vice President and Chief Financial Officer, has been with the Company since February of 1997. From 1995 until joining the Company, Ms. Walker served as the Chief Financial Officer of Southern Pacific Bank. From 1985 to 1995, Ms. Walker served as a Senior Manager with KPMG LLP, providing accounting and consulting services to clients in the firm's financial services practice. Ms. Walker is a Certified Public Accountant. Item 11. EXECUTIVE COMPENSATION Annual and Long-Term Compensation The following table sets forth information concerning the annual and long- term compensation earned by the Company's Chief Executive Officer and the other four most highly compensated executive officers of the Company (the "Named Executive Officers") for services rendered by them in all capacities in which they served the Company during 1998, 1997 and 1996: SUMMARY COMPENSATION TABLE
Long-Term Compensation ------------ Annual Compensation Securities ----------------------------- Underlying Name Year Salary ($) Bonus ($) Options (#) ---- -------- ---------- --------- ------------ Wayne L. Buz Knyal(1)... 1998 $400,000 $ 82,000 $ 8,892(2) -- 1997 100,000 665,292 13,940(3) -- 1996 100,000 150,000 47,709(4) -- Kevin T. Burke.......... 1998 199,833 100,000 -- 75,000 1997 133,830 205,000 -- 75,000 1996 -- -- -- -- Thomas P. Kaplan........ 1998 225,000 100,000 -- -- 1997 51,202 375,000 -- 150,000 1996 -- -- -- -- Peter A. Mozer(5)....... 1998 126,538 200,000 -- 100,000 1997 -- -- -- -- 1996 -- -- -- -- Raedelle Walker......... 1998 160,000 100,000 3,200(6) -- 1997 122,436 161,000 7,940(7) 55,000 1996 -- -- -- --
- -------- (1) Does not include distributions received by FLRT, Inc. as a member of Franchise Mortgage Acceptance Company LLC. (2) Represents a car allowance of $5,692 and a $3,200 contribution by the Company under its 401(k) Plan. (3) Represents a car allowance of $6,000 and a $7,940 contribution by the Company under its 401(k) Plan. (4) Represents a car allowance of $6,000, reimbursement of living expenses of $36,000 and a $5,709 contribution by the Company under its 401(k) Plan. (5) Peter A. Mozer joined the Company in May 1998 and serves as Executive Vice President and Chief Credit Officer at an annual base salary of $200,000. (6) Represents a $3,200 contribution by the Company under its 401(k) Plan. (7) Represents a $7,940 contribution by the Company under its 401(k) Plan. 59 Options Granted in 1998 The following table sets forth information with respect to grants of options to purchase shares of the Company's Common Stock to the Named Executive Officers during 1998: OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants ------------------------------------------------------ Potential Realized Value at Number of Percent of Assumed Annual Rates Securities Total Options of Stock Price Appreciation Underlying Granted to Exercise or for Option Term($)(4) Options Employees in Base Price Expiration --------------------------- Name Granted(#)(1) Fiscal Year(%)(2) ($/Share) Date(3) 5% 10% - ---- ------------- ----------------- ----------- ---------- --------------------------- Wayne L. "Buz" Knyal.... -- N/A N/A N/A N/A N/A Kevin T. Burke.......... 150,000 4.81% $11.00 10/01/2004 $561,158 $1,273,076 Thomas P. Kaplan........ -- N/A N/A N/A N/A N/A Peter A. Mozer.......... 100,000 3.21 11.00 10/01/2004 374,105 848,717 Raedelle Walker......... -- N/A N/A N/A N/A N/A
- -------- (1) Each of these options vests 20% per year on each anniversary date of the date of grant. (2) Based upon 3,118,755 options granted in 1998 under the 1997 Stock Option, Deferred Stock and Restricted Stock Plan. (3) Such stock options expire six years from the date of grant or earlier upon termination of employment. (4) The dollar amounts set forth are the result of calculations of the 5% and 10% rates set forth in the Securities and Exchange Commission's rules regarding the disclosure of executive compensation, and therefore are not intended to forecast possible future appreciation of the Company's Common Stock. 1998 Year-End Option Values The following table sets forth the number and dollar value of unexercised options held by the Named Executive Officers at December 31, 1998: FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised Options In-the-Money Options at Fiscal Year-End(#) At Fiscal Year-End($) ------------------------------ --------------------------- Name Exercisable / Unexercisable Exercisable / Unexercisable ---- ------------------------------ --------------------------- Wayne L. "Buz" Knyal.... 0 / 0 N/A Kevin T. Burke.......... 0 / 150,000 0 / 0 Thomas P. Kaplan........ 30,000 / 120,000 0 / 0 Peter A. Mozer.......... 0 / 100,000 0 / 0 Raedelle Walker......... 14,000 / 41,000 0 / 0
60 1998 Option Repricings The following table sets forth information with respect to the repricing of options to purchase shares of the Company's Common Stock to the Named Executive Officers during 1998: TEN-YEAR OPTION/SAR REPRICINGS
