<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 000-23283
FMAC
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4649104
- ------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
1888 CENTURY PARK EAST, THIRD FLOOR
LOS ANGELES, CALIFORNIA 90067
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 229-2600
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST POSSIBLE DATE:
CLASS SHARES OUTSTANDING AT OCTOBER 31, 1998
------------------------------ --------------------------------------
COMMON STOCK, $0.001 PAR VALUE 28,715,625
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
FORM 10-Q
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----------------------------- ----
<S> <C> <C>
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
Consolidated Balance Sheets September 30, 1998 and December 31, 1997....................... 3
Consolidated Statements of Income - Three months ended September 30, 1998 and 1997, and
nine months ended September 30, 1998 and 1997............................................... 4
Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997....... 5
Notes to Consolidated Financial Statements.................................................. 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 10
-------------------------------------------------------------------------------------
ITEM 3 NOT APPLICABLE
--------------
PART II - OTHER INFORMATION
ITEMS 1-6 NOT APPLICABLE
--------------
SIGNATURES..................................................................................... 17
----------
</TABLE>
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by Franchise Mortgage Acceptance
Company (the "Company") with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications, or in
oral statements made with the approval of an authorized executive officer, the
words or phrases "would be", "will allow", "intends to", "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 23,165 $ 7,335
Cash - restricted............................................... 5,751 2,744
Securities available for sale................................... 16,963 22,870
Loans and leases held for sale.................................. 693,464 343,200
Retained interest in loan and lease securitizations............. 21,027 21,652
Purchased and originated servicing rights....................... 25,932 2,213
Premises and equipment - net.................................... 6,161 2,518
Goodwill........................................................ 38,055 4,315
Accrued interest receivable..................................... 4,253 2,758
Other assets.................................................... 16,391 12,627
-------- --------
Total assets............................................... $851,162 $422,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings...................................................... $639,327 $256,220
Deferred income taxes........................................... 27,548 14,160
Other liabilities............................................... 27,437 13,430
-------- --------
Total liabilities.......................................... 694,312 283,810
-------- --------
Minority interest in subsidiary................................. 55 -
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares
authorized; none issued and outstanding..................... - -
Common stock, $.001 par value; 100,000,000 shares
authorized; 28,715,625 shares issued and outstanding........ 29 29
Additional paid in capital.................................... 118,330 118,330
Retained earnings............................................. 38,436 20,063
-------- --------
Total stockholders' equity.................................... 156,795 138,422
-------- --------
Total liabilities and stockholders' equity.................... $851,162 $422,232
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans and leases................. $ 4,740 $20,690 $43,978 $40,497
------- ------- ------- -------
Interest income.................................. 17,015 8,180 42,540 18,947
Interest expense................................. 11,038 6,394 28,484 15,788
------- ------- ------- -------
Net interest income........................... 5,977 1,786 14,056 3,159
------- ------- ------- -------
Loan servicing income............................ 4,812 854 10,680 2,230
Other income (loss).............................. (16) (588) 563 (588)
------- ------- ------- -------
Total revenue................................. 15,513 22,742 69,277 45,298
------- ------- ------- -------
Expense:
Personnel........................................ 6,949 4,620 20,130 9,285
Professional services............................ 776 616 2,301 1,792
Travel........................................... 809 499 2,307 1,022
Business promotion............................... 1,215 292 3,023 641
Valuation allowances............................. - 700 633 700
Occupancy........................................ 725 167 1,743 444
Goodwill amortization............................ 702 141 1,519 310
General and administrative....................... 2,116 1,005 5,888 2,439
------- ------- ------- -------
Total expense................................. 13,292 8,040 37,544 16,633
------- ------- ------- -------
Income before taxes and minority interest........ 2,221 14,702 31,733 28,665
Minority interest in subsidiary.................. (55) - 55 -
Income taxes..................................... 956 - 13,305 -
------- ------- ------- -------
Net income.................................... $ 1,320 $14,702 $18,373 $28,665
======= ======= ======= =======
Basic income per share............................. $ 0.05 $ 0.64
======= =======
Weighted average shares outstanding................ 28,716 28,716
======= =======
Diluted income per share........................... $ 0.05 $ 0.64
======= =======
Weighted average shares outstanding................ 28,742 28,878
======= =======
Pro forma earnings data:
Net income as reported............................ $14,702 $28,665
Pro forma income tax expense...................... 6,104 12,039
------- -------
Pro forma net income.............................. $ 8,598 $16,626
======= =======
Pro forma basic and diluted income per share...... $ 0.39 $ 0.76
======= =======
Weighted average shares outstanding............... 21,888 21,888
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 18,373 $ 28,665
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation, amortization and discount accretion................................ 4,054 (464)
Increase in accrued interest receivable.......................................... (1,313) (1,015)
Provision for deferred income taxes.............................................. 13,228 --
Increase in other liabilities.................................................... 12,979 5,393
Increase (decrease) in other assets.............................................. (2,462) 273
