-----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, WBb98e+2uaQMJofjDi3FWCnRmUHBpESCJPqL+wlgNOYMlZews6Mbe5egR5SNZX5E SIK9XlpsTe/VzvvN6q9xOw== 0000944209-99-001395.txt : 19990823 0000944209-99-001395.hdr.sgml : 19990823 ACCESSION NUMBER: 0000944209-99-001395 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990820 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANCHISE MORTGAGE ACCEPTANCE CO CENTRAL INDEX KEY: 0001045007 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954649104 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23283 FILM NUMBER: 99697119 BUSINESS ADDRESS: STREET 1: 1888 CENTURY PARK EAST STREET 2: 3RD FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3102292600 MAIL ADDRESS: STREET 1: 1888 CENTURY PARK EAST STREET 2: 3RD FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 10-Q 1 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 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 Identification Number) incorporation or organization) 1888 Century Park East, Third Floor Los Angeles, California 90067 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 229-2600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest possible date: Class Shares Outstanding at July 31, 1999 ------------------------------ ----------------------------------- Common Stock, $0.001 par value 28,781,552 FRANCHISE MORTGAGE ACCEPTANCE COMPANY FORM 10-Q TABLE OF CONTENTS -----------------
Part I - Financial Information Page ------------------------------ ---- Item 1 Consolidated Financial Statements --------------------------------- Consolidated Balance Sheets - June 30, 1999 and December 31, 1998........................... 3 Consolidated Statements of Operations and Comprehensive Loss - Three months ended June 30, 4 1999 and 1998 and six months ended June 30, 1999 and 1998................................... Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998............. 5 Notes to Consolidated Financial Statements.................................................. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12 ------------------------------------------------------------------------------------- Item 3 Quantitative and Qualitative Disclosures About Market Risk.................................. 18 ---------------------------------------------------------- Part II - Other Information --------------------------- Item 1 Legal Proceedings........................................................................... 20 ----------------- Items 2-6 Not Applicable -------------- Signatures.................................................................................. 21 ----------
Forward-Looking Statements Certain statements in this Form 10-Q 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 - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data)
June 30, December 31, 1999 1998 ---- ---- ASSETS Cash and cash equivalents............................................. $ 21,496 $ 33,425 Interest bearing deposits - restricted................................ 6,140 5,757 Securities available for sale......................................... 14,388 16,818 Loans and leases held for sale........................................ 352,496 325,727 Loans and leases held for investment.................................. 138,776 162,928 Retained interest in loan securitizations............................. 28,938 29,952 Servicing rights...................................................... 34,132 29,905 Premises and equipment, net........................................... 6,632 6,854 Goodwill.............................................................. 48,735 37,353 Accrued interest receivable........................................... 1,942 2,587 Other assets.......................................................... 29,539 25,008 -------- -------- Total assets..................................................... $683,214 $676,314 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings............................................................ $496,035 $483,763 Current income taxes payable.......................................... 1,576 1,661 Deferred income taxes................................................. 16,402 18,045 Other liabilities..................................................... 24,451 26,140 -------- -------- Total liabilities................................................ 538,464 529,609 -------- -------- Commitments and contingencies Minority interest in subsidiary....................................... (897) (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; 28,781,552 shares issued and outstanding at June 30, 1999 and 28,715,625 shares issued and outstanding at December 31, 1998....... 29 29 Additional paid-in capital.......................................... 126,193 118,330 Employee stock awards............................................... (7,313) -- Accumulated other comprehensive loss: Unrealized loss on securities available for sale, net of tax...... (1,500) -- Retained earnings................................................... 28,238 28,354 -------- -------- Total stockholders' equity....................................... 145,647 146,713 -------- -------- Total liabilities and stockholders' equity....................... $683,214 $676,314 ======== ========
See accompanying notes to consolidated financial statements. 3 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) (In thousands, except income (loss) per share)
Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1999 1998 1999 1998 ------- ------- ------- ------- Revenue: Gain on sale of loans and leases........................... $ 7,158 $22,917 $18,368 $39,238 ------- ------- ------- ------- Interest income............................................ 10,269 14,958 19,255 25,525 Interest expense........................................... 6,131 11,081 12,468 17,446 ------- ------- ------- ------- Net interest income..................................... 4,138 3,877 6,787 8,079 ------- ------- ------- ------- Loan servicing income...................................... 5,286 4,614 11,798 5,868 Trading income............................................. 1,822 -- 3,463 -- Insurance services income.................................. 193 -- 1,320 -- Other income (loss)........................................ (1,711) 201 (1,520) 579 ------- ------- ------- ------- Total revenue........................................... 16,886 31,609 40,216 53,764 ------- ------- ------- ------- Expense: Personnel.................................................. 