Length of Original Number of Option Term Securities Market Price Remaining at Underlying of Stock at Exercise Price Date of Options/SARs Time of at Time of New Repricing or Repriced or Repricing or Repricing or Exercise Amendment Name Date Amended (#) Amendment($) Amendment($) Price ($) (Months) - ---- ------- ------------ ------------ -------------- -------- ------------ Wayne L. "Buz" Knyal.... N/A N/A N/A N/A N/A N/A Kevin T. Burke.......... 10/1/98 50,000 5.28 18.00 11.00 61.5 Kevin T. Burke.......... 10/1/98 25,000 5.28 16.32 11.00 63.0 Kevin T. Burke.......... 10/1/98 75,000 5.28 22.86 11.00 67.5 Thomas P. Kaplan........ N/A N/A N/A N/A N/A N/A Peter A. Mozer.......... 10/1/98 100,000 5.28 22.86 11.00 67.5 Raedelle Walker......... N/A N/A N/A N/A N/A N/A
Employment Agreement In November 1997, the Company and Mr. Knyal entered into a five-year employment agreement terminating on October 31, 2002 pursuant to which Mr. Knyal agreed to act as the President and Chief Executive Officer of the Company for an annual base salary of $400,000, an annual bonus of not less than $82,000 and not to exceed $682,000, and customary benefits. Commencing June 1998, an amount of $82,000 per year will be deducted from the bonus payable to Mr. Knyal in order to repay certain amounts owed by Mr. Knyal to the Company, pursuant to the terms of a promissory note. If Mr. Knyal's employment is terminated by the Company without cause or by Mr. Knyal for good reason (meaning the Company's uncured breach of any material term of the agreement, the removal of Mr. Knyal as Chief Executive Officer (other than for cause) or any diminution by the Company of Mr. Knyal's powers, duties or authority), Mr. Knyal would be paid his annual salary and provided with all customary benefits through October 31, 2002. In addition, in such event, FLRT, Inc. a stockholder of the Company of which Mr. Knyal owns an 85% beneficial interest, would have registration rights similar to those granted to ICII under the ICII Registration Rights Agreement described herein under "Certain Transactions," without volume limitations. Compensation of Directors Compensation of Directors Directors who are not employees of the Company receive a fee of $12,000 per year, payable quarterly, $1,000 for each board meeting attended. Non-employee directors who are members of the Compensation and Audit Committees receive a fee of $1,000 for each committee meeting attended. Directors are reimbursed reasonable expenses incurred in attending Board and committee meetings per meeting attended. Concurrently upon the initial public offering of the Company's Common Stock in November 1997, the Company granted each non-employee director options to purchase 30,000 shares of Common Stock under the Company's 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan") at an exercise price of $18.00 per share. Such options vest 100% upon the first anniversary of the date of grant. Compensation Committee Interlocks and Insider Participation Mr. Lerner is currently a member of ICII's compensation committee. None of the executive officers of the Company has served on the Board of Directors or on the compensation committee of any other entity which had officers who served on the Company's Board of Directors or on the Company's Compensation Committee. 61 Profit Sharing and 401(k) Plans The Company's employees participate in a 401(k) plan sponsored by FMAC. Under the plan, employees may elect to enroll at the beginning of any month after which the employee has been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the employee's contribution up to 4% of the employee's compensation. The Company may also make a discretionary contribution on an annual basis to be allocated to participants who have contributed in excess of 4% of their compensation. The allocation is based upon a formula set by the plan and requires a five- year vesting period. All forfeitures are allocated to the remaining participants in the plan. Distribution of vested benefits to a terminated participant in the 401(k) is made in accordance with the contribution allocation form signed by the employee. Distributions are made, by election of the participant, in either certificates of deposit, FMAC common stock, stock or bond mutual funds, or a combination thereof. The Company contributed approximately $323,000, $163,000, and $88,000 to the 401(k) plan for the years ended December 31, 1998, 1997 and 1996, respectively. 1997 Stock Option, Deferred Stock and Restricted Stock Plan The Company's Board of Directors has adopted and its stockholders have approved the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which provides for the grant of qualified incentive stock options ("ISOs") that meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), stock options not so qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights awards ("Awards"). The Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the Stock Option Plan may not be less than 100% (or 110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the Stock Option Plan was November 18, 1997, the effective date of the Companys initial public offering. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock outstanding after the Company's initial public offering, but not less than 2,700,000 shares. The number of shares reserved for issuance under the Stock Option Plan is subject to anti-dilution provisions for stock splits, stock dividends and similar events. If an option granted under the Stock Option Plan expires or terminates, or an Award is forfeited or canceled, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the Stock Option Plan. Under the Stock Option Plan, the Company may make loans available to stock option holders, subject to the Committee's approval, in connection with the exercise of stock options granted under the Stock Option Plan. If shares of Common Stock are pledged as collateral for such indebtedness, such shares may be returned to the Company in satisfaction of such indebtedness. If so returned, such shares shall again be available for issuance in connection with future stock options and Awards under the Stock Option Plan. Unless otherwise determined by the Committee, upon stockholder approval of change of control of the Company, the stock awards will immediately vest and any unamortized deferred compensation will be charged to operations. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the Stock Option Plan ten years after the effective date of the Offering. Options vest under this plan at 20% on each anniversary from the date of grant for the Company's officers and employees and 100% on the first anniversary of the date of grant for the Company's directors. 62 On February 16, 1999, the Company's Board of Directors approved a grant of 1,197,000 shares of restricted stock and options to purchase 380,000 shares of stock at $7.00 per share to the Company's employees. The closing stock price on the date of grant was $6.31. The Board of Directors also approved the cancellation of options to purchase 1,240,500 shares of stock at a weighted average share price of $11.30. The restricted stock grants vest over a period of eight years and the vesting is accelerated contingent upon the occurrence of certain events. Deferred compensation expense of $8.4 million will be amortized over the vesting period of the stock award. All of these grants and cancellations were transacted in accordance with the Company's 1997 Stock Option, Deferred Stock and Restricted Stock Plan. Report of the Compensation Committee The Company's Compensation Committee was established in November 1997 and currently consists of Messrs. Snavely, Loughlin, Martin and Plantiko. The Compensation Committee sets and administers the policies governing the Company's compensation program, including incentive and stock option plans. The Company participates in studies and surveys of compensation practices for comparable companies in similar industries. The Committee considers these studies and surveys in determining base salary, bonus and long-term stock- based compensation. The Committee discusses and considers executive compensation matters and makes its decisions, subject to review by the Company's Board of Directors. The Company's compensation policies are structured to link the compensation of the Chief Executive Officer, Executive Vice Presidents and other executives of the Company with corporate performance. Through the establishment of short- and long-term compensation programs, the Company has attempted to align the financial interests of its executives with the results of the Company's performance, which is designed to put the Company in a competitive position regarding executive compensation and also to ensure corporate performance, which will enhance stockholder value. The Company's executive compensation philosophy is to set base salary at a market rate and then to provide performance-based variable compensation which allows total compensation to fluctuate according to the Company's earnings as well as value received by stockholders. Targeted levels of executive compensation are set at levels that the Committee believes to be consistent with others in the Company's industry, with such compensation increasingly weighted towards programs contingent upon the Company's level of annual and long-term performance. As a result, the Named Executive Officers actual compensation levels in any particular year may be above or below those of the Company's competitors, depending on the Company's performance. Section 162(m) of the Internal Revenue Code limits the Company's tax deduction for compensation paid to any one of the five most highly compensated executive officers in excess of $1 million, unless such compensation was based upon attainment