Provision for valuation allowance for retained interests in securitization....... -- 400
Increase in originated mortgage servicing rights................................. (3,577) --
Loan and lease operations
Loans and leases originated.................................................. (1,526,308) (507,003)
Loans sold to affiliates..................................................... 291,721 11,450
Provision for loan and lease losses.......................................... 633 300
Principal reductions......................................................... 65,208 12,288
Cash proceeds from loan sales and securitizations, net of gain............... 836,277 371,018
----------- ---------
Net cash used in operating activities................................................ (291,187) (78,695)
----------- ---------
Cash flows from investing activities:
Purchases of premises and equipment.............................................. (3,797) (1,332)
Decrease (increase) in interest bearing deposits................................. 1,993 (111)
Purchase of securities available for sale........................................ (16,963) --
Sale of securities available for sale............................................ 22,870 36,571
Increase in retained interests in securitizations................................ (12,154) (632)
Proceeds from retained interests in securitizations.............................. 13,041 1,453
Sale of servicing rights......................................................... 281 --
Purchase of Bankers Mutual....................................................... (63,028) --
Purchase of Enterprise Financial Group........................................... -- (408)
Increase in minority interest in subsidiary...................................... 55 --
----------- ---------
Net cash provided by (used in) investing activities.................................. (57,702) 35,541
----------- ---------
Cash flows from financing activities:
Net change in borrowings from Imperial Credit Industries, Inc. .................. -- (28,069)
Increase in borrowings........................................................... 364,719 76,578
Member distributions............................................................. -- (6,322)
----------- ---------
Net cash provided by financing activities............................................ 364,719 42,187
----------- ---------
Net change in cash..................................................................... 15,830 (967)
Cash (book overdraft) at beginning of period........................................... 7,335 (171)
----------- ---------
Cash (book overdraft) at end of period................................................. $ 23,165 $ (1,138)
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Unless the context indicates otherwise, all references hereinafter to the
Company refer to Franchise Mortgage Acceptance Company, a Delaware corporation
along with all its predecessor entities, including Franchise Mortgage Acceptance
Company LLC ("Franchise Mortgage LLC").
On November 18, 1997, the Company completed its initial public offering (the
"Offering") pursuant to which 10,000,000 shares of common stock were sold to the
public at a price of $18.00 per share. On November 28, 1997, 890,625 additional
shares of common stock were sold to the public at the sale price of $18.00 per
share.
Immediately prior to the Offering, Franchise Mortgage LLC merged into
Franchise Mortgage Acceptance Company, a Delaware corporation that was
incorporated in August 1997 for the purpose of succeeding to the business of
Franchise Mortgage LLC. As part of the initial public offering, Imperial Credit
Industries Inc. ("ICII") and FLRT, Inc. collectively sold to the public
4,062,500 shares of Company common stock at $18.00 per share. Subsequent to the
sales of common stock described above, ICII owned 38.4% and FLRT, Inc. owned
21.6% of the Company's outstanding shares of common stock.
(2) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the balance sheet and revenues and expenses for the periods presented.
Significant balance sheet accounts which could be materially affected by such
estimates include loans and leases held for sale, securities available for sale
and retained interest in loan securitizations. Actual results could differ
significantly from those estimates. The consolidated financial statements
include the accounts of FMAC Golf Finance Group LLC. All significant inter-
company accounts and transactions have been eliminated in consolidation.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standards (SFAS) No. 133, "Accounting for Derivatives Instruments
and Hedging Activities". SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivatives instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Under SFAS No. 133, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is in the process of determining what effect, if
any, adoption of SFAS No. 133 will have on the Company's financial condition and
results of operations.
6
<PAGE>
(4) SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of asset-backed securities issued by the
Company. For the nine months ended September 30, 1998 and the year ended
December 31, 1997, activity in securities available for sale was as follows:
<TABLE>
<CAPTION>
(In thousands) For the Nine Months Ended September 30, 1998
--------------------------------------------
Beginning Bond Cash Discount Hedging Ending
Balance Amount Discount Received Accretion (Gain) Loss Sold Balance
------- ------ -------- -------- --------- ----------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997-B (2).......... $22,870 $ - $ - $ - $ - $ - $(22,870) $ -
1998-CE (3)......... - 13,090 (2,702) - - - - 10,388
1998-CF (3)......... - 5,610 (2,063) - - - - 3,547
1998-1 (4).......... - 3,311 (283) - - - - 3,028
------- ------- ------- -------- --------- ----------- -------- -------
Totals.............. $22,870 $22,011 $(5,048) $ - $ - $ - $(22,870) $16,963
======= ======= ======= ======== ========= =========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
(In thousands) For the Year Ended December 30, 1997
------------------------------------
Beginning Bond Cash Discount Hedging Ending
Balance Amount Discount Received Accretion (Gain) Loss Sold Balance
------- ------ -------- -------- --------- ----------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991-A (1).......... $36,571 $ - $ - $ - $ - $ - $(36,571) $ -
1997-B (2).......... - 22,752 - - - 118 - 22,870
------- ------- -------- -------- --------- ---- -------- -------
Totals.............. $36,571 $22,752 $ - $ - $ - $118 $(36,571) $22,870
======= ======= ======== ======== ========= ==== ======== =======
</TABLE>
- --------------------
(1) 1991-A was purchased from Greenwich in August 1996, and included a $1.5
million premium. This security was sold in January 1997.
