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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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Mark One
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998 or
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-23283
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[LOGO OF FMAC]
Franchise Mortgage Acceptance Company
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 95-4649104
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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1888 Century Park East, Third Floor, 90067
Los Angeles, California (Zip Code)
(Address of principal executive offices)
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Registrants telephone number, including area code: (310) 229-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value NASDAQ National Market
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this From 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 1999 as reported on the NASDAQ National Market System, was approximately
$72,734,212. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 28, 1999, registrant had 28,760,557 shares of Common Stock
outstanding.
The following documents are incorporated by reference into this report: None
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FRANCHISE MORTGAGE ACCEPTANCE COMPANY
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
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Item 1. BUSINESS...................................................... 3
Item 2. PROPERTIES.................................................... 16
Item 3. LEGAL PROCEEDINGS............................................. 16
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS............. 16
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.......................................... 17
Item 6. SELECTED FINANCIAL DATA....................................... 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 56
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 56
Item 11. EXECUTIVE COMPENSATION........................................ 59
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 65
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 66
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- 70
K............................................................
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Forward-Looking Statements
Certain statements in this Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements, including, but are not limited
to: regional and national economic conditions, substantial changes in levels
of market interest rates, credit and other risks of lending and investment
activities and competitive and regulatory factors, competition in the
Company's existing and potential future lines of business, the ability of the
Company to complete, on a timely basis, the necessary actions with respect to
Year 2000 computer issues and other factors. Other factors and assumptions not
identified above were also involved in the derivation of these forward-looking
statements, and the failure of such other assumptions to be realized as well
as other factors may also cause actual results to materially differ from those
projected. The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
2
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PART I
Item 1. BUSINESS
Franchise Mortgage Acceptance Company (the "Company") is a commercial
finance company engaged in the business of originating and servicing loans and
equipment leases to small businesses, with a primary focus on established
national and regional franchise concepts and such other branded concepts such
as service stations or convenience stores. The Company also engages in the
business of originating and servicing multi-family income producing property
loans. Additionally, the Company's insurance services subsidiary offers
insurance products to businesses nationwide.
Unless the context indicates otherwise, all references hereinafter to the
Company refer to Franchise Mortgage Acceptance Company, along with all its
predecessor entities, including Franchise Mortgage Acceptance Company LLC
("Franchise Mortgage LLC").
General
Since commencing business in 1991, the Company believes it has become a
leading lender to national and regional quick service restaurant ("QSR")
franchisees, and the Company has developed a growing presence in the casual
dining sector. More recently, the Company has expanded its focus to include
financing retail energy licensees (service stations, convenience stores, truck
stops, car washes and quick lube businesses), golf operating businesses (golf
courses and golf practice facilities), the death care industry (funeral homes
and cemeteries), and multi-family income producing properties. The Company
originates long-term fixed- and variable-rate loan and lease products and
sells such loans and leases either through securitizations or whole loan sales
to institutional purchasers on a servicing retained basis. The Company's loan
and lease products are attractive investments to institutional investors
because of the credit profile of its borrowers ("Borrowers"), relatively long
loan and lease terms, call protection through prepayment penalties and
appropriate risk-adjusted yields. The Company also periodically makes equity
investments or receives contingent equity compensation as part of its core
lending and leasing business. The Company originated loans and leases through
35 marketing offices in 20 states at December 31, 1998. From the Company's
inception through December 31, 1998, it funded approximately $3.8 billion in
loans and leases and at December 31, 1998, had a servicing portfolio,
including loans and leases held for sale, of $5.4 billion. The Company's loan
and lease originations grew to $2.1 billion in 1998 from $0.8 billion in 1997.
At December 31, 1998, the Company's average initial loan balance was $848,000.
The Company's focus is to provide funding to industries that have been
historically underserved by banks and other traditional sources of financing.
This focus requires the Company to develop specific industry expertise in the
sectors which it serves in order to provide individualized financial solutions
for its Borrowers. The Company believes that its industry expertise, positive
market reputation, and proprietary databases, combined with its responsiveness
to Borrowers, flexibility in structuring transactions and broad product
offerings give it a competitive advantage over more traditional, highly
regulated small business lenders. The Company's Borrowers are generally small
business operators or multi-family income producing property owners, with
proven operating experience and a history of generating positive operating
cash flows. The Company relies primarily upon its assessment of enterprise
value, based in part on independent third party valuations, and historical
operating cash flows to make credit determinations, as opposed to relying
solely on the value of real estate and other collateral.