8,342 8,016 16,797 13,181 Professional services...................................... 1,353 929 1,845 1,525 Travel. .................................................. 886 931 1,730 1,498 Business promotion......................................... 1,006 1,151 1,851 1,808 Provision for losses....................................... 9,947 633 10,209 633 Occupancy.................................................. 933 663 1,756 1,018 Goodwill amortization...................................... 935 702 1,637 817 General and administrative................................. 3,158 1,509 5,473 3,772 ------- ------- ------- ------- Total expense........................................... 26,560 14,534 41,298 24,252 ------- ------- ------- ------- Income (loss) before income taxes and minority interest in subsidiary................................................. (9,674) 17,075 (1,082) 29,512 Minority interest in subsidiary............................. (956) 110 (889) 110 Income taxes (tax benefit).................................. (3,487) 7,126 (77) 12,349 ------- ------- ------- ------- Net income (loss)...................................... $(5,231) $ 9,839 $ (116) $17,053 ======= ======= ======= ======= Basic income (loss) per share............................... $ (0.18) $ 0.34 $ 0.00 $ 0.59 ======= ======= ======= ======= Weighted average shares outstanding......................... 28,780 28,716 28,757 28,716 ======= ======= ======= ======= Diluted income (loss) per share............................. $ (0.18) $ 0.34 $ 0.00 $ 0.59 ======= ======= ======= ======= Weighted average shares outstanding......................... 28,780 29,100 28,757 28,762 ======= ======= ======= ======= Net income (loss)........................................... $(5,231) $ 9,839 $ (116) $17,053 Other comprehensive loss: Unrealized loss on securities available for sale, net of tax....................................................... (1,500) -- (1,500) -- ------- ------- ------- ------- Comprehensive loss.......................................... $(6,731) $ 9,839 $(1,616) $17,053 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 4 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, -------- 1999 1998 ---- ---- Cash flows from operating activities: Net income (loss).................................................................. $ (116) $ 17,053 Adjustments to reconcile net income to net cash used in operating activities: Depreciation, amortization and discount accretion................................ 2,589 2,059 (Increase) decrease in accrued interest receivable............................... 645 (6,590) Increase (decrease) in deferred income taxes..................................... (643) 12,394 Decrease in current income taxes payable......................................... (85) -- Increase (decrease) in other liabilities and accrued interest payable............ (7,208) 14,577 (Increase) decrease in other assets.............................................. (4,531) 5,571 Increase in valuation allowance for retained interest in loan securitizations.... 458 -- Increase in originated mortgage servicing rights................................. (6,127) -- Loan and lease operations Loans and leases originated.................................................... (908,872) (879,266) Loans sold to affiliates....................................................... 487,907 157,348 Provision for loan and lease losses, net of write-offs......................... 9,122 910 Principal reductions........................................................... 79,370 41,797 Cash proceeds from loan sales and securitizations.............................. 329,607 448,972 --------- --------- Net cash used in operating activities.............................................. (17,884) (185,175) --------- --------- Cash flows from investing activities: Purchases of premises and equipment.............................................. (1,100) (2,689) Increase in interest bearing deposits............................................ (383) (218) Sale of securities available for sale............................................ -- 22,870 Proceeds from securities available for sale...................................... 1,094 398 Increase in retained interests in securitizations................................ -- (3,935) Proceeds from retained interests in securitizations.............................. 1,951 444 Purchase of servicing rights..................................................... -- (1,180) Purchase of Bankers Mutual....................................................... -- (63,028) Increase in Goodwill due to Bankers Mutual earn-out.............................. (7,500) -- Increase (decrease) in minority interest in subsidiary........................... (889) 110 --------- --------- Net cash used in investing activities.............................................. (6,827) (47,228) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock........................................... 510 -- Increase in borrowings........................................................... 12,272 231,161 --------- --------- Net cash provided by financing activities.......................................... 12,782 231,161 --------- --------- Net change in cash................................................................... (11,929) (1,242) Cash at beginning of period.......................................................... 33,425 7,335 --------- --------- Cash at end of period................................................................ $ 21,496 $ 6,093 ========= =========
