<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (date of earliest event reported): April 1, 1998
Franchise Mortgage Acceptance Company
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-23283 95-4649104
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
1888 Century Park East, Third Floor, Los Angeles, California 90067
(Address of principal executive offices, including zip code)
(310) 229-2600
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The audited financial statements of Bankers Mutual, a Mortgage Banking
Corporation and Bankers Mutual Mortgage, Inc. (collectively, "Bankers") for the
twelve month period ending December 31, 1997 and December 31, 1996, together
with the notes thereto, are located at pages 3 through 29 of this Form 8-K/A.
(b) Pro Forma Financial Information.
The unaudited Pro Forma Combined Condensed Balance Sheet and the unaudited Pro
Forma Combined Condensed Statements of Operations for the periods indicated
therein, together with the notes thereto, are located at pages 30 through 35 of
this Form 8-K/A.
(c) Exhibits.
See index to exhibits.
2
<PAGE>
BANKERS MUTUAL, a mortgage banking corporation
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Bankers Mutual, a mortgage banking corporation:
We have audited the accompanying balance sheets of BANKERS MUTUAL, a mortgage
banking corporation, as of December 31, 1997 and 1996, and the related
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bankers Mutual, a mortgage
banking corporation, as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
March 2, 1998
4
<PAGE>
BANKERS MUTUAL,
---------------
a mortgage banking corporation
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
-------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,025,273 $ 2,049,095
Accounts receivable 862,305 1,088,035
Mortgage loans held for sale 7,523,000 15,656,138
Due from affiliate 606,010 300,357
Prepaids and other assets 229,988 465,994
----------- -----------
Total current assets 11,246,576 19,559,619
----------- -----------
RESTRICTED CASH 5,000,000 5,000,000
FIXED ASSETS, net 736,154 591,052
MORTGAGE SERVICING RIGHTS 7,180,470 5,431,232
OTHER ASSETS 100,186 104,255
----------- -----------
$24,263,386 $30,686,158
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE>
BANKERS MUTUAL,
---------------
a mortgage banking corporation
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
-------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term bank borrowings $ 7,372,540 $14,467,440
Accounts payable and accrued liabilities 2,151,136 1,870,969
Accrued losses on FNMA/DUS program - 150,000
----------- -----------
Total current liabilities 9,523,676 16,488,409
----------- -----------
FANNIE MAE/DUS PROGRAM LOAN LOSS ALLOWANCE 868,536 748,536
DEFERRED INCOME TAXES 198,147 145,796
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value:
Authorized--2,000,000 shares
Shares issued and outstanding--1,060,471
and 1,047,987 shares at December 31, 1997
and 1996, respectively 673,929 534,733
Notes receivable from shareholders (132,653) -
Additional paid-in capital 4,257,315 4,188,341
Deferred compensation (460,133) (607,430)
Retained earnings 9,334,569 9,187,773
----------- -----------
Total shareholders' equity 13,673,027 13,303,417
----------- -----------
$24,263,386 $30,686,158
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
6
<PAGE>
BANKERS MUTUAL,
---------------
a mortgage banking corporation
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Loan fees $ 5,475,541 $ 3,706,629
Mortgage servicing activities 3,786,749 3,504,094
Gain on sale of loans 3,193,968 2,945,598
Interest on mortgage loans held for sale, net 494,551 296,337
Escrow fees 325,875 261,330
Other income 846,617 822,946
Other interest 1,120,656 1,413,498
----------- -----------
15,243,957 12,950,432
EXPENSES:
Compensation 8,738,215 7,187,996
Operating expenses 3,323,540 2,563,849
Interest 143,793 6,662
Provision for losses on FANNIE MAE/DUS program 120,000 250,000
----------- -----------
Income before provision
for income taxes 2,918,409 2,941,925
PROVISION FOR INCOME TAXES 99,524 108,494
----------- -----------
NET INCOME $ 2,818,885 $ 2,833,431
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
BANKERS MUTUAL,
---------------
a mortgage banking corporation
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,818,885 $ 2,833,431
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 235,560 184,928
Amortization of mortgage servicing rights 1,444,730 1,475,034
Additions to mortgage servicing rights (3,193,968) (2,945,598)
Amortization of deferred compensation 216,271 202,477
Provision for losses on FNMA/DUS program 120,000 100,000
Interest on notes receivable from shareholders (10,971) -
Changes in:
Deferred income taxes 52,351 34,221
Mortgage loans held for sale 8,133,138 (15,656,138)
Accounts receivable 225,730 (459,516)
Prepaids and other assets 240,075 (188,183)
Due from affiliate (305,653) (200,357)
Accounts payable and accrued liabilities 280,167 136,267
Accrued losses on FNMA/DUS program (150,000) 150,000
----------- ------------
Total adjustments 7,287,430 (17,166,865)
----------- ------------
Net cash provided by (used in)
operating activities 10,106,315 (14,333,434)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (380,662) (233,285)
----------- ------------
Net cash used in investing activities (380,662) (233,285)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term
bank borrowings (7,094,900) 14,459,738
Payment of dividends (2,672,089) (2,955,354)
Proceeds from the sale of common stock 7,060 -
Collections on notes receivable
from shareholders 10,454 166,684
----------- ------------
Net cash (used in) provided by
financing activities (9,749,475) 11,671,068
----------- ------------
Net decrease in cash (23,822) (2,895,651)
CASH, beginning of period 2,049,095 4,944,746
----------- ------------
CASH, end of period $ 2,025,273 $ 2,049,095
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the year for:
Interest $ 877,869 $ 825,011
=========== ============
Income taxes $ 103,000 $ 62,444
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
BANKERS MUTUAL,
---------------
a mortgage banking corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
<CAPTION>
Notes
Receivable Additional
Common From Paid-In Deferred Retained
Stock Shareholders Capital Compensation Earnings Total
-------- ------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES at December 31, 1995 $534,733 $(166,684) $4,188,341 $(809,907) $ 9,309,696 $13,056,179
Payments on notes receivable
from shareholders - 166,684 - - - 166,684
Amortization of deferred
compensation - - - 202,477 - 202,477
Dividends declared - - - - (2,955,354) (2,955,354)
Net income - - - - 2,833,431 2,833,431
-------- --------- ---------- --------- ----------- -----------
BALANCES at December 31, 1996 534,733 - 4,188,341 (607,430) 9,187,773 13,303,417
Common stock issued for cash and
notes receivable 139,196 (132,136) - - - 7,060
Deferred compensation with
respect to stock options - - 68,974 (68,974) - -
Payments on notes receivable
from shareholders - 10,454 - - - 10,454
Interest on notes receivable
from shareholders - (10,971) - - - (10,971)
Amortization of deferred
compensation - - - 216,271 - 216,271
Dividends declared - - - - (2,672,089) (2,672,089)
Net income - - - - 2,818,885 2,818,885
-------- --------- ---------- --------- ----------- -----------
BALANCES at December 31, 1997 $673,929 $(132,653) $4,257,315 $(460,133) $ 9,334,569 $13,673,027
======== ========= ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
BANKERS MUTUAL,
---------------
a mortgage banking corporation
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1997 AND 1996
--------------------------
1. Organization
------------
Bankers Mutual, a mortgage banking corporation, (the Company) was incorporated
as a California corporation on June 2, 1981. The Company originates and
services income property mortgage loans.