(2) 1997-B is an interest-only strip that was purchased from CS First Boston in
December 1997 and was subsequently sold in March 1998.
(3) 1998-CE and 1998-CF represent the Class E and F certificates that were
purchased by the Company as part of the 1998-C securitization.
(4) 1998-1 is the Class C certificate that was purchased by the Company as part
of the 1998-1 equipment finance securitization.
(5) LOANS AND LEASES HELD FOR SALE
The Company offers permanent commercial loans, short-term commercial loans
(DEVCO and Seasoning loans), multi-family and equipment loans and leases to
those sectors in which it operates. Substantially all of the Company's permanent
commercial loans are self-amortizing long-term fixed or adjustable rate loans
provided for purposes other than development and construction of business units.
DEVCO loans are short-term, interest-only loans offered to fund the development
and construction of new business units. Seasoning loans are short-term,
interest-only loans offered to fund the acquisition of new business units or the
conversion of existing business units into a different franchise concept. Multi-
family loans are generally fixed rate loans amortized over 30 years. Equipment
loans are fixed rate products tied to U.S. Treasury rates that generally have a
maximum term of up to 10 years. The Company's equipment leases generally range
in term from 5 to 7 years and are substantially made up of "direct financing"
leases.
At September 30, 1998 and December 31, 1997, loans and leases held for sale
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1998 1997
------------- ------------
<S> <C> <C>
Permanent commercial loans................................................................ $354,070 $149,699
Short-term commercial loans............................................................... 149,012 177,536
Multi-family loans........................................................................ 136,203 -
Loans in process.......................................................................... 247 -
Equipment loans and leases................................................................ 44,460 19,500
Allowance for loan and lease losses....................................................... (2,599) (998)
Reserve fund deposits with Southern Pacific Bank.......................................... 277 187
Net deferred loan fees.................................................................... (183) (2,530)
Unearned lease income..................................................................... (11,527) (5,520)
Lease residuals........................................................................... 276 301
Margin and deferred net losses on futures contracts used to hedge loans and leases
held for sale........................................................................... 23,228 5,025
-------- --------
Loans and leases held for sale......................................................... $693,464 $343,200
======== ========
</TABLE>
7
<PAGE>
Loans and leases held for sale were pledged as collateral for the borrowings
of the Company. Non-accrual loans, including impaired loans, totaled $7.6
million at September 30, 1998 and $4.0 million at December 31, 1997.
(6) RETAINED INTEREST IN LOAN AND LEASE SECURITIZATIONS
Activity in retained interest in loan and lease transactions was as follows
for the nine months ended September 30, 1998 and the year ended December 31,
1997:
<TABLE>
<CAPTION>
(In thousands) For the Nine Months Ended September 30, 1998
--------------------------------------------
Beginning Bond Cash Discount Reserve Valuation Ending
Balance Amount Received Accretion Fund Deposit Allowance Balance
------- ------ -------- --------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1994-A.............. $ 1,599 $ - $ (432) $171 $ - $ - $ 1,338
1995-A.............. 876 - (187) 91 - - 780
1996-A.............. 6,226 - (718) - - - 5,508
1996-B.............. 331 - - - - - 331
1997-A.............. 344 - - - - - 344
1997-B.............. 306 - - - - - 306
1997-C.............. 266 - - - - - 266
1997-1 (1).......... 11,704 - (11,704) - - - -
1998-A.............. - 283 - - 1,989 (1,989) 283
1998-B.............. - 3,652 - - 100 (100) 3,652
1998-C.............. - 5,796 - - 100 (100) 5,796
1998-1 (1).......... - 2,423 - - 1,424 (1,424) 2,423
------- ------- -------- --------- ------ ------- -------
Totals.............. $21,652 $12,154 $(13,041) $262 $3,613 $(3,613) $21,027
======= ======= ======== ========= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
(In thousands) For the Year Ended December 31, 1997
------------------------------------
Beginning Bond Cash Discount Reserve Valuation Ending
Balance Amount Received Accretion Fund Deposit Allowance Balance
------- ------ -------- --------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1994-A.............. $1,814 $ - $ (474) $ 259 $ - $ - $ 1,599
1995-A.............. 964 - (224) 136 - - 876
1996-A.............. 6,908 - (1,034) 752 - (400) 6,226
1996-B.............. - 331 - - - - 331
1997-A.............. - 326 - 18 1,586 (1,586) 344
1997-B.............. - 306 - - 1,852 (1,852) 306
1997-C.............. - 266 - - 1,523 (1,523) 266
1997-1 (1).......... - 11,704 - - - - 11,704
------ ------- ------- ------ ------ ------- -------
Totals.............. $9,686 $12,933 $(1,732) $1,165 $4,961 $(5,361) $21,652
====== ======= ======= ====== ====== ======= =======
</TABLE>
- -----------------
(1) Equipment Finance transaction.