See accompanying notes to consolidated financial statements 5 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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 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 February 17, 1999, the Company granted 1,189,500 shares of restricted common stock to certain employees, which vest over the next eight years and fully vest upon the effective date of the merger with Bay View Capital Corporation ("Bay View"). On February 24, 1999, the Company issued an additional 44,932 shares of common stock to former employees of the Company. On April 7, 1999, the Company issued 20,995 shares of common stock to certain employees. On March 11, 1999, Bay View and the Company executed an Agreement and Plan of Merger and Reorganization ("Merger Agreement") providing for the merger of the Company and Bay View. Under the terms of the Merger Agreement, Bay View will acquire all of the Company's common stock for consideration valued at approximately $309 million. Each share of the Company's common stock will be exchanged for, at the election of its holder, either $10.25 in cash or 0.5125 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 after the merger, other than any former Company stockholder who had been expressly approved by the appropriate banking regulatory authorities to own more than 9.99% of Bay View's common stock. The Merger Agreement also provides for additional payments of up to $30 million in connection with the earn-out provision of the Company's April 1998 purchase of Bankers Mutual, $7.5 million of which was paid by the Company during the second quarter of 1999. The Company and Bay View are currently in discussions regarding a possible restructuring of the transaction to increase the primary equity component of the consideration price. During the second quarter of 1999, Bay View received regulatory approval for the merger from the Federal Reserve Bank and on August 18, 1999, Bay View received approval by the Office of the Comptroller of the Currency. The acquisition, which is subject to approval by both the Company's and Bay View's stockholders, is expected to close by the end of the third quarter or the beginning of the fourth quarter of 1999. On April 30, 1999, the Company sold certain of its assets relating to its Equipment Finance Group to Federated Capital Corporation ("Federated"). As a condition of this agreement, Federated will service the Company's current equipment finance transactions and act as sub-servicer on the Company's 1998-1 securitization. The Company will still offer equipment loans to its borrowers, however, it will do so through its other operating units. (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 6 Company and FMAC Golf Finance Group LLC ("Golf JV"). All significant intercompany balances and 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) Supplemental Disclosure of Cash Flow Information Cash paid for interest for the six months ended June 30, 1999 and 1998 was $16.3 million and $12.8 million, respectively. Cash paid for taxes for the six months ended June 30, 1999 and 1998 was $1.7 million and $0.7 million, respectively. For the six months ended June 30, 1999, the Company recorded $1.5 million of unrealized losses on securities available for sale, net of tax. (4) Securities Available for Sale Securities available for sale consist of asset-backed securities issued by the Company. For the six months ended June 30, 1999 and the year ended December 31, 1998, activity in securities available for sale was as follows:
(In thousands) For the Six Months Ended June 30, 1999 -------------------------------------- Beginning Face Cash Discount Unrealized Ending Balance Amount Discount Received Accretion Sold Loss Balance --------- -------- --------- --------- --------- ---------- -------- 1998-CE(1).......... $10,388 $ - $ - $ (567) $ 815 $ - $(2,000) $ 8,636 1998-CF(1).......... 3,547 - - (243) 349 - (500) 3,153 1998-1(2)........... 2,883 - - (284) - - - 2,599 ------- ------ -------- ------- ------ ---- ------- ------- Totals.............. $16,818 $ - $ - $(1,094) $1,164 $ - $(2,500) $14,388 ======= ====== ======== ======= ====== ==== ======= ======= For the Year Ended December 31, 1998 ------------------------------------ Beginning Face Cash Discount Unrealized Ending Balance Amount Discount Received Accretion Sold Loss Balance --------- -------- --------- --------- --------- ---------- -------- 1997-B(3)........... $22,870 $ - $ - $ - $ - $(22,870) $ - $ - 1998-CE(1).......... - 13,090 (2,702) - - - - 10,388 1998-CF(1).......... - 5,610 (2,063) - - - - 3,547 1998-1(2)........... - 3,301 (283) (135) - - - 2,883 ------- ------- ------- ----- --------- -------- ---------- ------- Totals.............. $22,870 $22,001 $(5,048) $(135) $ - $(22,870) $ - $16,818 ======= ======= ======= ===== ========= ======== ========== =======
_____ (1) 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. (2) 1998-1 is the Class C certificate that was purchased by the Company as part of the 1998-1 equipment finance securitization. (3) 1997-B is an interest-only strip that was purchased from CS First Boston in December 1997 and was subsequently sold in March 1998. (5) Loans and Leases Held for Sale The Company offers permanent commercial loans, 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. 7 At June 30, 1999 and December 31, 1998, loans and leases held for sale consisted of the following:
(In thousands) June 30, December 31, 1999 1998 ---- ---- Permanent commercial loans(1)....................................................................... $235,409 $149,222 Multi-family loans.................................................................................. 60,096 119,599 Loans in process.................................................................................... 3,496 7,410 Equipment loans and leases.......................................................................... 74,832 63,671 Unearned lease income............................................................................... (20,256) (17,834) Allowance for loan and lease losses................................................................. (699) (445) Net deferred loan costs............................................................................. 1 2,198 Margin and deferred net (gains) losses on futures contracts used to hedge loans and leases held for sale(2)............................................................................................. (383) 1,906 -------- -------- Loans and leases held for sale................................................................... $352,496 $325,727 ======== ========
- ------------- (1) Includes $80.2 million in loans repurchased from Bay View, which were subsequently sold back to Bay View on June 29, 1999. (2) The deferred hedge (gain) loss is related to loans financed as part of the Golf JV. Activity in valuation allowances for loans and leases held for sale for the six months ended June 30, 1999 and the year ended December 31, 1998 was as follows:
(In thousands) June 30, December 31, 1999 1998 ---- ---- Balance, beginning of period................................. $ 445 $ 998 Provisions................................................... 254 1,699 Charge-offs.................................................. - - Transfer of allowance to loans held for investment........... - (2,252) ----- ------- Balance, end of period....................................... $ 699 $ 445 ===== =======