2. Significant Accounting Policies
-------------------------------
a. Mortgage Loans Held for Sale and Loan Fees
------------------------------------------
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors.
Loan fees consist of amounts received in connection with originating income
property mortgage loans. These loan fees are deferred, along with related
direct origination costs, and recorded as revenue upon sale of the related
loans.
b. Mortgage Servicing Activities
-----------------------------
Mortgage servicing fees, which are generally based on a percentage of the
outstanding principal balances of the mortgages serviced by the Company,
are recorded as income as the installment collections on the mortgages are
received. The Company's servicing portfolio is comprised of loans
collateralized by real property located primarily in California.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights," which the Company adopted effective January 1, 1996.
SFAS No. 122 amended SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." SFAS No. 122 was subsequently superseded by SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS 125 requires the recognition of
originated mortgage servicing rights, as well as purchased mortgage
servicing rights, as assets by allocating a portion of the cost of
originating a loan to the mortgage servicing right based on its fair value
relative to the loan as a whole. To determine the fair value of servicing
rights created, the Company uses a valuation model that calculates the
present value of future cash flows. In using this valuation model, the
Company incorporates assumptions that market participants would use in
estimating future net servicing income.
10
<PAGE>
The cost of capitalized mortgage servicing rights is amortized over the
estimated economic life of the related loans. The net capitalized cost of
mortgage servicing rights is periodically evaluated for impairment to
determine that capitalized amounts are not in excess of the estimated
future discounted cash flows from servicing fees. As of December 31, 1997,
no allowance for impairment of capitalized mortgage servicing rights was
required.
Included in mortgage servicing rights are excess servicing fees receivable,
consisting of adjustments to the sales price of certain loans sold to
investors. These adjustments result from adjusting the servicing fee rate
recognized on these loans upwards or downwards in order to provide for a
normal servicing fee rate over the estimated servicing life of the loans.
These amounts are amortized over the estimated servicing life of the
related loans.
c. Fixed Assets
------------
Fixed assets are recorded at cost. Depreciation on fixed assets is
computed on the straight-line method over the estimated useful lives of the
related assets, ranging from three to five years. Gains or losses on
assets sold or otherwise disposed of are included in the statements of
income.
d. FNMA/DUS Program Loan Loss Allowance
------------------------------------
The FNMA/DUS program loan loss allowance is maintained at a level
considered adequate to provide for losses that can be reasonably
anticipated. Management makes periodic credit reviews of the FNMA/DUS
program loan portfolio and considers current economic conditions,
historical loan loss experience, assessments of future potential problem
credits and other factors in determining the adequacy of the allowance.
The allowance is based on estimates and actual losses may vary from the
current estimates. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the periods
in which they become known. The allowance is increased by provisions
charged to operating expense and reduced by net charge-offs.
e. Income Taxes
------------
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes represents
the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
11
<PAGE>
f. Statements of Cash Flows
------------------------
For purposes of reporting cash flows, the Company considers unrestricted
investments in money market funds and certificates of deposits with
maturities of less than three months to be cash equivalents.
g. Use of Estimates
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
h. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 financial statements
to conform to current year classifications.
3. Fixed Assets
------------
Fixed assets at December 31, 1997 and 1996 consists of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 604,855 $ 630,893
Equipment and automobiles 1,557,357 1,150,657
----------- -----------
2,162,212 1,781,550
Less accumulated depreciation (1,426,058) (1,190,498)
----------- -----------
$ 736,154 $ 591,052
=========== ===========
</TABLE>
4. Short-Term Bank Borrowings
--------------------------
During 1997, the Company had revolving lines of credit agreements with two
financial institutions. These agreements provided for borrowings of up to an
aggregate of $70,000,000.
One of the agreements was amended on August 31, 1997 to provide for maximum
borrowings of $35,000,000 with an interest rate of LIBOR plus 1.5 percent
(7.219% at December 31, 1997). The agreement requires the Company to pay a non-
usage fee of .125 percent of the unused portion of the commitment. This line of
credit is collateralized by mortgage loans and deeds of trust. The agreement
contains restrictions on the amount of indebtedness the Company may incur and
restrictive covenants including minimum working capital, payment of dividends
and tangible net worth requirements, which the Company is in compliance with as
of December 31, 1997. This line of credit expires August 31, 1998. Balances
outstanding under this line of credit were $0 and $14,467,440 at December 31,
1997 and 1996, respectively.
12
<PAGE>
The second agreement was entered into by the Company on July 29, 1997, and
provides for maximum borrowings of up to $35,000,000. The Company may elect to
meet certain defined minimum non-interest bearing deposit balances with the
financial institution, in which case the applicable interest rate on the line of
credit is 1.0 percent. As of December 31, 1997, the Company has the required
amounts on deposit. Should less than the required minimum balances be
maintained, interest would be payable at an amount approximating the financial
institution's defined reference rate. The agreement contains restrictions on
the amount of indebtedness the Company may incur and restrictive covenants
including minimum working capital, payment of dividends and tangible net worth
requirements, which the Company is in compliance with as of December 31, 1997.
