<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 JUNE 30, 1998
COMMISSION FILE NUMBER: 000-23283
FMAC
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4649104
----------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
</TABLE>
1888 CENTURY PARK EAST, THIRD FLOOR
LOS ANGELES, CALIFORNIA 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 229-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X NO
----- ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Class Shares Outstanding at July 31, 1998
------------------------------ -----------------------------------
Common Stock, $0.001 par value 28,715,625
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FRANCHISE MORTGAGE ACCEPTANCE COMPANY
FORM 10-Q
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
ITEM 1 Consolidated Financial Statements
---------------------------------
<C> <S> <C>
Consolidated Balance Sheets June 30, 1998 and December 31, 1997............................ 3
Consolidated Statements of Operations - Three months ended June 30, 1998 and 1997, and six
months ended June 30, 1998 and 1997........................................................ 4
Consolidated Statements of Cash Flows - Six months ended June 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 1-5 Not Applicable..............................................................................
--------------
ITEM 6 Exhibits and Reports on Form 8-K............................................................ 15
SIGNATURES.................................................................................. 16
----------
</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
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- ---------------
ASSETS
<S> <C> <C>
Cash and cash equivalents....................................... $ 6,093 $ 7,335
Cash restricted................................................. 7,962 2,744
Securities available for sale................................... 2,255 25,345
Loans and leases held for sale.................................. 591,254 343,200
Retained interest in loan securitizations....................... 22,668 19,177
Purchased and originated servicing rights....................... 24,682 2,213
Premises and equipment net...................................... 5,543 2,518
Goodwill........................................................ 38,758 4,315
Accrued interest receivable..................................... 9,530 2,758
Other assets.................................................... 8,358 12,627
-------- --------
Total assets............................................... $717,103 $422,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings...................................................... $505,769 $256,220
Deferred income taxes........................................... 26,714 14,160
Other liabilities............................................... 29,035 13,430
-------- --------
Total liabilities.......................................... 561,518 283,810
-------- --------
Minority interest in subsidiary................................. 110 -
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 ........................................... 37,116 20,063
-------- --------
Total stockholders' equity .................................. 155,475 138,422
-------- --------
Total liabilities and stockholders' equity .................. $717,103 $422,232
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans and leases................. $ 22,917 $19,821 $ 39,238 $19,808
-------- ------- -------- -------
Interest income.................................. 14,958 7,425 25,525 10,767
Interest expense................................. (11,081) (6,695) (17,446) (9,394)
-------- ------- -------- -------
Net interest income........................... 3,877 730 8,079 1,373
-------- ------- -------- -------
Loan servicing income............................ 4,614 736 5,868 1,376
Other income..................................... 201 - 579 -
-------- ------- -------- -------
Total revenue................................. 31,609 21,287 53,764 22,557
-------- ------- -------- -------
Expense:
Personnel........................................ 8,016 2,067 13,181 4,665
Professional services............................ 929 698 1,525 1,176
Travel........................................... 931 347 1,498 524
Business promotion............................... 1,151 176 1,808 316
Valuation allowances............................. 633 - 633 -
Occupancy........................................ 663 161 1,018 277
Goodwill amortization............................ 702 88 817 169
General and administrative....................... 1,509 996 3,772 1,467
-------- ------- -------- -------
Total expense................................. 14,534 4,533 24,252 8,594
-------- ------- -------- -------
Income before taxes and minority interest........ 17,075 16,754 29,512 13,963
Minority interest in subsidiary.................. 110 - 110 -
Income taxes..................................... 7,126 - 12,349 -
-------- ------- -------- -------
Net income.................................... $ 9,839 $16,754 $ 17,053 $13,963
======== ======= ======== =======
Basic income per share............................. $0.34 $0.59
======== ========
Weighted average shares outstanding................ 28,716 28,716