(6) 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. At June 30, 1999 and December 31, 1998, loans and leases held for investment consisted of the following:
(In thousands) June 30, December 31, 1999 1998 ---- ---- Permanent commercial loans................................................................ $ 47,842 $ 9,639 Short-term commercial loans............................................................... 99,754 130,357 Multi-family loans........................................................................ - 25,233 Equipment loans and leases................................................................ 3,088 598 Allowance for loan and lease losses....................................................... (11,856) (2,988) Net deferred loan (fees) costs............................................................ (52) 89 -------- -------- Loans and leases held for sale......................................................... $138,776 $162,928 ======== ========
Non-accrual loans, including impaired loans, totaled $13.7 million and $17.1 million at June 30, 1999 and December 31, 1998, respectively. 8 Activity in valuation allowances for loans and leases held for investment for the six months ended June 30, 1999 and the year ended December 31, 1998 was as follows:
(In thousands) June 30, December 31, 1999 1998 ---- ---- Balance, beginning of period................................. $ 2,988 $ - Provisions(1)................................................ 9,259 736 Charge-offs.................................................. (391) - Transfer of allowance from loans held for sale............... - 2,252 ------- ------ Balance, end of period....................................... $11,856 $2,988 ======= ======
- ---------- (1) Does not include provisions for recourse liabilities for sold loans. (7) Retained Interest in Loan Securitizations Activity in retained interest in loan securitizations was as follows for the six months ended June 30, 1999 and the year ended December 31, 1998:
(In thousands) For the Six Months Ended June 30, 1999 --------------------------------------------------------------------------- Beginning Bond Cash Discount Valuation Ending Balance Amount Received Accretion(2) Allowance Balance ---------- ------ -------- ------------ --------- ------- 1994-A.................. $ 1,281 $ - $ (200) $ 98 $ - $ 1,179 1995-A.................. 754 - - 53 - 807 1996-A.................. 6,196 - (7) - - 6,189 1996-B.................. 331 - - - - 331 1997-A.................. 379 - - 20 - 399 1997-B.................. 338 - - 17 - 355 1997-C.................. 295 - - 15 - 310 1998-A.................. 305 - - 16 - 321 1998-B.................. 3,628 - (463) 351 - 3,516 1998-C.................. 5,806 - (560) 581 - 5,827 1998-1(1)............... 2,423 - (721) - - 1,702 1998-D.................. 9,666 - - 244 - 9,910 Valuation Allowance..... (1,450) - - - (458) (1,908) ------- ------- ------- ------ ----- ------- Totals................ $29,952 $ - $(1,951) $1,395 $(458) $28,938 ======= ======= ======= ====== ===== ======= For the Year Ended December 31, 1998 ---------------------------------------------------------------------------- Beginning Bond Cash Discount Valuation Ending Balance Amount Received Accretion(2) Allowance Balance --------- ------ -------- ----------- --------- ------- 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 ======= ======= ======== ====== ======= =======
- ---------- (1) Equipment Finance transaction. (2) The weighted average discount rate on retained interests was 19.58% and 18.0% at June 30, 1999 and December 31, 1998, respectively. 9 (8) Servicing Rights Activity in servicing rights for the six months ended June 30, 1999 and the year ended December 31, 1998 was as follows:
(In thousands) June 30, December 31, 1999 1998 ---- ---- Balance, beginning of period..................................... $29,905 $ 2,213 Originated....................................................... 6,127 8,190 Purchased........................................................ - 6 Amortization..................................................... (1,900) (2,291) Acquired as a result of Bankers Mutual acquisition............... - 21,787 ------- ------- Balance, end of period........................................... $34,132 $29,905 ======= =======
10 (9) Borrowings Borrowings consisted of the following at June 30, 1999 and December 31, 1998:
(dollars in thousands) June 30, 1999 ------------------------------------- Expiration Interest Commitment Principal Lender Date Index Rate(8) Amount Outstanding ------ ---- ----- --------- ---------- ----------- Credit Suisse First Boston(1)(2)........... 12/31/99 One-month LIBOR 6.54% to $300,000 $175,047 plus 130 to 150 basis points 6.74% Morgan Stanley(1).......................... 12/30/99 One-month LIBOR 6.74% to 300,000 24,136 plus 150 to 175 basis points 6.99% Banco Santander(1)......................... 08/31/99 One-month LIBOR 6.99% 50,000 24,426 plus 175 basis points Sanwa Bank(1).............................. 08/31/99 One-month LIBOR 6.84% 25,000 22,760 plus 160 basis points Goldman Sachs Mortgage Company(1)(3)....... 05/10/99 One-month LIBOR 6.24% 100,000 44,842 plus 100 basis points Residential Funding Corporation(4)......... 08/31/99 One-month LIBOR 6.24% 100,000 56,596 plus 100 basis points Bank of America(1)(5)...................... 08/30/99 Fixed rate 1.00% 35,000 3,430 Residential Funding Corporation(6)......... 05/31/04 One-month LIBOR 7.49% 50,000 31,432 plus 225 basis points Other borrowings(7)........................ - - 113,366 -------- -------- Totals................................... $960,000 $496,035 ======== ======== (dollars in thousands) December 31, 1998 ------------------------------------- Interest Commitment Principal Lender Rate(8) Amount Outstanding ------ --------- ---------- ----------- Credit Suisse First Boston(1)(2)........... 6.38% to $ 300,000 $122,356 6.58% Morgan Stanley(1).......................... 6.58% to 300,000 - 6.83% Banco Santander(1)......................... 6.83% 50,000 34,669 Sanwa Bank(1).............................. 6.68% 25,000 14,369 Goldman Sachs Mortgage Company(1)(3)....... 6.08% 100,000 46,989 Residential Funding Corporation(4)......... 6.08% 200,000 124,763 Bank of America(1)(5)...................... 1.00% 35,000 18,776 Residential Funding Corporation(6)......... 7.33% 50,000 31,432 Other borrowings(7)........................ - - 90,409 ---------- -------- Totals................................... $1,060,000 $483,763 ========== ========