In 1991, the Company began making loans to franchisees of Taco Bell Corp. In
1992 and 1993, loans to other national QSR concepts, such as Burger King,
Wendy's, Pizza Hut, KFC and Hardee's, were approved. The Company's principal
loan products at that time were fixed rate, 15-year, fully amortizing loans.
In 1995, the Company began offering loans to casual dining concepts such as
TGI Friday's, Applebee's and Denny's as well as offering its Borrowers
adjustable rate loans. Also in 1995, the Company began offering development
and construction ("DEVCO") loans to its more experienced Borrowers to fund the
development and construction or acquisition of new business units or the
conversion of existing business units into a different franchise concept. In
1996, the Company expanded its approved concepts to include strong regional
restaurants such as Carl's, Jr., Church's Chicken and Golden Corral and began
providing financing to owners and operators of golf courses and golf practice
facilities. The Equipment Finance Group also commenced activities in 1996 to
provide equipment
3
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loans and leases to the sectors which the Company serves and other strategic
markets. In February 1997, the Company created its Energy Finance Group to
make loans to businesses that distribute retail petroleum products. In the
third quarter of 1997, the Company began making loans to funeral home and
cemetery owners.
On April 1, 1998, the Company acquired substantially all of the assets and
assumed the liabilities of Bankers Mutual and Bankers Mutual Mortgage, Inc.
(together "Bankers"). The acquisition was made pursuant to an Asset Purchase
Agreement dated March 9, 1998 by and among the Company, Bankers and the
holders of the outstanding shares of Bankers. Bankers is a Federal National
Mortgage Association and Federal National Home Loan Bank lender and servicer.
The purchase price paid for the assets consisted of the following: (i) payment
by the Company to Bankers of $61.5 million in cash, (ii) delivery of a
promissory note in the principal amount of $5.0 million, (iii) contingent cash
payments of up to $30.0 million over three years dependent upon the
achievement of certain operating results, and (iv) the Companys assumption of
Bankers liabilities. The source of funds used for the acquisition was cash on
hand.
In April 1998, the Company formed a wholly owned insurance brokerage
subsidiary, FMAC Insurance Services Inc., which offers property, casualty, and
employee benefits policies and programs to businesses nationwide. In this
business, FMAC Insurance Services Inc. acts only as a broker, taking no
insurance risks.
In April 1998, the Company finalized a joint venture with MLQ Investors, LP
("MLQ") pursuant to which all loan and lease activities of the Company's Golf
Finance Group will be exclusively conducted by the new entity known as FMAC
Golf Finance Group LLC ("FGFG") which is 50% owned by each of the Company and
MLQ and managed by the Company. In connection therewith, a $100 million
warehouse line of credit has been established with Goldman Sachs Mortgage
Company to provide FGFG with financing.
In July 1998, the Company finalized a joint venture with SFT Venturer, LLC
("SFT") to form FMAC Star Fund, LLP. The purpose of this entity is to engage
in the activity of financing the Company's loans. Each party has a 50%
ownership position with SFT contributing 80% of the $90 million mandatory
capital and the Company contributing the remaining 20%. Contributions of
mandatory capital can only be requested with joint consent of both the Company
and SFT. As of December 31, 1998, the Company had made capital contributions
of $3.1 million.
On November 9, 1998, the Company entered into a purchase and sale agreement
with Global Alliance Finance Company, LLC, an affiliate of Deutsche Bank
Securities, Inc. ("GAFCO"). Under this agreement, the Company will sell
certain franchise loans to GAFCO at par value. When GAFCO sells or securitizes
such loans, GAFCO and the Company share equally in the resulting profits or
losses up to 30% of par value. There is no specified commitment by either
party, and the agreement may be terminated by either party on or after
November 30, 1999.
Recent Developments
On March 10, 1999, Bay View Capital Corporation ("Bay View") and the Company
executed an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") providing for the merger of the Company and Bay View. Following
the merger, the Company will operate as a subsidiary of Bay View Bank ("BVB").
In accordance with the terms of the Merger Agreement, Bay View will acquire
all of the common stock of the Company for consideration currently valued at
approximately $309 million. Each share of the Company's stock will be entitled
to receive, at the election of the holder, either $10.25 in cash or .5125
shares of Bay View's common stock. The Company's stockholder elections are
subject to the aggregate number of shares of the Company's common stock to be
exchanged for Bay View's common stock being equal to 60% of the number of
shares of the Company's common stock outstanding immediately prior to closing
the transaction and no Company stockholder owning more than 9.99% of Bay
View's common stock, on a pro forma basis.
The Merger Agreement also provides for an additional payment of up to $30
million by Bay View in connection with the earn-out provision of the Company's
April 1998 acquisition of Bankers.