The line of credit agreement expires July 30, 1998. Balances outstanding under
this line of credit were $7,372,540 and $0 at December 31, 1997 and 1996,
respectively.
5. Income Taxes
------------
The Company has elected to be treated as an "S" Corporation for federal and
state income tax purposes. As a result, no provision for federal income taxes
have been made as such taxes are passed through to the shareholders' individual
tax returns. For state tax purposes, the Company's current tax rate is 3.5
percent.
The Company's provision for state income taxes for the years ended December 31,
1997 and 1996 consists of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current $ 47,173 $ 34,854
Deferred 52,351 73,640
--------- ---------
$ 99,524 $ 108,494
========= =========
</TABLE>
The components of the net deferred tax liability as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Additional gain on sales of loans $ (56,249) $ (89,385)
Loan loss allowances 30,259 31,448
Loan origination costs (5,312) (6,846)
Capitalized mortgage servicing rights (195,068) (101,518)
Other 28,223 20,505
--------- ---------
Net deferred tax liability $(198,147) $(145,796)
========= =========
</TABLE>
The provision for income taxes differs from the expected California statutory
income tax rate primarily due to nondeductible meals and entertainment and
adjustments between the prior year tax return and the provision.
13
<PAGE>
6. Commitments and Contingencies
-----------------------------
Leases
------
The Company leases office facilities under noncancellable operating leases
expiring in 1999 and 2001, which require the following future annual
minimum rental payments as of December 31, 1997:
<TABLE>
<S> <C>
1998 $396,070
1999 184,287
2000 54,209
2001 7,194
--------
$641,760
========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $386,994
and $379,950, respectively. With respect to the Company's lease on its
Newport Beach office facility, the Company has the option to renew such
lease upon its expiration in 2001.
The Company subleases office facilities to an affiliate under a
noncancellable subleasing agreement expiring in 1999, which provides the
Company with the following future annual minimum rental income payments as
of December 31, 1997:
<TABLE>
<S> <C>
1998 $ 9,600
1999 3,200
-------
$12,800
=======
</TABLE>
FNMA/DUS Program
----------------
The Company is an approved seller/servicer under the Delegated Underwriting
and Servicing ("DUS") Program of the Federal National Mortgage Association
("FNMA"). At December 31, 1997 and 1996, loans originated and serviced by
the Company with original balances aggregating $1,184,036,436 and
$1,064,191,436, respectively, were outstanding under the DUS Program. The
provisions of the DUS Program require the Company to bear, generally to a
maximum of 20 percent of the original loan amount, losses, if any, which
may be incurred by FNMA resulting from defaults on loans originated and
sold by the Company under the DUS Program. At December 31, 1997 and 1996,
the Company has an allowance of $868,536 and $748,536 for estimated
potential future losses under the DUS Program.
Loans originated under the DUS Program are multi-family fixed rate loans,
which are collateralized by first trust deeds. In addition, some of these
loans are further collateralized by letters of credit and/or personal
guarantees of the borrowers.
14
<PAGE>
In conjunction with the DUS Program, the Company is party to a FNMA
Investment Agreement. Under the terms of this agreement, the Company is
required to maintain collateral in an interest-bearing account held with
FNMA. Cash held in this restricted account was $5,000,000 at December 31,
1997 and 1996, respectively.
Credit Risk
-----------
The Company's cash is on deposit at financial institutions in amounts,
which exceed the financial institution's federally-insured limit of
$100,000. All cash of the Company on deposit at one financial institution
is pledged against the line of credit but is not restricted as to use under
its terms.
Loan Commitments
----------------
The Company enters into financial instruments with off-balance sheet risk
in the normal course of business through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments include
commitments to extend credit and commitments with investors for the sale of
mortgage loans. At December 31, 1997 and 1996, the Company had commitments
to extend credit of $21,590,000 and $21,150,000 respectively, with matching
commitments to investors for the sale of mortgage loans.
7. Employee Stock Purchase and Shareholders' Agreement
---------------------------------------------------
During 1997, the Company issued 12,484 shares of its common stock to certain
officers of the Company in connection with an Employee Stock Purchase and
Shareholders' Agreement (the "Agreement"). The shares were issued in exchange
for cash and notes receivable. In addition, the Agreement called for the
granting of certain stock options (Note 8).
8. Stock Option Plan
-----------------
Effective January 1994, the Company approved a Nonqualified Stock Option Plan
(the "Plan") in conjunction with the Agreement. Under the terms of the Plan,
options on up to 93,566 shares of common stock can be granted to key employees
at the discretion of the Board of Directors. The exercise price of the options
is $.10 per share. During 1997, options for 6,242 shares were granted. Such
options expire in 2002. No stock options were granted in 1996. As of December
31, 1997, none of the options granted under the Plan have been exercised.
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion 25 ("APB No. 25"). Accordingly, compensation expense in
connection with the granting of the options described above is based on the
difference between the fair market value of the shares on the grant date and the
exercise price, and is amortized over the vesting period, which begins in the
year of issuance and continues for a period of five
15
<PAGE>
years. Accordingly, compensation expense amortization was $216,271 for the year
ended December 31, 1997. The Plan provides for full vesting upon the sale of
all or substantially all the Company's assets or stock. Unamortized
compensation expense was $460,133 and $607,430 at December 31, 1997 and 1996,
respectively.
The fair value of each option granted is estimated using the Black-Scholes
option-pricing model on the date of grant using the following assumptions: (i)
no dividend yield, (ii) volatility of effectively zero, (iii) risk-free interest
rate of seven percent and (iv) expected life of five years.
Had compensation expense for the Company's 1997 stock-based compensation been
recorded under the fair market value principles applicable under SFAS No. 123,
the Company's net income for the year ended December 31, 1997 would be
essentially unchanged from the amounts recorded under the principles of APB No.