- ----------- (1) The above borrowings are collateralized by franchise loans and leases held for sale and investment. (2) The agreement with Credit Suisse First Boston ("CSFB") requires the Company to obtain a capital infusion of $100 million by May 31, 1999. The Company is currently in the process of obtaining a temporary waiver of this covenant from CSFB until the Bay View merger is completed. (3) The warehouse line of credit with Goldman Sachs Mortgage Company is used to fund loans through the Golf JV. The Company is currently in the process of dissolving the Golf JV at which time this warehouse line will be terminated. (4) The Residential Funding Corporation ("RFC") 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 a fixed interest rate of 1.00% when the Company maintains minimum deposit requirements. (6) The RFC line of credit is collateralized by the Company's loan servicing portfolio. As of May 31, 1999, this line of credit has converted to a term loan requiring principal payments of approximately $1.6 million payable quarterly until May 31, 2004. (7) As of June 30, 1999, other borrowings includes $4.2 million of sold loans that have been accounted for as a financing, $47.2 million of loans that have been financed through FMAC Star Fund, LLP, a $7.0 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral, $54.2 million related to a participation agreement with Bay View Bank, and a $0.8 million loan with Far East Bank. As of December 31, 1998, other borrowings includes $55.3 million of sold loans that have been accounted for as a financing, $29.0 million of loans that have been financed through FMAC Star Fund, LLP, and a $6.1 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral. (8) The weighted average interest rate on borrowings was 6.59% and 6.96% at June 30, 1999 and December 31, 1998, respectively. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. On March 11, 1999, Bay View Capital Corporation ("Bay View") and the Company executed an Agreement and Plan of Merger and Reorganization ("Merger Agreement") providing for the merger of the Company and Bay View. Under the terms of the Merger Agreement, Bay View will acquire all of the Company's common stock for consideration valued at approximately $309 million. Each share of the Company's common stock will be exchanged for, at the election of its holder, either $10.25 in cash or 0.5125 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 after the merger, other than any former Company stockholder who had been expressly approved by the appropriate banking regulatory authorities to own more than 9.99% of Bay View's common stock. The Merger Agreement also provides for additional payments of up to $30 million in connection with the earn-out provision of the Company's April 1998 purchase of Bankers Mutual, $7.5 million of which was paid by the Company during the second quarter of 1999. The Company and Bay View are currently in discussions regarding a possible restructuring of the transaction to increase the primary equity component of the consideration price. During the second quarter of 1999, Bay View received regulatory approval for the merger from the Federal Reserve Bank and on August 18, 1999, Bay View received approval by the Office of the Comptroller of the Currency. The acquisition, which is subject to approval by both the Company's and Bay View's stockholders, is expected to close by the end of the third quarter or the beginning of the fourth quarter of 1999. On April 30, 1999, the Company sold certain of its assets relating to its Equipment Finance Group to Federated Capital Corporation ("Federated"). As a condition of this agreement, Federated will service the Company's current equipment finance transactions and act as sub-servicer on the Company's 1998-1 securitization. The Company will still offer equipment loans to its borrowers, however, it will do so through its other operating units. Results of Operations Three and Six Months Ended June 30, 1999 Compared to Three and Six Months Ended June 30, 1998 Total revenues decreased 46.6% to $16.9 million for the three months ended June 30, 1999 from $31.6 million for the comparable period in 1998. During the same periods, the Company's total expenses increased 82.7% to $26.6 million from $14.5 million. As a result, the Company experienced a net loss of $5.2 million for the three months ended June 30, 1999 as compared to net income of $9.8 million for the same period in 1998. Total revenues decreased 25.2% to $40.2 million for the six months ended June 30, 1999 from $53.8 million for the comparable period in 1998. During the same periods, the Company's total expenses increased 70.3% to $41.3 million from $24.3 million. As a result, the Company experienced a net loss of $116,000 for the six months ended June 30, 1999 as compared to net income of $17.1 million for the same period in 1998. The decrease in revenues for the three and six months ended June 30, 1999 was primarily attributable to decreases in gain on sale of loans and leases. During 1999, the Company has been selling its loans through whole loan sales as opposed to selling them through securitizations as it did in 1998. As a result, it has experienced lower 12 net gain at the time of sale. The Company plans to securitize loans again in the future but is trying to time such securitizations so as to optimize pricing. In addition to the lower profitability from the sale of loans, the Company wrote down its equipment loans and leases held for sale by $1.7 million during the three months ended June 30, 1999 in anticipation of a sale which is expected to close in the third quarter of 1999. Net interest income did not change significantly for the three months ended June 30, 1999 increasing 6.7% to $4.1 million as compared to $3.9 million during the same period in 1998. Net interest income decreased 16.0% to $6.8 million for the six months ended June 30, 1999 from $8.1 million for the comparable period in 1998. This decrease is primarily due to the addition of the Multi-Family Finance Group which originates its loan products at a lower net interest spread than the Company's other lending groups. Loan servicing income increased 14.6% to $5.3 million for the three months ended June 30, 1999 as compared to $4.6 million for the same period in 1998. Loan servicing income increased 101.1% to $11.8 million for the six months ended June 30, 1999 as compared to $5.9 million for the same