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Simultaneous with the merger, Bay View will contribute substantially all of
the assets and liabilities of the Company to a newly organized and wholly
owned subsidiary of BVB. The transaction is expected to close during the third
quarter of 1999, subject to approval by both the Company's stockholders and
Bay View's shareholders and subject to necessary regulatory approvals.
In connection with the merger, BVB has purchased $209.3 million in
commercial loans from the Company and additionally may purchase up to another
$150 million in commercial loans through the end of the first quarter of 1999.
BVB may also purchase additional levels of commercial loans through the
closing date of the transaction.
A Voting Agreement has been executed with one of the Company's stockholders,
Imperial Credit Industries, Inc. ("ICII"), which provides that this
stockholder may not sell its Company stock during the term of the Merger
Agreement and will vote in favor of the merger. In conjunction with the
merger, Wayne Knyal will have an ownership interest in Bay View in excess of
5% and will hold a seat on Bay Views Board of Directors.
Consummation of the merger is subject to a number of closing conditions,
including approval by both Bay View's shareholders and the Company's
stockholders, obtaining necessary regulatory approvals and other closing
conditions.
Business Strategy
The Company's goal is to become a leading national small business lender in
each of its target markets. The Company's growth and operating strategy is
based on the following key elements:
Growth in Existing Sectors. The Company plans to replicate its success in
the restaurant sector in other business sectors that it has entered more
recently, such as retail energy, golf and death care, through focused product
development, customer service and support. The Company forms specialized teams
for each sector to assess customer needs, market opportunities, competitive
environment, business value, and credit quality; generate customer loyalty;
and enhance service and support. Management believes that its industry
leadership position, relationships with major Borrowers, franchisors and
vendors, and expertise within sectors will assist the Company in increasing
its market share.
Controlled Expansion into New Sectors. Management believes that substantial
opportunities exist to extend the Company's expertise into other business
sectors. The Company believes that its experience in lending to restaurant
franchisees has allowed it to develop a template for efficiently originating
and servicing loans and leases in other industry sectors. The Company's
philosophy is to provide complete business solutions to identified industries
by developing strategies and financial products which are based on industry
characteristics and each Borrower's specific needs. The Company carefully
reviews industry data, seeking business sectors with a combination of large
funding requirements, proven cash flow generating capabilities, standardized
operations, a scarcity of long-term funding sources and characteristics
attractive to secondary market investors.
Maintenance of Credit Quality. The Company's delinquency and loss experience
has been extremely low, due in part to its lending to experienced operators,
detailed industry knowledge, relationship with both franchisors and
franchisees system wide, active oversight of its existing servicing portfolio,
strict underwriting criteria and the Company's ability to locate qualified
replacement franchisees / borrowers to assume delinquent loans.
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The following table sets forth amounts of loans and leases held in the
Company's servicing portfolio, including loans and leases held for sale and
investment, and the combined delinquency and foreclosure experience for the
periods indicated:
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As of December 31,
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1998 1997 1996
----------------- ----------------- -----------------
% of % of % of
Loans and Loans and Loans and
Balance Leases Balance Leases Balance Leases
------- --------- ------- --------- ------- ---------
(Dollars in millions)
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Loans and leases held in
servicing portfolio.... $5,423 100.00% $1,629 100.00% $737 100.00%
30-59 days delinquent... 9 0.16 -- -- -- --
60-89 days delinquent... 2 0.04 3 0.15 -- --
90 days or more
delinquent............. 58 1.06 13 0.81 -- --
------ ------ ------ ------ ---- ------
Total delinquencies... $ 69 1.26% $ 16 0.96% $-- -- %
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Secondary Market Execution. The Company is committed to maintaining
effective secondary market execution on loans and leases that it originates
and sells. The Company believes that the favorable execution it has
experienced to date is primarily the result of the attractive terms and the
credit quality of the loans and leases that it originates. Of the $40.1
million in gain on sale, which includes net loan fees, recognized by the
Company during 1998, $32.4 million was comprised of cash received by the
Company at the time of sale before hedge losses of 31.1 million. As a result,
the Company has reduced its exposure to the risks associated with holding
large amounts of such retained interests on its balance sheet. For the year
ended December 31, 1998, the Company completed five securitizations and one
whole loan and lease sale totaling $1.1 billion and $14.4 million,
respectively. In all such transactions, the Company has retained the right to
service the sold or securitized loans, with the exception of the whole loan
and lease sale in December.