======== ========
Diluted income per share........................... $0.34 $0.59
======== ========
Weighted average shares outstanding................ 29,100 28,762
======== ========
Pro forma earnings data:
Net income as reported............................ $16,754 $13,963
Pro forma income tax expense...................... 7,037 5,935
------- -------
Pro forma net income.............................. $ 9,717 $ 8,028
======= =======
Pro forma basic and diluted income per share...... $0.44 $0.37
======= =======
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>
Six Months Ended
June 30,
----------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 17,053 $ 13,963
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.......................................... 2,059 388
Increase in accrued interest receivable................................ (6,590) (577)
Provision for deferred income taxes.................................... 12,394 --
Increase in other liabilities.......................................... 14,577 2,359
Decrease in other assets............................................... 5,571 931
Loan and lease operations
Loans and leases originated.......................................... (879,266) (300,617)
Gain on sale of loans and leases..................................... (39,238) (19,808)
Loans sold to (purchased from) affiliates............................ 159,513 17,772
Provision for loan and lease losses.................................. 910 --
Proceeds from loan sales and securitizations and
principal reductions................................................ 527,842 192,943
--------- ---------
Net cash used in operating activities........................................ (185,175) (92,646)
--------- ---------
Cash flows from investing activities:
Purchases of premises and equipment.................................... (2,689) (898)
Decrease in interest bearing deposits.................................. (218) (73)
Sale of securities available for sale.................................. 22,870 36,367
Proceeds from securities available for sale............................ 398 401
Increase in retained interests in securitizations...................... (3,935) (326)
Proceeds from retained interests in securitizations.................... 444 732
Purchase of servicing rights........................................... (1,180) --
Purchase of Bankers Mutual............................................. (63,028) --
Increase in minority interest in subsidiary............................ 110 --
--------- ---------
Net cash provided by (used in) investing activities.......................... (47,228) 36,203
--------- ---------
Cash flows from financing activities:
Net change in borrowings from Imperial Credit Industries, Inc.......... -- (7,731)
Increase in borrowings................................................. 231,161 70,682
Member distributions................................................... -- (6,322)
--------- ---------
Net cash provided by financing activities.................................... 231,161 56,629
--------- ---------
Net change in cash............................................................ (1,242) 186
Cash (book overdraft) at beginning of period.................................. 7,335 (171)
--------- ---------
Cash at end of period......................................................... $ 6,093 $ 15
========= =========
</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.
(4) SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of asset-backed securities issued by the
Company. For the six months ended June 30, 1998 and the year ended December 31,
1997, activity in securities available for sale was as follows:
6
<PAGE>
<TABLE>
<CAPTION>
(In thousands) For the Six Months Ended June 30, 1998
--------------------------------------
Beginning Cash Discount Hedging Ending
Balance Purchased Received Accretion (Gain) Loss Sold Balance
--------- --------- --------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1994-A (1).......... $ 1,599 $ - $(266) $116 $ - $ - $1,449
1995-A (1).......... 876 - (132) 62 - - 806
1997-B (3).......... 22,870 - - - - (22,870) -
------- --------- ----- ---- ----------- --------- ------
Totals.............. $25,345 $ - $(398) $178 $ - $( 22,870) $2,255
======= ========= ===== ==== =========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
(In thousands) For the Year Ended December 31, 1997
------------------------------------
Beginning Cash Discount Hedging Ending
Balance Purchased Received Accretion (Gain) Loss Sold Balance
--------- --------- --------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1994-A (1).......... $ 1,814 $ - $(474) $259 $ - $ - $ 1,599
1995-A (1).......... 964 - (224) 136 - - 876
1991-A (2).......... 36,571 - - - - (36,571) -
1997-B (3).......... - 22,752 - - 118 - 22,870
------- ------- ----- ---- ---- -------- -------
Totals.............. $39,349 $22,752 $(698) $395 $118 $(36,571) $25,345
======= ======= ===== ==== ==== ======== =======
</TABLE>
(1) 1994-A and 1995-A are interest-only strips that were purchased from
Greenwich Capital Markets, Inc. in June 1996.
(2) 1991-A was purchased from Greenwich in August 1996, and included a $1.5
million premium. This security was sold in January 1997.