The components of retained interest in loan securitizations were as follows at
the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Overcollateralization amounts......................... $20,495 $20,627
Cash reserve deposit--restricted...................... 9,629 6,781
Residual interests.................................... 120 132
Valuation allowance................................... (9,217) (5,888)
------- -------
Balance............................................... $21,027 $21,652
======= =======
</TABLE>
8
<PAGE>
(7) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest for the nine months ending September 30, 1998 and 1997
was $27.2 million and $15.2 million, respectively. Cash paid for income taxes
for the nine months ending September 30, 1998 was $0.8 million. There was no
cash paid for income taxes in the nine months ending September 30, 1997 as the
Company had been treated as a partnership for federal and state income tax
purposes.
The components associated with the acquisition of Bankers were as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fair value of assets acquired............. $ 82,604
Cash paid................................. (63,028)
Note payable to Bankers................... (5,000)
--------
Liabilities assumed..................... $ 14,576
========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Franchise Mortgage Acceptance Company (the "Company") is a specialty
commercial finance company engaged in the business of originating and servicing
loans and equipment leases to small businesses, with a primary focus on
established national and regional franchise concepts, other branded concepts
such as service stations or convenience stores and multi-family income producing
properties.
Unless the context indicates otherwise, all references hereinafter to the
Company refer to Franchise Mortgage Acceptance Company, along with all its
predecessor entities, including Franchise Mortgage Acceptance Company LLC
("Franchise Mortgage LLC").
On April 1, 1998, the Company acquired substantially all of the assets and
assumed the liabilities of Bankers Mutual and Bankers Mutual Mortgage, Inc.
(together, "Bankers"). The acquisition was made pursuant to an Asset Purchase
Agreement dated March 9, 1998 by and among the Company, Bankers, and the holders
of the outstanding shares of Bankers. Bankers is a Federal National Mortgage
Association and Federal Home Loan Bank lender and servicer. The purchase price
paid for the assets was the result of arms-length negotiations and consisted of
the following: (i) payment by the Company to Bankers of $61.5 million in cash,
(ii) delivery of a promissory note in the principal amount of $5.0 million,
(iii) contingent cash payments of up to $30.0 million over three years dependent
upon the achievement of certain operating results, and (iv) the Company's
assumption of Bankers' liabilities. The source of funds used for the acquisition
was cash on hand.
In April 1998, the Company formed a wholly owned insurance brokerage
subsidiary, FMAC Insurance Services Inc., which offers property, casualty, and
employee benefits policies and programs to businesses nationwide. In this
business, the Company acts only as a broker, taking no insurance risks.
In April 1998, the Company finalized a joint venture with MLQ Investors, LP
("MLQ") pursuant to which all loan and lease activities of the Company's Golf
Finance Group will be exclusively conducted by the new entity known as FMAC Golf
Finance Group LLC which is 50% owned by each of the Company and MLQ and managed
by the Company. In connection therewith, a $100.0 million warehouse line of
credit has been established with a major investment banking firm to provide FMAC
Golf Finance Group LLC with financing. The line is a twelve-month facility with
interest based on Libor.
In July 1998, the Company finalized a joint venture with SFT Venturer, LLC
("SFT") to form FMAC Star Fund, LLP. The purpose of this entity is to engage in
the activity of financing the Company's loans. Each party has a 50% ownership
position with SFT contributing 80% of the mandatory capital and the Company
contributing the remaining 20%.
On November 9, 1998, the Company entered into a purchase and sale agreement
with Global Alliance Finance Company, LLC, an affiliate of Deutsche Bank
Securities, Inc. ("GAFCO"). Under this agreement, the Company will sell certain
franchise loans to GAFCO at par value. When GAFCO sells or securitizes such
loans, GAFCO and the Company share equally in the resulting profits or losses up
to 30% of par value. There is no specified commitment by either party, and the
agreement may be terminated by either party on or after November 30, 1999.
LOAN AND LEASE ORIGINATIONS
Types of Loan and Lease Products
The Company offers permanent commercial loans, short-term commercial loans
(DEVCO and Seasoning loans), multi-family loans, and equipment loans and leases
to those sectors in which it operates.
Permanent Commercial Loans. Substantially all of the Company's permanent
commercial loans are self-amortizing long-term fixed or adjustable rate loans
provided for purposes other than development and construction of business units.
These loans generally have a maximum term and amortization of up to 20 years.
Fixed rate loans are tied to the U.S. Treasury rates plus a spread while
adjustable rate loans are tied to the London interbank offered rate ("LIBOR")
plus a spread and generally reprice on a monthly basis. As a cash flow lender,
the Company maintains flexibility to tailor a loan program to fit the specific
needs of its borrowers. The terms of the loans vary in part based on the
collateral pledged.
Commercial Development and Construction Loans. DEVCO loans are offered to
fund the development and construction of new business units. These loans
generally provide an interest-only period of up to 18 months that gives the
Borrower the opportunity to construct the unit, stabilize business unit
performance, and achieve a higher cash flow in the short-term. Fixed rate DEVCO
loans are tied to U.S. Treasury rates, while adjustable rate DEVCO loans are
tied to LIBOR.