Diversification of Revenue Sources. Management is committed to developing a
diversified revenue base to reduce revenue volatility and enhance
profitability. The Company continually monitors and adjusts its loan and lease
products and securitization structures to improve the stability of its cash
flows. Revenue sources include loan and lease origination points and fees,
interest income earned prior to the sale of the loans and leases, whole loan
and lease sale profits, securitization profits, loan and lease servicing fees
and equity investment returns.
Industry Background
Franchising
A franchise is a business operating pursuant to a franchise agreement under
which the franchisee undertakes to conduct a business or sell a product or
service in accordance with methods and procedures prescribed by a franchisor
and the franchisor undertakes to assist the franchisee through advertising,
promotion and other advisory services. Although the term franchise is
typically associated with fast food restaurants, a multitude of franchise
businesses exist, offering a variety of products and services such as hotels
and motels, automotive parts, and cleaning services. Most franchise concepts
offer franchisees training and diverse levels of ongoing support and
oversight. Business format franchisors provide franchisees with a
comprehensive operating system, whereas product distribution arrangements
primarily license a trademark and/or logo. According to the International
Franchise Association, franchises comprise one out of every twelve businesses
in the United States. The Franchise Trade Association has estimated that by
the year 2000, over 50% of retail sales, or approximately $1 trillion, will be
generated by franchises. The Company believes that its customers' businesses
will perform similarly to the typical performance of franchisees in a system.
A proven franchise / brand tends to negate some of the risks associated with
small businesses.
The Food Service Sector
According to the National Restaurant Association ("NRA") data, in 1998 the
food service industry employed more than nine million people and had estimated
sales of $338.4 billion. According to the NRA, full service restaurants, QSRs,
commercial cafeterias, social caterers and ice cream and frozen yogurt stands
("Eating
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Places") represented an estimated $227.4 billion, or 67.2%, of such food
service sales in 1998 and are expected to grow by 4.7% to $238.1 billion in
1999. The QSR segment of Eating Places represents those restaurants that offer
fast food or take-out, without table service. Most QSR establishments offer
food products that lend themselves to quick service, such as pizza, chicken,
hamburgers and similar food items. Full service restaurants typically
represent casual and fine dining restaurants that accept major credit cards,
offer table service and provide full liquor service. The QSR segment
represented an estimated $105.6 billion, or 46.4%, of all Eating Places sales
in 1998, and is expected to grow by 4.6% to $110.4 billion in 1999. The full
service segment represented an estimated $111.8 billion, or 49.2% of all
Eating Places sales in 1998, and is expected to grow by 4.9% to $117.3 billion
in 1999.
Development and maturation of the QSR segment of the food service industry
has led to a consolidation of restaurant operators. Increased competition has
decreased profit margins which has contributed to the emergence of
increasingly large and professionally managed restaurant operating companies.
Large operators typically have greater economies of scale and better
management systems which allow them to compete more effectively. As size and
diversification become increasingly important, many franchise restaurant
operators are becoming affiliated with multiple restaurant systems. The
Company believes that the maturation of the fast food segment is likely to
result in continued and enhanced stability for this industry segment. Chain
restaurant consolidation has also created lending opportunities for the
Company arising from the demand by restaurant operators for acquisition
financing.
The Retail Energy Sector
The United States retail petroleum sector is composed of service stations,
convenience stores, and other related retail establishments which provide
branded and independent fuel for motor vehicle consumption. According to
industry sources such as the U.S. Federal Highway Administration, Bureau of
Labor Statistics and National Petroleum News ("NPN"), retail petroleum sector
sales for the year ended December 31, 1997 approximated $235 billion.
According to NPN, the service station sector included approximately 183,000
units. The Company believes that these units are generally well located as a
result of the early origins of these units relative to convenience stores and
other retail merchants. According to the National Association of Convenience
Stores (NACS), at December 31, 1997, there were approximately 95,700 domestic
convenience stores of which approximately 73% distributed fuel. According to
NACS, convenience store industry sales were $156.2 billion, of which $83.8
billion were motor fuel sales. According to the U.S. Federal Highway
Administration, 124.3 billion gallons of gasoline were sold in the U.S. in
1997. The strength in demand reflects United States economic growth, the
increase in the total vehicle miles traveled and the growing popularity of
sport utility vehicles and minivans.
The Company believes the retail energy sector is currently underserved by
traditional lenders. Increasing sales and profit margins for gasoline
retailers, the perceived diminished risk of lender liability for environmental
clean-up costs and heightened profitability in multi-profit service
stations/convenience store combinations should increase demand for financing.
In addition, the Company believes that service station consolidation has also
created lending opportunities arising out of the demand for acquisition
financing.