(3) 1997-B is an interest-only strip that was purchased from CS First Boston in
December 1997 and was subsequently sold in March 1998.
(5) LOANS AND LEASES HELD FOR SALE
The Company offers permanent commercial loans, 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 June 30, 1998 and December 31, 1997, loans and leases held for sale consisted
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1998 1997
---------- -------------
<S> <C> <C>
Permanent commercial loans................................................................ $271,834 $149,699
Short-term commercial loans............................................................... 202,162 177,536
Multi-family loans........................................................................ 62,846
Equipment loans and leases................................................................ 69,588 19,500
Allowance for loan and lease losses....................................................... (2,599) (998)
Reserve fund deposits with Southern Pacific Bank.......................................... 277 187
Net deferred loan fees.................................................................... (1,046) (2,530)
Unearned lease income..................................................................... (20,046) (5,520)
Lease residuals........................................................................... 286 301
Margin and deferred net losses on futures contracts used to hedge loans and leases
held for sale........................................................................... 7,952 5,025
-------- --------
Loans and leases held for sale......................................................... $591,254 $343,200
======== ========
</TABLE>
Loans and leases held for sale were pledged as collateral for the borrowings
of the Company. Non-accrual loans, including impaired loans, totaled $5.8
million at June 30, 1998 and $4.0 million at December 31, 1997. There were three
restructured loans totaling $827,000 at June 30, 1998 and three restructured
loans totaling $844,000 at December 31, 1997, which were accruing interest.
7
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(6) RETAINED INTEREST IN LOAN SECURITIZATIONS
Activity in retained interest in loan securitizations was as follows for the
six months ended June 30, 1998 and the year ended December 31, 1997:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
------------ ----------
<S> <C> <C>
Balance, January 1.................................. $19,177 $ 6,908
Additions........................................... 5,543 17,895
Accretion........................................... - 770
Cash received....................................... (444) (1,034)
Valuation allowance................................. (1,608) (5,362)
------- -------
Balance, end of period.............................. $22,668 $19,177
======= =======
</TABLE>
The components of retained interest in loan securitizations were as follows at
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1998 1997
---------------- -----------------
<S> <C> <C>
Overcollateralization amounts........................ $21,914 $18,152
Cash reserve deposit--restricted..................... 7,902 6,781
Residual interests................................... 124 132
Valuation allowance.................................. (7,272) (5,888)
------- -------
Balance.............................................. $22,668 $19,177
======= =======
</TABLE>
(7) Borrowings
Warehouse lines of credit, repurchase facilities and working capital lines of
credit at June 30, 1998 and December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) June 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 $172,587 $300,000 $127,249
Morgan Stanley......................... 09/30/98 500,000 198,340 200,000 94,031
Banco Santander........................ 04/30/98 - - 50,000 21,649
Sanwa Bank............................. 06/30/99 25,000 24,993 25,000 4,506
Goldman Sachs(1)....................... 04/30/99 100,000 28,985 - -
Residential Funding Corporation........ 08/31/98 35,000 25,300 - -
Bank of America........................ 07/31/98 35,000 - - -
Residential Funding Corporation........ 05/31/99 50,000 - - -
Other Borrowings(2)(3)................. - 55,564 - 8,785
---------- -------- -------- --------
$1,045,000 $505,769 $575,000 $256,220
========== ======== ======== ========
</TABLE>
(1) The warehouse line of credit with Goldman Sachs is used to fund loans
through FMAC Golf Finance Group LLC.
(2) Other borrowings include a $55.6 million sale of loans that has been
accounted for as a financing at June 30, 1998.
(3) Other borrowings include a $6.4 million sale of loans that has been
accounted for as a financing and a $2.4 million loan from Goldman Sachs
Mortgage Company to finance a golf loan at December 31, 1997.
The above facilities have variable interest rates based on London Interbank
Offered Rate ("Libor"). The weighted average interest rate on the outstanding
principal balances of these facilities was 7.12% and 8.23% at June 30, 1998 and
December 31, 1997, respectively.