of pre-established, objective performance goals, the Compensation Committee consists only of outside directors as defined for purposes of Section 162(m), and such performance-based compensation has been approved by stockholders. All of the members of the Compensation Committee qualify as outside directors. The Committee will review the Company's existing compensation program to determine the deductibility of future compensation paid or awarded pursuant thereto and will seek guidance with respect to changes to the Company's existing compensation program that will enable the Company to continue to attract and retain key individuals while optimizing the deductibility to the Company of amounts paid as compensation. The Committee believes that its overall executive compensation program should be successful in providing competitive compensation appropriate to attract and retain highly qualified executives and also to encourage increased performance from the executive group which will create added stockholder value. COMPENSATION COMMITTEE: H. Wayne Snavely Richard J. Loughlin John E. Martin Brad S. Plantiko 63 STOCK PRICE PERFORMANCE GRAPH The following Performance Graph compares the Company's cumulative return on its Common Stock (i.e., change in price plus reinvestment of dividends) with the Standard & Poor's 500 Index and a peer group index of companies engaged in the Company's business focus (consisting of Conti Financial Corp., Franchise Finance Corporation of America, Captec Net Lease Realty and Sirrom Capital Corp.) (the "Peer Group Index"). The Performance Graph assumes that $100 was invested on November 18, 1997 (the date of the Company's initial public offering) in each of the Common Stock, the Standard & Poor's 500 Index and the Peer Group Index. The stock price performance shown in this graph is not necessarily indicative of and is not intended to suggest future stock price performance. 64 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Stockholders and Ownership by Management As of February 28, 1999, there were 28,760,557 shares of the Company's Common Stock outstanding. The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company's Common Stock as of February 28, 1999, by (i) each director of the Company, (ii) each of the Named Executive Officers of the Company, (iii) each person who is known to the Company to beneficially own more than 5% of the Company's Common Stock, and (iv) all directors and executive officers of the Company as a group:
Amount and Nature of Beneficial Percent Beneficial Owner Ownership of Class ---------------- ---------- -------- Imperial Credit Industries, Inc.(l)..................... 11,023,492 38.3% FLRT, Inc. (2).......................................... 7,004,633 24.4 Wellington Management Company, LLP(3)................... 2,047,750 7.1 Wayne L. Knyal(4)(5).................................... 5,953,938 20.7 Kevin T. Burke(4)....................................... -- -- Thomas P. Kaplan(4)..................................... -- -- Peter A. Mozer(4)....................................... -- -- Raedelle Walker(4)...................................... -- -- H. Wayne Snavely(4)..................................... -- -- Ronald V. Davis(4)...................................... -- -- Perry A. Lerner(4)...................................... -- -- Richard J. Loughlin(4).................................. -- -- John E. Martin(4)....................................... -- -- Michael L. Matkins(4)................................... -- -- Brad S. Plantiko(4)..................................... -- -- All Directors and Officers as a Group(12 Persons)(4).... 5,953,938 20.7
- -------- (1) Imperial Credit Industries, Inc. may be reached at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California, 90505. (2) FLRT, Inc. may be reached through the Company at 1888 Century Park East, Third Floor, Los Angeles, California, 90067. (3) Based upon Schedule 13G filed with the Securities and Exchange Commission on February 8, 1999. Wellington Management Company, LLP ("WMC"), in its capacity as investment advisor, may be deemed to beneficially own the Company's shares which are held of record by clients of WMC. WMC may be reached at 75 State Street, Boston, Massachusetts 02109. (4) Franchise Mortgage Acceptance Company and each of such persons may be reached at 1888 Century Park East, Third Floor, Los Angeles, California, 90067. (5) Wayne L. Knyal is deemed to beneficially own 85% of the shares of the Company's Common Stock held by FLRT, Inc. Section 16(a) Beneficial Ownership Reporting Compliance Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the Company's Directors, officers and persons holding more than 10% of the Company's Common Stock are required to file forms reporting their beneficial ownership of the Company's Common Stock and subsequent changes in that ownership with the Securities and Exchange Commission. Such persons are also required to furnish the Company copies of the forms so filed. Based solely upon a review of copies of such forms filed with the Company, the Company believes that during 1998 its officers and Directors complied with the Section 16(a) filing requirements. 