period in 1998. This was due to an increase in loans and leases serviced which resulted from the securitizations and whole loan sales during 1998 with servicing rights retained by the Company as well as an increase of serviced loans directly related to the addition of Multi-Family Finance Group. As of June 30, 1999, the Company's loan servicing portfolio totaled approximately $6.0 billion as compared to $4.5 billion at June 30, 1998. Trading income for the three and six months ended June 30, 1999 was $1.8 million and $3.5 million, respectively and represents hedging gains and losses on the Company's loans held for sale. The Company also recorded $1.3 million in insurance brokerage fee income for the six months ended June 30, 1999. Other income (loss) for the six months ended June 30, 1999 includes a $1.8 million write-off of accrued interest receivable related to prior periods. Total expenses increased 82.7% to $26.6 million for the three months ended June 30, 1999 as compared to $14.5 million for the same period of the prior year. Total expenses increased 70.3% to $41.3 million for the six months ended June 30, 1999 as compared to $24.3 million for the same period of the prior year. Certain of the expense increases in the three and six months ended June 30, 1999 were related to activities in anticipation of the Bay View merger. Increases in professional services, occupancy and general and administrative expenses include expenses of preparing for the Year 2000 computer issue which were expanded in anticipation of the Bay View merger; legal and consulting expenses associated with warehouse line renewals and negotiations, sale of the Equipment Finance Group and divestiture of the Company's joint ventures and equity holdings in anticipation of the Bay View merger; expenses of FMAC Golf Finance Group LLC ("Golf JV"); expenses of the Insurance Services division which did not begin operations until the end of the second quarter of 1998; and depreciation and office-related expenses associated with the expansion and moving of several large offices in the latter half of 1998. The provision for losses had the most significant impact on total expenses for both the three and six months ended June 30, 1999 increasing to $9.9 million and $10.2 million, respectively, from $0.6 million and $0.6 million for the three and six months ended June 30, 1998, respectively. $2.2 million of this provision relates to the remaining equipment loans and leases which were not part of the sale of the Company's Equipment Finance Group. $2.3 million relates to loans remaining with the Golf JV. $0.5 million is related to the Company's retained interests in securitizations. A portion of the remaining provision relates to five problem loans for which new information reflected a deteriorating valuation during the second quarter of 1999, enabling the Company to better estimate the value of the collateral. The remainder of the provision was related to two loans which are not past due but are experiencing some reduction in their fixed charge coverage ratios. 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 June 30, 1999 and December 31, 1998 consisted of the following: 13
(In thousands) June 30, 1999 December 31, 1998 ------------- ----------------- Expiration Commitment Principal Commitment Principal Lender Date Amount Outstanding Amount Outstanding ------ ---- ------ ----------- ------ ----------- Credit Suisse First Boston(1)(2)............. 12/31/99 $300,000 $175,047 $ 300,000 $122,356 Morgan Stanley(1)............................ 12/30/99 300,000 24,136 300,000 - Banco Santander(1)........................... 08/31/99 50,000 24,426 50,000 34,669 Sanwa Bank(1)................................ 08/31/99 25,000 22,760 25,000 14,369 Goldman Sachs Mortgage Company(1)(3)......... 05/10/99 100,000 44,842 100,000 46,989 Residential Funding Corporation(1)(4)........ 08/31/99 100,000 56,596 200,000 124,763 Bank of America(1)(5)........................ 08/30/99 35,000 3,430 35,000 18,776 Residential Funding Corporation(6)........... 05/31/04 50,000 31,432 50,000 31,432 Other Borrowings(7).......................... - 113,366 - 90,409 -------- -------- ---------- -------- Totals..................................... $960,000 $496,035 $1,060,000 $483,763 ======== ======== ========== ========
_____ (1) The above borrowings are collateralized by franchise loans and leases held for sale and investment. (2) The agreement with Credit Suisse First Boston ("CSFB") requires the Company to obtain a capital infusion of $100 million by May 31, 1999. The Company is currently in the process of obtaining a temporary waiver of this covenant from CSFB until the Bay View merger is completed. (3) The warehouse line of credit with Goldman Sachs Mortgage Company is used to fund loans through the Golf JV. The Company is currently in the process of dissolving the Golf JV at which time this warehouse line will be terminated. (4) The Residential Funding Corporation ("RFC") 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 a fixed interest rate of 1.00% when the Company maintains minimum deposit requirements. (6) The RFC line of credit is collateralized by the Company's loan servicing portfolio. As of May 31, 1999, this line of credit has converted to a term loan requiring principal payments of approximately $1.6 million payable quarterly until May 31, 2004. (7) As of June 30, 1999, other borrowings includes $4.2 million of sold loans that have been accounted for as a financing, $47.2 million of loans that have been financed through FMAC Star Fund, LLP, a $7.0 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral, $54.2 million related to a participation agreement with Bay View Bank, and a $0.8 million loan with Far East Bank. As of December 31, 1998, other borrowings includes $55.3 million of sold loans that have been accounted for as a financing, $29.0 million of loans that have been financed through FMAC Star Fund, LLP, and a $6.1 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral. The above facilities, with the exception of Bank of America, have variable interest rates based on London Interbank Offered Rate plus a spread. The line of credit with Bank of America has a fixed interest rate of 1.00% when minimum deposit requirements are maintained. The warehouse line with Banco Santander has been used primarily for funding loans and leases of the Equipment Finance Group. Due to the divestiture of this division, the Company may not elect to renew this facility. The Company is currently