(8) Recent Developments
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
8
<PAGE>
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.
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.
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 June 30, 1998, the Diversified Finance Group originated
loans through a network of 5 offices in 5 states. For the six months ended June
30, 1998, this group originated $371.4 million of loans. From inception in 1991
through June 30, 1998, the Diversified Finance Group provided approximately $1.8
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 June 30, 1998, the FMAC Golf
Finance Group, LLC originated loans through a network of 4 offices in 3 states.
From its inception through June 30, 1998, the FMAC Golf Finance Group, LLC
provided approximately $9.5 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 June 30, 1998, the Energy Finance Group originated
loans through a network of 9 offices in 7 states. For the six months ended June
30, 1998, this group originated $282.4 million of energy
11
<PAGE>
loans. From its inception in 1997 through June 30, 1998, the Energy Finance
Group provided approximately $465.0 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 three months ended June 30, 1998, the Multi-Family
Finance Group funded $244.9 million in multi-family loans, which included $72.8
million in loans that were funded without the use of a credit facility. Loan
programs include Fannie Mae DUS, Bankers Capital and Freddie Mac Program Plus.
As of June 30, 1998, the multi-family loan servicing portfolio had an unpaid
principal balance of $2.3 billion with no delinquencies. The Multi-Family
Finance Group originates business through its in-house origination team located
in four 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
six months ended June 30, 1998, this group originated $37.5 million of loans and
leases. From its inception in 1996 through June 30, 1998, the Equipment Finance
Group provided approximately $92.8 million in financing to borrowers.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 Compared to Three and Six Months Ended
June 30, 1997
For comparative purposes, the following discussion presents the pro forma
statement of operations for the three and six months ended June 30, 1997 as if
the Company had been taxed as a corporation for that period.
Total revenues increased 48.5% to $31.6 million for the three months ended
June 30, 1998 from $21.3 million for the comparable period in 1997. During the
same periods, the Company's total expenses increased 220.6% to $14.5 million
from $4.5 million. As a result, net income increased to $9.8 million for the
three months ended June 30, 1998 as compared to pro forma net income of $9.7
million in the same period of 1997.
Total revenues increased 138.3% to $53.8 million for the six months ended June
30, 1998 from $22.6 million for the comparable period in 1997. During the same
periods, the Company's total expenses increased 182.2% to $24.3 million from
$8.6 million. As a result, net income increased to $17.1 million for the six
months ended June 30, 1998 as compared to pro forma net income of $8.0 million
in the same period of 1997.
The increase in revenues for the three months ended June 30, 1998 was
attributable to a $3.1 million increase in gain on sale of loans and leases. For
the three months ended June 30, 1998, the Company sold approximately $265.6
million of loans and leases in a loan securitization for a gain on sale of $22.9
million (of which $19.2 million was comprised of cash) as compared to $158.6
million of loans and leases sold in a loan securitization and a whole loan sale
for a gain on sale of $19.8 million (of which $19.5 million was comprised of
cash) for the three months ended June 30, 1997. During the three months ended
June 30, 1998, the Company recognized $4.5 million in loan fees related to the
sales of loans and leases held for sale as compared to recognized loan fees of
$2.4 million for the same period in 1997.
The increase in revenues for the six months ended June 30, 1998 was
attributable to a $19.4 million increase in gain on sale of loans and leases.
For the six months ended June 30, 1998, the Company sold approximately $449.0
million of loans and leases in two loan securitizations for a gain on sale of
$39.2 million (of which $35.2 million was comprised of cash) as compared to
$173.9 million of loans and leases sold in a loan securitization and and a whole
loan sale for a gain on sale of $19.8 million (of which $19.5 million was
comprised of cash) for the six months ended June 30, 1997. During the six months
ended June 30, 1998, the Company recognized $6.4 million in loan fees related to
the sales of loans and leases held for sale as compared to recognized loan fees
of $2.4 million for the same period in 1997.