65 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Arrangements with ICII and its Affiliates The Company and ICII have entered into agreements for the purpose of defining their ongoing relationships. The agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's-length negotiations between independent parties. It is the intention of the Company and ICII that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. However, there can be no assurance that each of such agreements, or the transactions provided for therein, have been effected on terms at least as favorable to the Company as could have been obtained from unaffiliated parties. Additional or modified arrangements and transactions may be entered into by the Company, ICII and their respective subsidiaries. Any such future arrangements and transactions will be determined through negotiation between the Company and ICII, and it is possible that conflicts of interest will be involved. All transactions by and between the Company and ICII must be approved by a majority of the disinterested directors of the Company. Following is a summary of certain arrangements and transactions between the Company and ICII. Unless the context indicates otherwise, all references herein to the Company refer to Franchise Mortgage Acceptance Company and its predecessor entities, including Franchise Mortgage LLC. Services Agreement The Company and ICII entered into a services agreement (the "Services Agreement") effective as of November 18, 1997, the date of the Company's initial public offering (the "Effective Date") under which ICII provides human resource administration, securitization capability and certain accounting functions to the Company. ICII charges fees for each of the above services which it provides under the Services Agreement at a rate equal to $100 per month per employee employed by the Company at the end of each month. The Services Agreement has an initial term that ends one year from the Effective Date and is renewable annually thereafter. The Company may terminate the Services Agreement, in whole or in part, upon one month's written notice. As part of the services to be provided under the Services Agreement, ICII provides the Company, with insurance coverage and self insurance programs, including health insurance. The charge to the Company for insurance coverage is based upon a pro rata portion of the costs to ICII of the various policies. ICII's total insurance expense is allocated among ICII and its subsidiaries based on the number of employees at each entity. The expense is annualized and charged to each entity monthly. Management believes that the terms of the Services Agreement are as favorable to the Company as could be obtained from independent third parties. The Services Agreement has been terminated effective December 31, 1998. ICII Registration Rights Agreement The Company has entered into a registration rights agreement with ICII (the "ICII Registration Rights Agreement") pursuant to which the Company has agreed to file one or more registration statements under the Securities Act of 1933, as amended, in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. has certain piggyback registration rights with respect to a demand registration statement initiated by ICII concerning shares of the Company's Common Stock held by ICII; provided however than for a period of three years following the Effective Date, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, or in the event that Mr. Knyal's employment is terminated by the Company without cause or by Mr. Knyal for good reason (as defined in his employment agreement), FLRT, Inc. shall have registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without volume limitations. 66 Transactions Involving Southern Pacific Bank The Company purchased $15.5 million in franchise loans at par value from Southern Pacific Bank ("SPB") on June 26, 1997. These franchise loans were purchased at par value by SPB from the Company in 1996 and 1997. The Company purchased $45.1 million in franchise loans at par value from SPB on December 24, 1997. These franchise loans were purchased at par value by SPB from the Company in 1996 and 1997. On December 30, 1997, the Company sold $1.8 million of participation loans at par value to SPB. The Company also has a master purchase and sale agreement with 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 year ended December 31, 1998 and 1997, loans originated for SPB (and not repurchased), totaled approximately $26.5 million and $7.4 million, respectively. No cash was paid to SPB for interest for the years ended December 31, 1998 and 1997 