negotiating the renewal of the warehouse line of credit with Sanwa Bank which may include an increase of the commitment amount. The weighted average interest rate on the outstanding principal balances of these facilities was 6.59% and 6.96% at June 30, 1999 and December 31, 1998, respectively. The Company also has a master purchase and sale agreement with Southern Pacific Bank (''SPB"), a wholly owned subsidiary of Imperial Credit Industries, Inc. to originate loans for SPB under mutual agreement, and subject to SPB underwriting each such loan prior to sale of such loans. Under this agreement, the Company also has the ability to repurchase loans, under mutual agreement with SPB. There is no specified commitment by either party, and each individual sale is negotiated separately as to pricing. This agreement has no expiration date. For the six months ended June 30, 1999 and year ended December 31, 1998, loans originated for SPB (and not repurchased), including participations, totaled approximately $6.3 million and $26.5 million, respectively. 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 (v) cash proceeds from loan securitization and (vi) insurance brokerage fees. 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 six months ended June 30, 1999, net cash used in operating activities was $15.0 million. This excludes cash used in net loan origination activities of $2.9 million. The net use of cash in the six months ended June 30, 1999 was primarily related to the lower profitability of loan sales resulting from the decision to sell loans to Bay View in 14 anticipation of the merger. For the six months ended June 30, 1998, net cash provided by operating activities was $45.0 million, exclusive of cash used in net loan origination activities of $230.2 million. For the six months ended June 30, 1999, net cash used in investing activities was $6.8 million, which was primarily attributable to payment of $7.5 million to Bankers Mutual and Bankers Mutual Mortgage Inc. (together "Bankers") according to the earn-out clause of the Asset Purchase Agreement dated March 9, 1998 by and among the Company, Bankers, and the holders of the outstanding shares of Bankers. For the six months ended June 30, 1998, net cash used in investing activities was $47.2 million, which was primarily attributable to the purchase of Bankers and the sale of a $22.9 million security, which was related to the Company's 1997-B securitization. For the six months ended June 30, 1999, net cash provided by financing activities was $12.8 million, which was primarily attributable to an increase in borrowings from warehouse lines of credit to finance loan originations during the period. For the six months ended June 30, 1998, net cash provided by financing activities was $231.2 million, which was primarily attributable to an increase in borrowings from warehouse lines of credit to finance loan originations during the period. 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 twelve months if the Company's future operations are consistent with management's expectations. However, the Company is dependent upon its ability to sell and securitize its loans as well as 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 21/st/ century date (i.e. 20--) from a 20/th/ 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 and operations are Y2K ready. Further, the Company is making such efforts, as it deems appropriate, to determine that its value chain participants will also be 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 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. Both the Y2K Project Steering Committee and the Y2K Project Core Team meet 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 of all internal systems, which commenced in September 1998 and will continue until the Y2K Project is completed; Phase II covers testing and remediation of all mission critical systems, which commenced in January 1999 and concluded in April 1999; Phase III covers testing and remediation of all non-mission critical systems, which commenced in December 1998 and concluded 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 15 . Value chain participants . Business infrastructure . Customers, including Y2K readiness of potential new customers The assessment of all value chain participants is substantially complete. Ongoing value chain participant monitoring programs are now being put into place. All high and medium priority borrower assessments have been completed, with the remainder to be completed in August 1999. To date, the Company has not identified any critical Y2K issues with either its value chain participants or its borrowers. The Company has established dedicated budgets for its Y2K Project. Currently, the projected total cost of the Y2K Project is approximately $1.0 million but is subject to change if any unanticipated situations arise. Any expenses related to Y2K issues are being expensed as incurred. As of July 31, 1999, the Company has incurred approximately $638,000 in Y2K Project related expenditures. The Company is substantially complete with the assessment, testing and remediation of all internal systems. All non-compliant systems have either been replaced or retired. To date, the risks associated with the Company's internal Y2K issues do not appear to be material due to the current compliance status of most all hardware and the vendor assurances on the third-party supplied software systems. Risks related to third-party business partners and borrowers are not completely known at this time. The Company's ongoing Awareness and Impact Assessment phase will result in the identification of substantially all Y2K related risks in these areas. There can be no guarantee that the systems of other organizations on which the Company's systems rely will be Y2K compliant or will be compatible with the Company' systems, each of which could have a material adverse effect on the Company. The Company is currently building specific contingency plans as they relate to the Y2K issues. A formal process is currently underway to address all determined business risks in a comprehensive contingency plan. This plan will address all system, facilities, business partner and borrower areas as they specifically relate to the Y2K risks that are identified. The Company is working to identify and analyze the most reasonably likely worst case scenarios for third-party relationships affected by the Y2K issues. These scenarios could include possible infrastructure collapse, unforeseen product