10
<PAGE>
Commercial Seasoning Loans. Seasoning loans are offered to fund the
acquisition of new business units or the conversion of existing business units
into a different franchise concept. Seasoning loans generally provide an
interest-only period of up to 18 months that gives borrowers the opportunity to
stabilize business unit performance and achieve a higher cash flow in the short-
term. Generally, other terms and conditions are similar to those of DEVCO
loans.
Multi-Family Loans. Substantially all of the Company's multi-family loans
are long-term fixed rate loans provided for purposes of financing multi-family
income producing properties. Multi-family loans generally have a maximum term
and amortization of up to 30 years with a 9 1/2 years yield maintenance period.
Fixed rate loans are tied to the U.S. Treasury rates.
Equipment Loans and Leases. The Company provides equipment financing to
experienced owners and operators in those sectors in which the Company operates.
Equipment loans are fixed rate products tied to U.S. Treasury rates. These loans
generally have a maximum term of up to 10 years. In addition, the Company
originates equipment leases with terms that generally range from 5 to 7 years.
Substantially all of the leases originated by the Company are "direct
financing" leases in that they transfer substantially all of the benefits and
risks of equipment ownership to the lessee. Because the Company's leases are
classified as direct financing leases, the Company records total estimated
unguaranteed residual value and initial direct costs as the gross investment in
the lease. The difference between the gross investment in the lease and the cost
of the leased equipment is defined as "unearned income." Interest income is
recognized over the term of the lease by amortizing the unearned income and
deferred initial direct costs using the interest method.
Lending Groups
The Company's focus at inception was to provide secured financing to
franchisees of Taco Bell Corp. After establishing an infrastructure and credit
expertise, the Company began expanding its quick service restaurant concepts,
loaning to casual dining concepts and moving into other related lending sectors
such as retail energy, golf, death care, multi-family finance, and equipment
finance. The Company carefully reviews industry data seeking sectors with a
combination of large capital requirements, proven cash flow generating
capabilities, standardized operations, a scarcity of long term funding sources
and characteristics attractive to secondary market investors. This business
formula provides the template to identify, test and determine the potential
value of entering into new sectors.
The Company's lending groups currently include Diversified Finance, FMAC Golf
Finance, LLC, Energy Finance, Multi-Family Finance, and Equipment Finance. Each
of these groups includes a core group of professionals who are experts in the
sector and can target selected borrowers in such sector.
Diversified Finance Group. During the first quarter of 1998, the Company
organized the Diversified Finance Group by combining its Restaurant, Golf, and
Funeral Divisions. As of September 30, 1998, the Diversified Finance Group
originated loans through a network of 5 offices in 5 states. For the nine months
ended September 30, 1998, this group originated $599 million of loans. From
inception in 1991 through September 30, 1998, the Diversified Finance Group
provided approximately $2.1 billion in financing to borrowers.
FMAC Golf Finance Group, LLC. FMAC Golf Finance Group, LLC was established
in April 1998 to provide loans to national, regional, and local operators of
golf courses and golf practice facilities. As of September 30, 1998, the FMAC
Golf Finance Group, LLC originated loans through a network of 4 offices in 3
states. From its inception through September 30, 1998, the FMAC Golf Finance
Group, LLC provided approximately $30 million in financing to borrowers.
Energy Finance Group. The Energy Finance Group was organized to provide
loans to national and regional businesses that distribute retail petroleum
products such as service stations, convenience stores, truck stops, car washes
and quick lube stores. As of September 30, 1998, the Energy Finance Group
originated loans through a network of 9 offices in 7 states. For the nine months
ended September 30, 1998, this group originated $450 million
11
<PAGE>
of energy loans. From its inception in 1997 through September 30, 1998, the
Energy Finance Group provided approximately $632 million in financing to
borrowers.
Multi-Family Finance Group. Multi-family loans from $250,000 to $3.0 million
are provided through the Company's Multi-Family Mid-Market Division. Loans from
$3.0 million to $50.0 million are provided through the Company's Multi-Family
Major Loan Division. For the six months ended September 30, 1998, the Multi-
Family Finance Group funded $467 million in multi-family loans, which included
$85 million in loans that were funded without the use of a credit facility. Loan
programs include Fannie Mae, Bankers Capital and Freddie Mac Program Plus. As of
September 30, 1998, the multi-family loan servicing portfolio had an unpaid
principal balance of $2.5 billion with no delinquencies. The Multi-Family
Finance Group originates business through its in-house origination team located
in five production offices.
Equipment Finance Group. The Equipment Finance Group was organized to
provide equipment financing to experienced owners and operators in sectors in
which the Company operates and other strategic complementary businesses. For the
nine months ended September 30, 1998, this group originated $60 million of loans
and leases. From its inception in 1996 through September 30, 1998, the Equipment
Finance Group provided approximately $116 million in financing to borrowers.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 Compared to Three and Nine Months
Ended September 30, 1997
For comparative purposes, the following discussion presents the pro forma
statement of operations for the three and nine months ended September 30, 1997
as if the Company had been taxed as a corporation for those periods.