25, as the relationship of the exercise price of the Company's stock-based
compensation and the fair market value of the underlying common stock as of the
date of grant generates no additional deferred compensation expense under the
principles of SFAS No. 123.
9. Mortgage Servicing Activities
-----------------------------
Mortgage servicing activities for the years ended December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Gross receipts under servicing contracts $ 5,231,479 $ 4,979,128
Amortization of mortgage servicing
rights (1,444,730) (1,475,034)
----------- -----------
$ 3,786,749 $ 3,504,094
=========== ===========
</TABLE>
The Company services loans for others with principal balances totaling
$1,359,774,268 and $1,219,832,962 at December 31, 1997 and 1996, respectively.
10. Interest on Mortgage Loans Held For Sale, Net
---------------------------------------------
Interest income on mortgage loans held for sale for the years ended December 31,
1997 and 1996 was $1,276,093 and $1,085,200, respectively. Interest expense on
related short-term bank borrowings for the years ended December 31, 1997 and
1996 was $781,542 and $788,863, respectively.
11. Profit-Sharing and Savings Plan
-------------------------------
The Company has a defined contribution profit-sharing and 401(k) savings plan
(the "401(k) Plan") for the benefit of all eligible employees. Eligible
participants, as defined, must be at least 21 years of age and have completed
one year of employment.
16
<PAGE>
The 401(k) Plan provides for annual contributions at the discretion of the Board
of Directors. The 401(k) Plan also provides for voluntary employee contributions
of up to 15 percent of the employees' annual compensation which are matched up
to 50 percent by the Company. Discretionary and matching contributions to the
401(k) Plan for the years ended December 31, 1997 and 1996 were $90,260 and
$76,595, respectively.
12. Custodial Funds
---------------
Custodial funds amounted to approximately $19,563,301 and $27,625,080 at
December 31, 1997 and 1996, respectively. Such funds, which are maintained by
the Company on behalf of various parties, are deposited in trust bank accounts
and are excluded from assets and liabilities in the accompanying balance sheet.
13. Related Party Transactions
--------------------------
The Company shares office space, facilities and personnel with an affiliate that
has the same shareholders as the Company. The Company allocates costs to the
affiliate based upon the provisions of an Administrative Services Agreement, an
Employee Secondment Agreement, and a Sublease Agreement. The Administrative
Services Agreement provides for the rendering of accounting, collection, legal,
and insurance services for the affiliate. Through the Employee Secondment
Agreement, the Company's employees perform services for the affiliate. The
Company is compensated under these agreements in the amount of $9,709 per month.
Both agreements have a term of 3 years and will be automatically renewed for
period of one year if not terminated by the affiliate. The Sublease Agreement
provides for the subleasing of office space to the affiliate (Note 6). For the
years ended December 31, 1997 and 1996, amounts received by the Company under
these agreements were $149,560 and $168,419, respectively.
14. Subsequent Event (unaudited)
----------------------------
On March 10, 1998, the Company signed an agreement to sell substantially all of
its assets to Franchise Mortgage Acceptance Company. The sale is expected to
close on or about April 1, 1998.
17
<PAGE>
BANKERS MUTUAL MORTGAGE, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Bankers Mutual Mortgage, Inc.:
We have audited the accompanying balance sheets of BANKERS MUTUAL MORTGAGE, INC.
as of December 31, 1997 and 1996, and the related statements of income,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bankers Mutual Mortgage, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
March 2, 1998
19
<PAGE>
BANKERS MUTUAL MORTGAGE, INC.
-----------------------------
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
-------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $4,275,589 $1,432,171
Accounts receivable 294,199 157,126
Income taxes receivable - 15,362
Prepaid expenses 5,356 4,754
Mortgage loans held for sale 3,850,000 -
---------- ----------
Total current assets 8,425,144 1,609,413
ORGANIZATION COSTS 2,425 3,956
MORTGAGE SERVICING RIGHTS 1,176,861 99,530
---------- ----------
Total assets $9,604,430 $1,712,899
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term bank borrowings $3,773,000 $ -
Accounts payable and accrued liabilities 3,624,250 111,447
Due to affiliate 606,010 300,357
---------- ----------
Total current liabilities 8,003,260 411,804
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value:
Authorized -- 1,000,000 shares
Outstanding -- 57,705 and 57,078 shares
at December 31, 1997 and 1996, respectively 577,050 570,780
Notes receivable from shareholders (80,345) -
Additional paid-in capital 114,250 -
Deferred compensation (32,156) -
Retained earnings 1,022,371 730,315
---------- ----------
Total shareholders' equity 1,601,170 1,301,095
---------- ----------
Total liabilities
and shareholders' equity $9,604,430 $1,712,899
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
20
<PAGE>
BANKERS MUTUAL MORTGAGE, INC.
-----------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
---------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
Loan fees $ 832,104 $ 37,127
Mortgage servicing activities 1,013,010 934,998
Gain on sale of loans 994,738 101,473
Interest on mortgage loans held for sale, net 156,433 12,033
Other interest 480,439 296,493
Other income 227,486 60,823
---------- ----------
3,704,210 1,442,947
EXPENSES:
Compensation 1,863,708 863,329
Operating expenses 84,549 92,209
Interest 38,025 34,253
---------- ----------
Income before provision for income taxes 1,717,928 453,156
PROVISION FOR INCOME TAXES 59,784 13,931
---------- ----------
Net income $1,658,144 $ 439,225
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
BANKERS MUTUAL MORTGAGE, INC.