shortages, major transportation disruptions, any one of which could have major and material effects on the Company's business. While the Company is developing contingency plans to address most issues under its control, an infrastructure problem outside of its control could result in a delay in the Company's delivering its products and services depending on the nature and severity of the problems. Although the Company is dedicating substantial resources towards obtaining Y2K readiness, there is no assurance that it will be successful in its efforts to identify and address all Y2K issues. Even if the Company acts in a timely manner to complete all of its assessments, identify, develop and implement remediation plans believed to be adequate, and develop contingency plans, some problems may not be identified or corrected in time to prevent material adverse consequences to the Company. The estimates and conclusions herein are forward-looking statements and are based on management's best estimates of future events. Risks of completing the plan include the availability of resources, the ability to discover and correct potential Y2K sensitive problems which could have a serious impact on certain operations and the ability of the Company's service providers to bring their systems into Y2K compliance. As the Company continues to progress with its Y2K initiatives, it may discover that actual results will differ materially from these estimates. The Company's Y2K efforts are continual and the Y2K Project will 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 16 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. 17 ITEM 3. 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 June 30, 1999:
Total Fair (Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Balance Value ---- ---- ---- ---- ---- ---------- ------- ----- Interest-sensitive assets: Loans held for sale Permanent commercial loans....... $ - $ 150 $ - $ - $ 231 $235,028 $235,409 $235,409 Average interest rate.......... - 12.00% - - 11.60% 9.37% 9.37% Multi-family loans............... - - - - - 60,096 60,096 60,096 Average interest rate.......... - - - - - 7.48% 7.48% Equipment loans and leases....... - 29 659 2,638 5,522 45,728 54,576 54,576 Average interest rate.......... - 10.69% 11.52% 12.33% 12.00% 10.97% 11.14% Loans held for investment Permanent commercial loans(1).... 1,786 126 872 - - 41,965 44,749 44,749 Average interest rate.......... 9.63% 8.75% 9.36% - - 9.32% 9.33% Short-term commercial loans(1)... 66,092 12,509 - - - 15,574 94,175 94,175 Average interest rate.......... 9.35% 8.59% - - - 9.33% 9.24% Equipment loans and leases(1).... - - - 30 69 652 751 751 Average interest rate.......... - - - 14.59% 10.66% 12.25% 12.19% Securities available for sale(2)... 1,008 1,868 1,584 1,263 1,200 7,465 14,388 14,388 Retained interest in loan securitizations(3)................ 1,955 3,484 2,684 2,087 1,534 17,194 28,938 28,938 Servicing rights................... 2,090 4,202 3,827 3,493 3,354 17,166 34,132 34,132 ---------------------------------------------------------------------------------------------- Total interest-sensitive assets.... $ 72,931 $22,368 $9,626 $9,511 $11,910 $440,868 $567,214 $567,214 ============================================================================================== Interest-sensitive liabilities: Borrowings......................... $467,747 $ 6,286 $6,286 $6,286 $ 6,286 $ 3,144 $496,035 $496,035 Average interest rate.......... 6.51% 7.49% 7.49% 7.49% 7.49% 7.49% 6.59% ---------------------------------------------------------------------------------------------- Total interest-sensitive liabilities $467,747 $ 6,286 $6,286 $6,286 $ 6,286 $ 3,144 $496,035 $496,035 ==============================================================================================
_____ (1) Future cash flows for loans held for investment are shown net of valuation allowances. (2) As of June 30, 1999, the weighted average interest rate on securities held for sale was 8.84%. (3) 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 June 30, 1999, the weighted average discount rate used on the retained interests was 19.58% 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. 18 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. 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 balances securing such facilities. The Company's hedging strategy normally includes selling U.S. Treasury futures in such amounts and maturities as to effectively hedge the interest rate volatility of its portfolio. The Company does not maintain naked or leveraged hedge positions. 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. 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among others, were 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 sought 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. On April 6, 1999, a verdict was rendered in the Superior Court whereby Mr. Knyal and FLRT, Inc. were ordered to pay approximately $24.3 million in compensatory damages and $8 million in punitive damages for breach of fiduciary duty and fraud. Counsel to the predecessor entity and Mr. Knyal believe that the verdict is without basis, that reversible error occurred during the course of the trial and in connection with the rendering of the verdict and such counsel and Mr. Knyal intend to vigorously appeal the verdict. 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. On July 22, 1999, the Court of Appeal issued an order staying any attempts by the plaintiffs to execute against Mr. Knyal and/or FLRT, Inc. The plaintiffs have agreed that Mr. Knyal and FLRT, Inc. can vote their shares of the Company's stock in favor of the Bay View merger and, if the merger is completed, such shares will be entitled to be exchanged for shares of Bay View stock. 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. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANCHISE MORTGAGE ACCEPTANCE COMPANY Date: August 20, 1999 By: /s/ Raedelle Walker ------------------------------------ Raedelle Walker Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-1999 DEC-31-1999 APR-01-1999 JAN-01-1999 JUN-30-1999 JUN-30-1999 27,636 27,636 43,326 43,326 491,272 491,272 0 0 0 0 562,234 562,234 10,909 10,909 (4,277) (4,277) 683,214 683,214 522,062 522,062 0 0 0 0 0 0 29 29 145,618 145,618 683,214 683,214 7,158 18,368 16,886 40,216 0 0 0 0 26,560 41,298 0 0 0 0 (8,718) (193) (3,487) (77) (5,231) (116) 0 0 0 0 0 0 (5,231) (116) (0.18) 0.00 (0.18) 0.00
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