Total revenues decreased 31.8% to $15.5 million for the three months ended
September 30, 1998 from $22.7 million for the comparable period in 1997. During
the same periods, the Company's total expenses increased 65.3% to $13.3 million
from $8.0 million. As a result, net income decreased to $1.3 million for the
three months ended September 30, 1998 as compared to pro forma net income of
$8.6 million in the same period of 1997.
Total revenues increased 52.9% to $69.3 million for the nine months ended
September 30, 1998 from $45.3 million for the comparable period in 1997. During
the same periods, the Company's total expenses increased 125.7% to $37.5 million
from $16.6 million. As a result, net income increased to $18.4 million for the
nine months ended September 30, 1998 as compared to pro forma net income of
$16.6 million in the same period of 1997.
The decrease in revenues for the three months ended September 30, 1998 was
attributable to a $16.0 million decrease in gain on sale of loans. The decrease
was due primarily to two factors.
. A $16.8 million hedge loss associated with the $349 million of loans sold in
----------------------------------------------------------------------------
a securitization in the third quarter of 1998. A significant portion of this
----------------------------------------------
is estimated to have been related to abnormal market influences. This loan
securitization resulted in a $0.5 million gain on sale as compared to a $18.9
million gain on sale for the $185.2 million securitization in the three months
ended September 30, 1997.
For accounting purposes, hedge gains and losses associated with loans held for
sale are deferred until sale of the loans, and are included in the computation
of the gain on sale of the loans. The Company hedges these loans with treasury
futures, which have correlated to a high degree with the gross gain on sale of
the securitized loans, due to the fact that the Company prices its fixed-rate
loans based on treasury rates with similar maturities. Effectively, when
treasury rates decline or rise, increasing or decreasing the gain on sale of
the securitized loans, the treasury futures have an opposite result, thus
protecting the Company from interest rate risk. During the third quarter of
1998, market anomalies caused a divergence from correlation on a number of
days, resulting in losses on those days which were not offset to the same
degree with gains on the
12
<PAGE>
securitized loans. Notwithstanding the aforementioned anomalies, management
believes that these treasury futures hedges have had and will continue to have
a high degree of correlation with the gross gain on sale of the Company's
loans throughout the hedging period. On September 30, 1998, the Company had
approximately $23.2 million in deferred hedge losses related to the remaining
loans and leases held for sale. Such loans and leases held for sale are
carried at the lower of cost or market value and include the deferred hedge
loss in the cost basis of the loans and leases. Losses deferred will be
recognized at the time of the sale of loans and leases to which they are
related.
. A difference in market conditions between the third quarters of 1998 and 1997.
-----------------------------------------------------------------------------
Demand for commercial asset-based securities was very high in the third
quarter of 1997 as compared to the low demand experienced in the market in the
third quarter of 1998. In the third quarter of 1998, market conditions caused
a movement by investors to liquid investments, resulting in a lower demand for
securitized assets.
The Company also sold in a securitization $38.3 million of equipment loans and
leases, for a gain of $0.8 million. These loans and leases were also encumbered
by hedge losses due to market conditions, totaling $1.7 million.
The $349 million securitization in the three months ended September 30, 1998
resulted in a cash gain of $11.5 million, before hedge loss of $16.8 million. As
part of the transaction, the Company purchased two subordinated bonds for $13.9
million. This compared to the $185.1 million securitization in the three months
ended September 30, 1997 which resulted in a cash gain of $23.4 million, before
hedge loss of $3.7 million.
The increase in revenues for the nine months ended September 30, 1998 was
attributable to a $3.5 million increase in gain on sale of loans and leases. For
the nine months ended September 30, 1998, the Company sold approximately $836.3
million of loans and leases in four loan and lease securitizations for a gain on
sale of $44.0 million, which resulted in a cash gain of $46.0 million, before
hedge loss of $21.4 million as compared to $371.8 million of loans and leases
sold in two loan securitizations and three whole loan and lease sales for a gain
on sale of $40.5 million, which resulted in a cash gain of $44.0 million, before
hedge loss of $4.2 million for the nine months ended September 30, 1997.
Net interest income also contributed to the change in revenues, increasing
234.7% to $6.0 million for the three months ended September 30, 1998 as compared
to $1.8 million for the same period in 1997. For the nine months ended September
30, 1998, revenues increased 345.0% to $14.1 million as compared to $3.2 million
for the same period in 1997. These increases were primarily due to the
significant increase in loans and leases held for sale which resulted from
increased loan and lease originations as well as the acquisition of Bankers.
Loan servicing income increased 463.5% to $4.8 million for the three months
ended September 30, 1998 as compared to $0.9 million for the same period in
1997. Loan servicing income increased 378.9% to $10.7 million for the nine
months ended September 30, 1998 as compared to $2.2 million for the same period
in 1997. These increases were due to an increase in loans and leases serviced
for other institutions which resulted from the sales and securitization of loans
and leases with servicing rights retained by the Company as well as the
acquisition of Bankers. A $2.5 billion servicing portfolio was acquired with the
Bankers' purchase. The Company's loan servicing portfolio increased to $5.1
billion as of September 30, 1998 from $1.2 billion as of September 30, 1997.