-----------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
---------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,658,144 $ 439,225
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of organization costs 1,531 1,532
Amortization of deferred compensation 8,039 -
Additions to mortgage servicing rights (1,128,458) (101,473)
Amortization of mortgage servicing rights 51,127 1,943
Interest on notes receivable from shareholders (6,412) -
Changes in:
Accounts receivable (137,073) (69,976)
Income taxes receivable 15,362 7,947
Prepaid expenses (602) (354)
Mortgage loans held for sale (3,850,000) 16,675,000
Accounts payable and accrued liabilities 3,512,803 29,435
Due to affiliate 305,653 200,357
----------- ------------
Total adjustments (1,228,030) 16,744,411
----------- ------------
Net cash provided by
operating activities 430,114 17,183,636
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES: - -
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term
bank borrowings 3,773,000 (16,341,500)
Payment of dividends (1,366,088) (246,298)
Proceeds from the sale of common stock 4,016 -
Collections on notes receivable from shareholders 2,376 8,262
----------- ------------
Net cash provided by (used in)
financing activities 2,413,304 (16,579,536)
----------- ------------
Net increase in cash 2,843,418 604,100
CASH, beginning of period 1,432,171 828,071
----------- ------------
CASH, end of period $ 4,275,589 $ 1,432,171
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the year for:
Interest $ 753,749 $ 151,421
=========== ============
Income taxes $ 15,362 $ 2,500
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
BANKERS MUTUAL MORTGAGE, INC.
-----------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
<CAPTION>
Notes
Receivable Additional
Common From Paid-In Deferred Retained
Stock Shareholders Capital Compensation Earnings Total
-------- ------------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES at December 31, 1995 $570,780 $ (8,262) $ - $ - $ 537,388 $ 1,099,906
Payments on notes receivable from
shareholders - 8,602 - - - 8,602
Interest on notes receivable from
shareholders - (340) - - - (340)
Dividends declared - - - - (246,298) (246,298)
Net income - - - - 439,225 439,225
-------- -------- -------- --------- ----------- -----------
BALANCES at December 31, 1996 570,780 - - - 730,315 1,301,095
Common stock issued for cash and notes
receivable 6,270 (76,309) 74,055 - - 4,016
Deferred compensation with respect to
stock options - - 40,195 (40,195) - -
Payments on notes receivable from
shareholders - 2,376 - - - 2,376
Interest on notes receivable from
shareholders - (6,412) - - - (6,412)
Amortization of deferred compensation - - - 8,039 - 8,039
Dividends declared - - - - (1,366,088) (1,366,088)
Net income - - - - 1,658,144 1,658,144
-------- -------- -------- -------- ----------- -----------
BALANCES at December 31, 1997 $577,050 $(80,345) $114,250 $(32,156) $ 1,022,371 $ 1,601,170
======== ======== ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
BANKERS MUTUAL MORTGAGE, INC.
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1997 AND 1996
--------------------------
1. Organization
------------
Bankers Mutual Mortgage, Inc. (the "Company") was incorporated as a California
corporation on June 1, 1994 and commenced operations in July 1994. The Company
originates and services income property mortgage loans.
2. Significant Accounting Policies
-------------------------------
a. Loan Fees
---------
Loan fees consist of amounts received in connection with originating income
property mortgage loans. These loan fees are deferred, along with related
direct origination costs, and recorded as revenue upon sale of the related
loans.
b. Mortgage Servicing Activities
-----------------------------
Mortgage servicing fees, which are generally based on a percentage of the
outstanding principal balances of the mortgages serviced by the Company,
are recorded as income as the installment collections on the mortgages are
received. The Company's servicing portfolio is comprised of loans
collateralized by income properties located primarily in California.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," which the Company adopted effective January 1, 1996.
SFAS No. 122 amended SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." SFAS No. 122 was subsequently superseded by SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS 125 requires the recognition of
originated mortgage servicing rights, as well as purchased mortgage
servicing rights, as assets by allocating a portion of the cost of
originating a loan to the mortgage servicing right based on its fair value
relative to the loan as a whole. To determine the fair value of servicing
rights created, the Company uses a valuation model that calculates the
present value of future cash flows. In using this valuation model, the
Company incorporates assumptions that market participants would use in
estimating future net servicing income.
24
<PAGE>
The cost of capitalized mortgage servicing rights is amortized over the
estimated economic life of the related loans. The net capitalized cost of
mortgage servicing rights is periodically evaluated for impairment to
determine that capitalized amounts are not in excess of the estimated
future discounted cash flows from servicing fees. As of December 31, 1997,
no allowance for impairment of capitalized mortgage servicing rights was
required.
c. Income Taxes
------------
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes represents
the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
d. Statements of Cash Flows
------------------------
For purposes of reporting cash flows, the Company considers unrestricted
investments in money market funds and certificates of deposit with
maturities of less than three months to be cash equivalents.
e. Organization Costs
------------------
The Company has capitalized all organizational costs associated with its
startup. Organizational costs are amortized using the straight-line method
over five years. Accumulated amortization was $5,232 and $3,701 at
December 31, 1997 and 1996, respectively.
f. Mortgage Loans Held for Sale
----------------------------
Real estate mortgage loans held for sale are stated at the lower of cost or
market.
g. Use of Estimates
----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
h. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 financial statements
to conform to current year classifications.
25
<PAGE>
3. Short-Term Bank Borrowings
--------------------------
During 1997, the Company had revolving lines of credit agreements with two
financial institutions. These agreements provided for borrowings of up to an
aggregate of $140,000,000 at December 31, 1997, and maximum borrowings of
$70,000,000 thereafter.
One of the agreements was amended on December 4, 1997 to provide for maximum
borrowings of $105,000,000 until December 31, 1997, and for maximum borrowings
of $35,000,000 thereafter. The Company may elect to maintain balances in
interest bearing deposit accounts with a designated financial institution, in
which case the applicable interest rate on the line of credit will be 1.5% on
all borrowings up to the amount on deposit. The interest rate on borrowings in
excess of this amount will be LIBOR plus 2% (7.719% as of December 31, 1997).
The agreement requires the company to pay a non-usage fee of .125% on the unused
portion of the commitment. This line of credit is collateralized by mortgage
loans and by deeds of trust. The original agreement contains restrictions on
the amount of indebtedness the Company may incur and restrictive covenants
including minimum working capital, payment of dividends and tangible net worth
requirements, which the Company is in compliance with as of December 31, 1997.
This line of credit expires August 31, 1998. Balances outstanding under this
line of credit were $3,773,000 and $0 at December 31, 1997 and 1996,
respectively.