and approximately $10.3 million was paid in the year ended December 31, 1996. ICII Options Granted to Executive Officers In December 1995 and July 1996, ICH granted Raedelle A. Walker incentive stock options to purchase an aggregate of 30,000 shares of ICII common stock. The exercise price of all such options was the fair market value of ICII common stock at the time of the grants and the number of shares subject to options granted by ICII as described herein have been adjusted to reflect stock splits. Borrowings and Guarantees In consideration of ICII's guarantee of the Company's warehouse lines of credit during the year ended December 31, 1998, the Company paid to ICII monthly a fee equal to 15 basis points on the Company's outstanding commitment amounts covered by such guarantee. For the years ended December 31, 1998, 1997 and 1996, the amounts of such guarantee fees were $459,000, $555,000 and $0, respectively. Equity Investments Franchise Equity Fund L.L.C. The Company, ICII and Mr. Knyal are parties to an Operating Agreement, dated April 1, 1996, pursuant to which such parties organized Franchise Equity Fund L.L.C., a Delaware limited liability company ("FEF LLC"), for the purpose of making equity investments in franchisees of PepsiCo related businesses. The Company owns a 99% membership interest in, and is the manager of FEF LLC. ICH and Mr. Knyal own 0.67% and 0.33% membership interests, respectively, in FEF LLC. In June 1996, FEF LLC, Mr. Knyal and certain other investors entered into an agreement to organize five limited partnerships in New Jersey and Pennsylvania (the "Summerwood Partnerships") for the purpose of acquiring and operating 68 Taco Bell and KFC restaurant units. FEF LLC made a loan of $2.0 million to the Summerwood Partnerships in exchange for warrants to purchase a 40% limited partner interest in each of the Summerwood Partnerships. In December 1996, FEF LLC exercised the warrants in full, the $2.0 million loan was converted into capital contributions and FEF LLC acquired a 40% limited partner interest in each of the Summerwood Partnerships. During the year ended December 31, 1998, the general partner of the Summerwood Partnerships required FEF LLC to make additional capital contributions to the Summerwood Partnerships in the aggregate amount of $2.0 million. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. In addition, pursuant to the terms of the agreement, Mr. Knyal is required to personally guarantee any obligations of the Summerwood Partnerships that the limited partners of such partnerships are required to personally guarantee. In connection with the acquisition, the Company made 58 loans to the Summerwood Partnerships in the initial aggregate amount of $40.6 million. The loans bear interest at annual rates ranging from 8.55% to 10.80% and are due on dates ranging from July 2001 to July 2011. At December 31, 1998, the outstanding balance of such loans was $37.1 million. 67 In November 1996, FEF LLC and certain other investors organized Restaurant Management of Carolina, L.P., a Delaware limited partnership ("Restaurant Management LP"), for the purpose of acquiring and operating 37 Taco Bell restaurant units. FEF LLC made an initial capital contribution of $3.0 million ($2.0 million of which has been repaid to FEF LLC) to, and owns a 32.5% limited partner interest in, Restaurant Management LP. Under certain circumstances, the general partner may require FEF LLC to make additional capital contributions to Restaurant Management LP in the aggregate amount of $2.0 million until the third anniversary of the acquisition. The purchase price for the units was funded in part through 27 loans from the Company in the initial aggregate amount of $23.2 million. The loans bear interest at annual rates ranging from 8.55% to 10.00% and are due on dates ranging from June 1998 to January 2012. At December 31, 1998, the outstanding balance of such loans was $21.9 million. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. In addition, in March and August 1996, prior to the acquisition, the Company made 15 loans to certain affiliates of Restaurant Management LP in the initial aggregate amount of $9.9 million. The loans bear interest at annual rates ranging from 10.25% to 10.45% and are due on dates ranging from September 2008 to September 2011. At December 31, 1998, the outstanding balance of such loans was $9.1 million. In December 1996, FEF LLC and certain other investors organized Family Eats Limited Partnership, a Delaware limited partnership ("Family Eats LP"), for the purpose of acquiring and operating 19 Taco Bell units. FEF LLC made a capital contribution of $1.45 million to, and owns a 49% limited partner interest in, Family Eats LP. During the year ended December 31, 1998, the general partner required FEF LLC to make additional capital contributions to Family Eats LP in the aggregate amount of $1.55 million. The purchase price for the units was funded in part through 18 loans from Franchise Mortgage LLC in the initial aggregate amount of $10.1 million. The loans bear interest at annual rates ranging from 9.66% to 10.25% and are due on dates ranging from July 1998 to January 2012. At December 31, 1998, the outstanding balance of such loans was $10.0 million. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. CVB, LLC. The Company, ICII and Mr. Knyal are parties to an Operating Agreement, dated February 6, 1997, pursuant to which such parties organized CVB, L.L.C., a Delaware limited liability company ("CVB LLC"), for the purpose of making equity investments in franchisees of Church's Chicken units. The Company owns a 99% membership interest in, and is the manager of, CVB LLC. ICII and Knyal own 0.67% and 0.33% membership interests, respectively, in CVB LLC. In April 1997, CVB LLC and another investor organized Atlanta Franchise Development Company, LLC, a Delaware limited liability company ("Atlanta Franchise LLC"), for the purpose of acquiring and operating 100 Church's Chicken units. CVB LLC made a nominal capital contribution to, and owns a 40% membership interest in, Atlanta Franchise LLC. The purchase price for the units was funded in part through 72 loans from Franchise Mortgage LLC in the initial aggregate amount of $25.1 million. The loans bear interest at an annual rate of 11.72% and are due in April 2012. At December 31, 1998, the outstanding balance of such loans was $23.7 million. The other investor has certain rights to purchase CVB LLC's membership interest after the fifth anniversary of the acquisition, and CVB LLC has certain rights to sell its membership interest to Atlanta Franchise LLC after the seventh anniversary of the acquisition. HNN Equity, LLC. The Company and ICII are parties to an Operating Agreement, dated March 27, 1997, pursuant to which such parties organized HNN Equity, L.L.C., a Delaware limited liability company ("HNN Equity LLC"), for the purpose of making an equity investment in Hot N Now, L.L.C., a Delaware limited liability company ("Hot 'N Now LLC"). The Company and ICII each own a 50% membership interest in, and share joint management of, HNN Equity LLC. In April 1997, HNN Equity LLC and Davis/HNN, L.L.C. ("Davis/HNN LLC"), a limited liability company principally owned by Ronald V. Davis, a director of the Company, organized Hot 'N Now LLC under the laws of the state of Delaware for the purpose of acquiring all franchisor and tradename rights to a quick service restaurant concept named "Hot 'N Now" as well as acquiring and operating 36 Not 'N Now units. HNN Equity LLC owns a 40% membership interest in Hot 'N Now LLC. 68 Davis/HNN LLC owns a 60% membership interest in, and is the manager of, Hot 'N Now LLC. The purchase price for the Units was $2.0 million and was funded through a capital contribution of $ 1.5 million by Davis/HNN LLC and a loan of $600,000 from Davis/HNN LLC. The loan bears interest at an annual rate of 8% and is payable out of distributable cash from the operations of Hot 'N Now LLC. Mr. Davis is the Chief Executive Officer of Hot 'N Now LLC and Davis/HNN LLC is entitled to an annual base fee of $60,000 per year in his capacity as manager of Hot 'N Now LLC. The manager may require the members to make additional capital contributions to Hot 'N Now LLC to satisfy the obligations of Hot 'N Now LLC to make rent payments under real estate leases for 19 units. Such obligations are also guaranteed by ICII. PRG Equity,L.LC. On April 14,1997, the Company organized PRG Equity, L.L.C., a Delaware limited liability company ("PRG Equity LLC"), for the purpose of making an equity investment in Pate Restaurant Enterprises, Ltd., a Florida limited partnership which owns and operates seven Hardee's units ("Pate Restaurant LP"). The Company owns all of the membership interests in and manages PRG Equity LLC. In April 1997, Franchise Mortgage LLC made seven loans to Pate Restaurant LP in the initial aggregate amount of $3.5 million. In connection with such loans, PRG Equity LLC acquired a 40% limited partner interest in Pate Restaurant LP. The loans bear interest at annual rates ranging from 9.94% to 10.79% and are due on dates ranging from November 1998 to May 2012. At December 31, 1998, the outstanding balance of such loans was $3.3 million. The other investors in Pate Restaurant LP have certain rights to purchase PRG Equity LLC's limited partner interest after the seventh anniversary of the acquisition, and PRG Equity LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. Certain Loans In connection with the purchase of certain of the assets and liabilities of the FMAC Division from Greenwich in June 1995, the Company assumed as a receivable a $410,000 unsecured non-interest bearing note made by Mr. Knyal in favor of Greenwich. The note was restructured in August 1997 to be payable in five annual installments