Total expenses increased 65.3% to $13.3 million for the three months ended
September 30, 1998 as compared to $8.0 million for the same period of the prior
year primarily due to infrastructure needs to support the increase in loan and
lease originations and the expenses relating to the Multi-Family Finance Group
resulting from the acquisition of Bankers. Total expenses as a percentage of
loan and lease originations were 2.0% for the third quarter of 1998 compared to
3.8% for the same period of 1997. Personnel expenses increased 50.4% to $6.9
million, business promotions increased 316.1% to $1.2 million, occupancy
increased 334.1% to $0.7 million and goodwill amortization increased 397.9% to
$0.7 million for the three months ended September 30, 1998 as compared to the
same period in 1997.
13
<PAGE>
Total expenses increased 125.7% to $37.5 million for the nine months ended
September 30, 1998 as compared to $16.6 million for the same period of the prior
year primarily due to infrastructure needs to support the increase in loan and
lease originations and the expenses relating to the Multi-Family Finance Group
resulting from the acquisition of Bankers. Total expenses as a percentage of
loan and lease originations were 2.3% for the nine months ended September 30,
1998 compared to 3.3% for the same period of 1997. Personnel expenses increased
116.8% to $20.1 million, business promotions increased 371.6% to $3.0 million,
occupancy increased 292.6% to $1.7 million and goodwill amortization increased
390.0% to $1.5 million for the nine months ended September 30, 1998 as compared
to the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires access to short-term warehouse lines of credit and
repurchase facilities in order to fund loan and lease originations pending sale
or securitization of such loans and leases. Warehouse lines of credit,
repurchase facilities and working capital lines of credit at September 30, 1998
and December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) September 30, 1998 December 31, 1997
------------------ -----------------
Expiration Commitment Principal Commitment Principal
Lender Date Amount Outstanding Amount Outstanding
------ ---- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
Credit Suisse First Boston............. 12/31/98 $ 300,000 $169,811 $300,000 $127,249
Morgan Stanley(1)...................... 11/13/98 500,000 191,747 200,000 94,031
Banco Santander........................ 08/31/99 50,000 18,145 50,000 21,649
Sanwa Bank............................. 06/30/99 25,000 17,061 25,000 4,506
Goldman Sachs(2)....................... 04/30/99 100,000 48,114 - -
Residential Funding Corporation........ 09/30/99 100,000 58,390 - -
Bank of America........................ 01/29/99 35,000 5,380 - -
Residential Funding Corporation........ 05/31/99 50,000 17,000 - -
Other Borrowings(3).................... - 113,679 - 8,785
---------- -------- -------- --------
$1,160,000 $639,327 $575,000 $256,220
========== ======== ======== ========
</TABLE>
- -----------------
(1) Consists of $300 million committed and $200 million uncommitted.
(2) The warehouse line of credit with Goldman Sachs is used to fund loans
through FMAC Golf Finance Group LLC.
(3) Other borrowings includes $63.3 million of sold loans that have been
accounted for as a financing at September 30, 1998, $50.4 million dollars
of loans that have been financed through FMAC Star Fund, LLP as of
September 30, 1998, a $6.4 million sale of loans that has been accounted
for as a financing at December 31, 1997, and a $2.4 million loan from
Goldman Sachs Mortgage Company to finance a golf loan at December 31, 1997.
The above facilities, with the exception of Bank of America, have variable
interest rates based on London Interbank Offered Rate ("Libor"). The line of
credit with Bank of America has a fixed interest rate of 1.00% when Bankers
maintains minimum deposit requirements. The weighted average interest rate on
the outstanding principal balances of these facilities was 6.92% and 8.23% at
September 30, 1998 and December 31, 1997, respectively.
The Company's warehouse line of credit with Morgan Stanley has been extended
to November 13, 1998 from its original expiration date of September 30, 1998.
The Company is currently negotiating renewal of this warehouse line of credit,
which may include restructuring of funding arrangements.
14
<PAGE>
The Company also has a master purchase and sale agreement with Southern
Pacific Bank, a wholly owned subsidiary of ICII ("SPB") to originate loans for
SPB under mutual agreement, and subject to SPB underwriting each such loan prior
to sale of such loans. Under this agreement, the Company also has the ability to
repurchase loans, under mutual agreement with SPB. There is no specified
commitment by either party, and each individual sale is negotiated separately as
to pricing. This agreement has no expiration date. For the nine months ended
September 30, 1998, loans originated for SPB (and not repurchased), including
particpations, totaled approximately $26.8 million.
The Company's sources of operating cash flow include: (i) loan origination
income and fees; (ii) net interest income on loans held for sale; (iii) cash
servicing income; (iv) premiums obtained in sales of whole loans and (v) cash
proceeds from loan securitization. Cash from loan origination fees, net interest
income on loans held for sale and loan servicing fees, as well as available
borrowings generally provide adequate liquidity to fund current operating
expenses, excluding the difference between the amount funded on loans originated
and the amount advanced under the Company's current warehouse facilities (the
"haircut").