The second agreement was amended on July 29, 1997 to provide for maximum
borrowings of up to $35,000,000. The Company may elect to meet certain defined
minimum non-interest bearing deposit balances with the financial institution, in
which case the applicable interest rate on the line of credit will be 1.5% on
all borrowings up to the amount on deposit. The interest rate on borrowings in
excess of this amount would be payable at a rate approximating the financial
institution's defined reference rate. The original agreement, as amended on
December 31, 1997, contains restrictions on the amount of indebtedness the
Company may incur and restrictive covenants including minimum GAAP net worth,
minimum working capital, payment of dividends and tangible net worth
requirements, which the Company is in compliance with as of December 31, 1997.
The line of credit agreement expires July 30, 1998. The Company's balances
outstanding under this line of credit were $0 at December 31, 1997 and 1996.
4. Income Taxes
------------
The Company has elected to be treated as an "S" Corporation for federal and
state income tax purposes. As a result, no provision for federal income taxes
has been made as such taxes are passed through to the shareholders' individual
tax returns. For state tax purposes, the Company's current tax rate is 3.5
percent.
26
<PAGE>
The Company's provision for state income taxes for the years ended December 31,
1997 and 1996 consists of:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Current $ 29,049 $10,447
Deferred 30,735 3,484
-------- -------
$ 59,784 $13,931
======== =======
</TABLE>
The components of the net deferred tax liability as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Capitalized mortgage servicing rights $(34,577) $(3,484)
Other 358 -
-------- -------
Net deferred tax liability $(34,219) $(3,484)
======== =======
</TABLE>
The provision for income taxes differs from the expected California statutory
income tax rate primarily due to nondeductible meals and entertainment and
adjustments between the prior year tax return and the provision.
5. Commitments and Contingencies
-----------------------------
Credit Risk
-----------
The Company has deposits at certain banking institutions in amounts that
are in excess of the federally-insured limit of $100,000.
Leases
------
The Company leases office facilities from an affiliate under a
noncancellable sublease agreement expiring in 1999, which requires the
following future annual minimum rental payments as of December 31, 1997:
<TABLE>
<S> <C>
1998 $ 9,600
1999 3,200
-------
$12,800
=======
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $9,600 and
$9,600, respectively.
27
<PAGE>
Loan Commitments
----------------
The Company enters into financial instruments with off-balance sheet risk
in the normal course of business through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments include
commitments to extend credit and commitments with investors for the sale of
mortgage loans. At December 31, 1997 and 1996, the Company had commitments
to extend credit of $7,950,000 and $0 respectively, with matching
commitments to investors for the sale of mortgage loans.
6. Employee Stock Purchase and Shareholders' Agreement
---------------------------------------------------
During 1997, the Company issued 627 shares of its common stock to certain
officers of the Company in connection with an Employee Stock Purchase and
Shareholders' Agreement (the "Agreement"). The shares were issued in exchange
for cash and notes receivable. The notes receivable are collateralized by the
shares of stock through certain pledge and security agreements whereby all
shares related to the notes receivable were redelivered to the Company to be
held so long as the receivable remains outstanding. In addition, the Agreement
called for the granting of certain stock options (Note 7).
7. Stock Option Plan
-----------------
In November 1994, the Company approved a Nonqualified Stock Option Plan (the
"Plan") in conjunction with the Agreement. During 1997, options for 314 shares
were granted. The exercise price of the options was $.10 per share. No stock
options were granted in 1996.
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25 ("APB No. 25"). Accordingly, compensation expense, in
connection with the granting of the options described above, is based on the
difference between the fair market value of the shares on the grant date and the
exercise price, and is amortized over the vesting period, which begins in the
year of issuance and continues for a period of five years. Unamortized
compensation expense was $32,156 at December 31, 1997.
The fair value of each option granted is estimated using the Black-Scholes
option-pricing model on the date of grant using the following assumptions: (i)
no dividend yield, (ii) volatility of effectively zero, (iii) risk-free interest
rate of seven percent and (iv) expected life of five years.
Had compensation expense for the Company's 1997 stock-based compensation been
recorded under the fair market value principles applicable under SFAS No. 123,
the Company's net income for the year ended December 31, 1997 would be unchanged
from the amounts recorded under the principles of APB No. 25, as the
relationship of the exercise price of the Company's stock-based compensation and
the fair market value of the underlying common stock as of the date of grant
generates no additional deferred compensation expense under the principles of
SFAS No. 123.
28
<PAGE>
8. Interest on Mortgage Loans Held For Sale, Net
---------------------------------------------
Interest income on mortgage loans held for sale for the years ended December 31,
1997 and 1996 was $1,016,945 and $72,085, respectively. Interest expense on
related short-term bank borrowings was $860,512 and $60,052, respectively.
9. Related Party Transactions
--------------------------
The Company shares office space, facilities and personnel with an affiliate that
has the same shareholders as the Company. The Company receives an allocation of
charges from the affiliate based upon the provisions of an Administrative
Services Agreement, Employee Secondment Agreement, and a Sublease Agreement. The
Administrative Services Agreement provides for the rendering of accounting,
collection, legal, and insurance services by the affiliate. Through the Employee
Secondment Agreement, the affiliate's employees perform services for the
Company. The Company is obligated under these agreements in the amount of $9,706
per month. Both agreements have a term of 3 years and will be automatically
renewed for periods of one year if not terminated by the Company. The Sublease
Agreement provides for the subleasing of office space to the Company (Note 5).
For the years ended December 31, 1997 and 1996, amounts paid by the Company
under these agreements was $149,560 and $168,419, respectively.
10. Loan Servicing and Custodial Funds
----------------------------------
Custodial funds amounted to $13,112,415 and $5,926,359 at December 31, 1997 and
1996, respectively. Such funds, which are maintained by the Company on behalf of
various parties, are deposited in trust bank accounts and are excluded from
assets and liabilities in the accompanying balance sheet.
The Company services loans for others with principal balances totaling
$1,068,653,701 and $673,196,620 at December 31, 1997 and 1996, respectively.