of $82,000 commencing June 30, 1998 out of the bonus due to Mr. Knyal under his employment agreement with the Company. On July 15, 1997 the Company loaned Kevin T. Burke $170,000 for the purposes of assisting Mr. Burke to purchase a home. The loan is evidenced by a promissory note executed by Mr. Burke in favor of the Company that bears interest at an annual rate of 8%. On March 17, 1998, this loan was increased to $320,000 and is payable in one installment on June 30, 1999. On October 24, 1997 the Company loaned Donald Hakes $150,000 for the purposes of assisting Mr. Hakes to purchase a home. The loan is evidenced by a promissory note executed by Mr. Hakes in favor of the Company that bears interest at an annual rate of 8%. On March 17, 1998, this loan was increased to $170,000 and is payable in one installment on June 30, 1999. Other Matters Michael L. Matkins, a Director of the Company, is a partner in the law firm Allen, Matkins, Leck, Gamble & Mallory LLP, which provides legal services to the Company. 69 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit Number Exhibit Description ------- ------------------- 3.3* Form of Articles of Incorporation of the Company. 3.4* Form of Bylaws of the Company. 4.1* Form of Specimen Common Stock Certificate. 10.1* Form of 1997 Stock Option, Deferred Stock and Restricted Stock Plan and Form of Option Agreement. 10.2* Form of Employment Agreement dated August 26, 1997 by and between the Company and Wayne L. Knyal. 10.3** Form of Asset Purchase Agreement dated March 9, 1998 by and among the Company and Bankers Mutual and Bankers Mutual Mortgage, Inc. 10.4*** Form of Agreement and Plan of Merger and Reorganization dated March 10, 1999, by and between the Company and Bay View Capital Corporation. 10.5*** Form of Voting Agreement dated March 10, 1999, between the Company and Bay View Capital Corporation. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule.
- -------- * Incorporated by reference to, and all such Exhibits have the corresponding Exhibit number filed as part of, the Company's Registration Statement on Form S-1 (Commission File No. 333-34481) and Amendments No. 1, 2, and 3 filed with the SEC on August 27, 1997, October 10, 1997, October 24, 1997, and November 6, 1997, respectively. ** Incorporated by reference to Form 8-K filed with the SEC on April 13,1998. *** Incorporated by reference to Form 8-K filed with the SEC on March 12, 1999. 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By /s/ Wayne L. Knyal _____________________________________ Wayne L. Knyal President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Wayne L. Knyal President, Chief Executive March 31, 1999 ____________________________________ Officer and Director Wayne L. Knyal (Principal Executive Officer) /s/ Raedelle A. Walker Executive Vice President and March 31, 1999 ____________________________________ Chief Financial Officer Raedelle A. Walker (Principal Financial Officer and Principal Accounting Officer) /s/ H. Wayne Snavely Chairman of the Board March 31, 1999 ____________________________________ H. Wayne Snavely /s/ Ronald V. Davis Director March 31, 1999 ____________________________________ Ronald V. Davis /s/ Perry A. Lerner Director March 31, 1999 ____________________________________ Perry A. Lerner /s/ Richard J. Loughlin Director March 31, 1999 ____________________________________ Richard J. Loughlin /s/ John E. Martin Director March 31, 1999 ____________________________________ John E. Martin /s/ Michael L. Matkins Director March 31, 1999 ____________________________________ Michael L. Matkins /s/ Brad S. Plantiko Director March 31, 1999 ____________________________________ Brad S. Plantiko
71 EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 Consent of Independent Auditors The Board of Directors Franchise Mortgage Acceptance Company: We consent to incorporation by reference in the registration statement (No. 333-74375) on Form S-8 of Franchise Mortgage Acceptance Company of our report dated January 19, 1999, except as to notes 22, 23, and 20 to the consolidated financial statements, which are as of February 16, 1999, March 10, 1999, and March 29, 1999, respectively, relating to the consolidated balance sheets of Franchise Mortgage Acceptance Company as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' or members' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998, annual report on Form 10-K of Franchise Mortgage Acceptance Company. KPMG LLP Los Angeles, California March 29, 1999 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 39,182 10,079 46,770 44,522 491,242 345,958 0 0 0 0 577,194 400,559 9,900 3,066 (3,046) (548) 676,314 422,232 511,564 269,650 0 0 0 0 0 0 29 29 146,684 138,393 676,314 422,232 67,577 60,476 67,577 60,476 0 0 0 0 53,766 24,755 0 0 0 0 13,819 35,721 5,528 15,001 8,291 20,720 0 0 0 0 0 0 8,291 20,720 0.29 0.91 0.29 0.91
-----END PRIVACY-ENHANCED MESSAGE-----