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<PAGE>
Net interest income also contributed to the increase in revenues, increasing
431.1% to $3.9 million for the three months ended June 30, 1998 as compared to
$0.7 million for the same period in 1997, 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.
Net interest income also contributed to the increase in revenues, increasing
488.4% to $8.1 million for the six months ended June 30, 1998 as compared to
$1.4 million for the same period in 1997, 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 526.9% to $4.6 million for the three months
ended June 30, 1998 as compared to $0.7 million for the same period in 1997.
Loan servicing income increased 326.5% to $5.9 million for the six months ended
June 30, 1998 as compared to $1.4 million for the same period in 1997. This was
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 $4.5 billion as of June 30, 1998
from $1.0 billion as of June 30, 1997.
Total expenses increased 220.6% to $14.5 million for the three months ended
June 30, 1998 as compared to $4.5 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. Personnel expenses increased 287.8%
to $8.0 million, business promotions increased 554.0% to $1.2 million, occupancy
increased 311.8% to $0.7 million and goodwill amortization increased 697.7% to
$0.7 million for the three months ended June 30, 1998 as compared to the same
period in 1997.
Total expenses increased 182.2% to $24.3 million for the six months ended June
30, 1998 as compared to $8.6 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. Personnel expenses increased 182.6%
to $13.2 million, business promotions increased 472.2% to $1.8 million,
occupancy increased 267.5% to $1.0 million and goodwill amortization increased
383.4% to $0.8 million for the six months ended June 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. At June 30, 1998, the Company had
warehouse lines of credit with total commitment amounts of $1.0 billion on which
$505.8 million was outstanding.
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 six months ended June
30, 1998, loans originated for SPB (and not repurchased), including
particpations, totaled approximately $25.2 million.
The Company also has an equipment finance sale facility in place with
Greenwich Capital Markets, Inc. ("Greenwich"), which is used to fund equipment
loans and leases. Under the terms of the facility, the Company sells loans and
future lease payment streams to Franchise Lease Funding Corporation II ("FLF2"),
and FLF2 simultaneously borrows funds from Greenwich. The facility is for $100.0
million expiring in September 1998.
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)
13
<PAGE>
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 six months ended June 30, 1998, net cash provided by operating
activities was $45.1 million. This excludes cash used in net loan origination
activities of $230.2 million, which was primarily attributable to the Company's
increased loan origination volume. For the six months ended June 30, 1997, net
cash provided by operating activities was $17.1 million, exclusive of cash used
in net loan origination activities of $109.7 million.
For the six months ended June 30, 1998, net cash used in investing activities
was $47.2 million, which was primarily attributable to the purchase of Bankers
and the sale of a $22.9 million security, which was related to the Company's
1997-B securitization. For the six months ended June 30, 1997, net cash provided
by investing activities was $36.2 million, which was primarily attributable to
the sale of securities related to the restructuring of the Company's 1991-A
securitization.
For the six months ended June 30, 1998, net cash provided by financing
activities was $231.2 million, which was primarily attributable to increased
amounts of warehouse line borrowings resulting from increased loan and lease
originations during the period. For the six months ended June 30, 1997, net cash
provided by financing activities was $56.6 million, which was primarily
attributable to an increase of $63.0 million in borrowings from warehouse lines
of credit and repurchase facilities and ICII as well as 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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. On April 1, 1998, Franchise Mortgage Acceptance Company (the "Company")
acquired substantially all of the assets and assumed the liabilities of
Bankers Mutual and Bankers Mutual Mortgage, Inc. as reported in the
Company's Form 8-K and Form 8-K/A filed on April 13, 1998 and June 4, 1998,
respectively.
b. On April 6, 1998, Thomas J. Shaughnessy, Clinton V. Barrow, Kent M. Davis,
Courtney Stephens, and Pierette Newman resigned as reported in the Company's
Form 8-K filed on April 13, 1998.
c. Exhibit 27 - Financial Data Schedule
15
<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: August 13, 1998 By: /s/ Raedelle Walker
--------------------------------
Raedelle Walker
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
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<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
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