11. Subsequent Event (unaudited)
----------------------------
On March 10, 1998, the Company signed an agreement to sell substantially all of
its assets to Franchise Mortgage Acceptance Company. The sale is expected to
close on or about April 1, 1998.
29
<PAGE>
Pro Forma Effect of Acquisition of Bankers Mutual, a Mortgage Banking
Corporation and Bankers Mutual Mortgage, Inc.
The following unaudited pro forma combined condensed financial data combines
the unaudited condensed financial data of Franchise Mortgage Acceptance Company
(the "Company") and Bankers Mutual, a Mortgage Banking Corporation and Bankers
Mutual Mortgage, Inc. (collectively, "Bankers") as if the acquisition (the
"Acquisition") had been effective on March 31, 1998, with respect to the Pro
Forma Combined Condensed Balance Sheet, and as of the beginning of the periods
indicated herein, with respect to the Pro Forma Combined Condensed Statements of
Operations. This Acquisition is being accounted for under the purchase method of
accounting. Under the purchase method of accounting, assets and liabilities of
Bankers are adjusted to their estimated fair values and combined with the
recorded book values of the assets and liabilities of the Company. This
information should be read in conjunction with the historical financial
statements of the Company and Bankers including their respective notes thereto,
and in conjunction with the pro forma combined condensed financial statements,
including the notes thereto, appearing elsewhere in this Form 8-K/A, the
financial statements contained in the Company's Annual Report filed on Form 10-
K, and the historical financial statements of Bankers as filed in this Form 8-
K/A. The effect of the Acquisition's costs incurred has been reflected as part
of the purchase price. The pro forma combined condensed financial statements do
not give effect to any anticipated cost savings in conjunction with the
Acquisition. The Pro Forma Combined Condensed Balance Sheet is not necessarily
indicative of the financial position that would have occurred had the
Acquisition been consummated on March 31, 1998 or that may exist in the future.
The Pro Forma Combined Condensed Statements of Operations are not necessarily
indicative of the results that would have occurred had the Acquisition been
consummated on the dates indicated or that may be achieved in the future.
30
<PAGE>
FMAC - Bankers
Pro Forma Combined Condensed Balance Sheet
March 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
FMAC and
Bankers Bankers Pro Forma Bankers
ASSETS FMAC Mutual Mutual Mortgage Adjustments Pro Forma
--------- -------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 61,126 $ 279 $ 1,621 $ (63,026) $ -
Cash - restricted 2,523 5,000 - - 7,523
Securities available for sale 2,335 - - - 2,335
Loans and leases held for sale 478,656 13,849 5,135 - 497,640
Retained interest in loan securitizations 19,070 - - - 19,070
Premises and equipment, net 3,237 734 - 236 4,207
Goodwill 4,200 - - 34,159 38,359
Accrued interest receivable 2,103 162 20 - 2,285
Servicing rights 2,126 5,874 1,329 17,785 27,114
Other assets 6,044 2,137 394 - 8,575
--------- -------- ------- --------- ---------
Total assets $ 581,420 $ 28,035 $ 8,499 $ (10,846) $ 607,108
========= ======== ======= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdraft $ - $ - $ - $ 167 $ 167
Borrowings 404,482 13,253 5,135 - 422,870
Deferred income taxes 19,383 198 37 - 19,618
Other liabilities 12,204 928 970 5,000 19,102
--------- -------- ------- --------- ---------
Total liabilities 436,069 14,379 6,142 5,167 461,757
Stockholders' equity:
Preferred stock
Common stock 29 674 577 (1,251) 29
Notes receivable from shareholders - (135) (82) 217 -
Additional paid in capital 118,044 4,267 114 (4,381) 118,044
Deferred compensation - (406) (30) 436 -
Retained earnings (accumulated deficit) 27,278 9,256 1,778 (11,034) 27,278
--------- -------- ------- --------- ---------
Total stockholders' equity 145,351 13,656 2,357 (16,013) 145,351
--------- -------- ------- --------- ---------
Total liabilities and stockholders' equity $ 581,420 $ 28,035 $ 8,499 $ (10,846) $ 607,108
========= ======== ======= ========= =========
</TABLE>
31
<PAGE>
FMAC - Bankers
Pro Forma Combined Condensed Statement of Operations
For the Three Months Ended March 31, 1998
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Bankers Bankers Pro Forma Bankers
FMAC Mutual Mutual Mortgage Adjustments Pro Forma
---- ------- --------------- ----------- ---------
Revenue:
<S> <C> <C> <C> <C> <C>
Gain on sale of loans and leases $ 14,376 $ (205) $ 170 $ - $ 14,341
Origination fee income 2,365 1,018 601 - 3,984
Interest income 10,567 595 189 11,351
Interest expense (6,365) (236) (84) (100) (6,785)
-------- ------- ------- ------ --------
Net interest income (expense) 4,202 359 105 (100) 4,566
-------- ------- ------- ------ --------
Servicing income 1,254 1,684 369 - 3,307
Gain (loss) on sale of investments 49 - - - 49
Other income (loss) (91) 225 9 - 143
-------- ------- ------- ------ --------
Total revenue 22,155 3,081 1,254 (100) 26,390
-------- ------- ------- ------ --------
Expenses:
Personnel 5,165 2,116 636 - 7,917
Professional services 596 106 13 - 715
Travel 567 27 - - 594
Business promotion 657 73 - - 730
Occupancy 356 112 2 - 470
Goodwill amortization 115 - - 569 684
Valuation allowances 1 104 - - 105
General and administrative 2,261 360 8 - 2,629
-------- ------- ------- ------ --------
Total expenses 9,718 2,898 659 569 13,844
-------- ------- ------- ------ --------
Net pretax income (loss) 12,437 183 595 (669) 12,546
Income tax expense 5,223 13 6 27 5,269
-------- ------- ------- ------ --------
Net income (loss) $ 7,214 $ 170 $ 589 $ (696) $ 7,277
======== ======= ======= ====== ========
Basic earnings per share $ 0.25 $ 0.25
Average shares (000) 28,716 28,716
Diluted earnings per share $ 0.25 $ 0.25
Average shares (000) 28,805 28,805
</TABLE>
32
<PAGE>
FMAC - Bankers
Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 1997
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
FMAC and
Bankers Bankers Pro Forma Bankers
FMAC Mutual Mutual Mortgage Adjustments Pro Forma
---- ------- --------------- ----------- ---------
Revenue:
<S> <C> <C> <C> <C> <C>