For the nine months ended September 30, 1998, net cash provided by operating
activities was $41.3 million. This excludes cash used in net loan origination
activities of $332.5 million, which was primarily attributable to the Company's
increased loan origination volume. For the nine months ended September 30, 1997,
net cash provided by operating activities was $33.3 million, exclusive of cash
used in net loan origination activities of $111.9 million.
For the nine months ended September 30, 1998, net cash used in investing
activities was $57.7 million, which was primarily attributable to the purchase
of Bankers as well as the purchase of the E and F certificates relating to the
1998-C securitization, offset by the sale of a $22.9 million security, which was
related to the Company's 1997-B securitization. For the nine months ended
September 30, 1997, net cash provided by investing activities was $35.5 million,
which was primarily attributable to the sale of securities related to the
restructuring of the Company's 1991-A securitization.
For the nine months ended September 30, 1998, net cash provided by financing
activities was $364.7 million, which was primarily attributable to increased
amounts of warehouse line borrowings resulting from increased loan and lease
originations during the period. For the nine months ended September 30, 1997,
net cash provided by financing activities was $42.2 million, which was primarily
attributable to an increase of $76.6 million in borrowings from warehouse lines
of credit, offset by a decrease of $28.1 million in borrowings from ICII and
member distributions of $6.3 million.
The Company anticipates that its current cash, together with cash generated
from operations and funds available under its credit facilities, will be
sufficient to fund its operations for at least the next 12 months if the
Company's future operations are consistent with management's expectations.
However, the Company is dependent upon its ability to access warehouse lines of
credit and repurchase facilities to fund new loan originations. The Company
currently expects to be able to maintain existing warehouse lines of credit and
repurchase facilities as current arrangements expire or become fully utilized;
however, there can be no assurance that such financing will be available on
favorable terms, if at all.
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company are monetary in nature.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of
15
<PAGE>
inflation. Inflation affects the Company primarily through its effect on
interest rates, since interest rates normally increase during periods of high
inflation and decrease during periods of low inflation. During periods of
increasing interest rates, demand for loans and a borrower's ability to qualify
for mortgage financing in a purchase transaction may be adversely affected.
During periods of decreasing interest rates, borrowers are more likely to
refinance their existing loans, which may negatively impact the Company's
investments in securitization related assets and interest-only securities.
YEAR 2000 COMPLIANCE
The Year 2000 issue affects virtually all companies and organizations. Many
currently installed computer systems and software systems were designed to use
only a two-digit date field. These date code fields will need to accept four
digit entries to distinguish 21/st/ century dates from 20/th/ century dates.
Until the date fields are updated, the systems or programs could fail or give
erroneous results when referencing dates following December 31, 1999. The
Company has developed a formal strategic plan which includes an awareness and
impact assessment, system testing, and remediation. This plan is projected to be
completed by June 1999. After reviewing the Company's initial assessment of its
internal systems, management believes that the costs associated with Year 2000
compliance should not be material. The risks associated with the Company's Year
2000 issues are currently being identified and have been determined to include,
but are not limited to, the Company's internal systems as well as third party
business partners, vendors, and suppliers. The Company is incorporating and
encompassing the Year 2000 area as part of the Company's Business Continuity
Plan. While the efforts to assess and correct the Company's Year 2000 issues are
expected to be complete prior to related forecasted failure horizons, the
Company is taking definite measures to assess risks and develop specific
contingency plans. The Company's Year 2000 efforts are on going and its overall
project will continue to evolve, as new information becomes available.
RECENT DEVELOPMENTS
Effective October 30, 1998, G. Louis Graziadio, III, resigned as a member of
the Company's Board of Directors. The Board of Directors has appointed Brad
Plantiko, Chief Financial Officer of Imperial Credit Industries, Inc., the
Company's largest stockholder, to replace Mr. Graziadio as a member of the
Board.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
Date: November 10, 1998 By: /s/ Raedelle Walker
--------------------
Raedelle Walker
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 28,916 28,916
<SECURITIES> 37,990 37,990
<RECEIVABLES> 697,717 697,717
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 764,623 764,623
<PP&E> 8,469 8,469
<DEPRECIATION> (2,308) (2,308)
<TOTAL-ASSETS> 851,162 851,162
<CURRENT-LIABILITIES> 666,764 666,764
<BONDS> 0 0
0 0
0 0
<COMMON> 29 29
<OTHER-SE> 156,766 156,766
<TOTAL-LIABILITY-AND-EQUITY> 851,162 851,162
<SALES> 4,740 43,978
<TOTAL-REVENUES> 15,513 69,277
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 13,292 37,544
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,276 31,678
<INCOME-TAX> 956 13,305
<INCOME-CONTINUING> 1,320 18,373
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,320 18,373
<EPS-PRIMARY> 0.05 0.64
<EPS-DILUTED> 0.05 0.64
</TABLE>