Gain on sale of loans and leases $ 45,459 $ (947) $ 967 $ - $ 45,479
Origination fee income 6,658 5,586 1,037 - 13,281
Interest income 26,758 2,443 1,504 - 30,705
Interest expense (21,602) (972) (899) (400) (23,873)
-------- -------- ------- -------- --------
Net interest income (expense) 5,156 1,471 605 (400) 6,832
-------- -------- ------- -------- --------
Servicing income 3,314 7,928 1,049 - 12,291
Gain (loss) on sale of investments - - - - -
Other income (loss) (111) 853 8 750
-------- -------- ------- -------- --------
Total revenue 60,476 14,891 3,666 (400) 78,633
-------- -------- ------- -------- --------
Expenses:
Personnel 13,636 9,463 1,870 - 24,969
Professional services 2,416 385 38 - 2,839
Travel 1,585 86 - - 1,671
Business promotion 1,251 150 - - 1,401
Occupancy 683 434 10 - 1,127
Goodwill amortization 425 - - 2,277 2,702
Valuation allowances 933 120 - - 1,053
General and administrative 3,826 1,334 30 - 5,190
-------- -------- ------- -------- --------
Total expenses 24,755 11,972 1,948 2,277 40,952
-------- -------- ------- -------- --------
Net pretax income (loss) 35,721 2,919 1,718 (2,677) 37,681
Income tax expense 15,001 100 60 665 15,826
-------- -------- ------- -------- --------
Net income (loss) $ 20,720 $ 2,819 $ 1,658 $ (3,342) $ 21,855
======== ======== ======= ======== ========
Basic earnings per share $ 0.91 $ 0.96
Average shares (000) 22,670 22,670
Diluted earnings per share $ 0.91 $ 0.96
Average shares (000) 22,670 22,670
</TABLE>
33
<PAGE>
(1) BASIS OF PRESENTATION
Certain historical data of Bankers have been reclassified on a pro forma
basis to conform to the Company's classifications.
(2) PURCHASE PRICE AND FUNDING
On April 1, 1998, the Company acquired substantially all of the assets and
assumed the liabilities of 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 was the result of arms-length
negotiations and consisted of the following: (i) payment by the Company to
Bankers of $61.5 million in cash, (ii) delivery of a promissory note in the
principal amount of $5.0 million, (iii) contingent cash payments of up to $30.0
million over three years dependent upon the achievement of certain operating
results, and (iv) the Company's assumption of Bankers' liabilities. The source
of funds used for the acquisition was cash on hand.
The foregoing information contained in this Form 8-K/A pertaining to the
acquisition is qualified in its entirety by reference to the complete text of
the Asset Purchase Agreement, a copy of which was attached as an exhibit to the
Form 8-K that was filed by the Company on April 13, 1998.
(3) ALLOCATION OF PURCHASE PRICE
The purchase price of Bankers has been allocated as follows (in thousands):
Cash and cash equivalents...................................... $ 1,900
Cash - restricted.............................................. 5,000
Loans held for sale............................................ 18,984
Premises and equipment, net.................................... 970
Goodwill....................................................... 34,159
Accrued interest receivable.................................... 182
Servicing rights............................................... 24,988
Other assets................................................... 2,531
Borrowings..................................................... (18,388)
Deferred income taxes.......................................... (235)
Other liabilities.............................................. (1,898)
--------
Total....................................................... $ 68,193
========
(4) ACQUISITION COSTS
The table below reflects the Company's costs of acquisition of Bankers. The
costs have been recorded in the Pro Forma Combined Condensed Balance Sheet in
order to disclose the aggregate effect of these activities on the Company's pro
forma combined financial position. The aggregate costs, primarily comprised of
cash charges, included the following (in thousands):
Investment banking and other professional fees................. $ 1,646
Filing fees, permits and licensing............................. 47
--------
Total....................................................... $ 1,693
========
(5) PRO FORMA ADJUSTMENTS
Cash and cash equivalents has been reduced to reflect the $61.5 million paid
at the time of acquisition, $1.7 million in acquisition costs, and adjusted by
$0.2 million to reflect a book overdraft. Bankers' fixed assets and servicing
rights have been adjusted to reflect the current valuation. Other liabilities
have been increased to reflect the $5.0 million note to Bankers. Common stock
has been adjusted as it was not transferred from Bankers. Notes
34
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receivable from shareholders has been adjusted as it was not transferred from
Bankers. Additional paid-in capital has been adjusted as it was not transferred
from Bankers. Deferred compensation has been adjusted as it was not transferred
from Bankers. Retained earnings has been adjusted as it was not transferred from
Bankers.
For the three months ended March 31, 1998 and the year ended December 31,
1997, pro forma adjustments have been made to interest expense to reflect
interest on the $5.0 million note to Bankers, goodwill amortization resulting
from the acquisition of Bankers, and income tax expense to reflect the tax
effect that would have resulted had Bankers been taxed as a corporation.
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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, hereunto duly authorized.
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
June 4, 1998 \s\ Raedelle Walker
----------------------------------------------------
Raedelle Walker
Executive Vice President and Chief Financial Officer
36
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EXHIBIT INDEX
Sequential Page
Exhibit Number Description Number
-------------- ----------- ------
2.1 Asset Purchase Agreement dated as of N/A
March 9, 1998, by and among the
Registrant, Bankers Mutual, a Mortgage
Banking Corporation, Bankers
Mutual Mortgage, Inc. and the
shareholders named therein is
incorporated herein by reference to
Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated
April 13, 1998, of which this
amendment on Form 8-K/A forms a part.
37