The Golf Sector
In the United States, golf courses handled approximately 547 million rounds
in 1997, a compound annual growth rate of 2.4% from 1993. According to the
National Golf Foundation (NGF), the overall number of golfers increased 7% to
26.5 million, the highest number of golfers since 1990. Currently, 25% of
golfers are over 50 years of age, with 47.2% between the ages of 18 and 39.
The National Golf Foundation (NGF) statistics show that golfers in their 50's
play three times as much as golfers between the ages of 18 and 39. The number
of rounds played should significantly increase as the baby-boomer segment of
the population heads toward retirement age. In addition, for the past 10
years, the game has added approximately two million beginners a year, with the
18 to 29 age group producing the largest single sub-segment. In 1997, there
was a 51% increase in the number of beginner golfers to three million while
the game also recognized a 34% increase in junior golfers (defined as
individuals between the ages of 12 and 17).
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According to NGF, 429 new golf courses were opened in 1997, of which 285
were new facilities and 144 were expansions of existing facilities. As of
December 31, 1997, there were 932 courses under construction, of which 655
were new facilities and 277 were expansions of existing facilities. According
to NGF data, there were 719 courses in the planning stages (not yet under
construction), of which 576 were new facilities while 143 were expansions of
existing facilities. Of the courses under construction at the end of 1997, it
is estimated that as many as 485 courses will open in 1998. NGF defines a golf
facility as a facility with at least one nine-hole course and that may include
different types of courses, such as regulation-length courses, executive-
length courses, and par-3 length courses. In 1997, there were 14,602 golf
facilities consisting of 16,010 golf courses. Of the total number of
facilities in the U.S., 71% were public access.
The Company believes that the golf sector has the following similar
characteristics to other sectors that the Company currently lends to: positive
cash flow from operations, golf course and facility ownership is broad and
diverse geographically, and the industry is underserved by traditional
lenders. Increased golf usage has driven demand for loans for renovation and
construction, while increased dollars spent at golf courses has driven demand
for loans for golf course and facilities acquisitions.
The Funeral Services Sector
The funeral services industry (more generally referred to as the death care
industry) includes funeral homes, cemeteries, crematoria and memorial parks,
as well as merchandise such as urns, caskets, memorials, and vaults. There are
an estimated 23,000 funeral homes and 10,500 private cemeteries in the United
States. A funeral home or cemetery builds a customer base that can last for
several generations.
The industry is highly fragmented and undergoing intense consolidation.
Acquisition activity has accelerated dramatically over the past few years both
in the U.S. and abroad. Owners of funeral homes and cemeteries have had few
alternatives to finance their businesses at their true value and are in
general under leveraged. Finance sources have historically consisted primarily
of local banks, the Small Business Administration, and other commercial
finance lenders. This lack of readily available financing has made it
difficult for operators to remain independent. Based on research conducted in
the latter half of 1997, the Company has determined that a large portion of
funeral home owners desire to remain independent, to have a succession plan
for their businesses and to have an alternative to selling out.
The number of deaths in the U.S is increasing roughly 1% per year, a rate
that is expected to remain fairly steady for the next 10 years. The death rate
should begin to accelerate in 15 years with the aging of the baby boomer
generation. Essentially, death care is a non-cyclical business, with modest
but steady volume growth. A seasonality is present in the industry with deaths
increasing during colder months, and death rates can vary by region. According
to the 1995 U.S. Census report, average deaths in the U.S. were 8.8 per 1,000
population. Roughly 2.3 million deaths occurred in 1995 which is expected to
grow to 2.4 million by 2000, 2.6 million by 2010, and 4.0 million by 2050.
In an industry where demand is growing only 1% annually, local market share
is the key to growth in profitability, as incremental margins are exceedingly
high when fixed costs are covered. In addition, revenue enhancement and
opportunities for cost savings are important to profit growth on a "same-
store" basis.
Data received from the National Funeral Directors Association and supported
by a Company survey to the industry suggest that over 95% of funeral home
operators own the land and building on which their businesses reside, the
average business has been under the same ownership for in excess of 20 years,
and death care businesses generate significant amounts of cash flow.
The Company believes that the funeral services sector offers similar
characteristics to other sectors to which the Company currently lends,
including positive cash flow from operations, broad and geographically diverse
ownership, and the fact that the industry has been historically underserved by
traditional lenders. The Company is actively providing independent operators
and small to medium size consolidators with a competitively structured source
of debt financing.
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The Multi-Family Income Property Sector
According to the 1997 Housing and Urban Development survey of mortgage
lending activity, commercial banks and savings and loan associations
originated 68.1% of the multi-family loans in the United States followed by
mortgage companies which originated 22.4% for the same period. The National
Multi Housing Council ("NMHC") reported that there were 101 million U.S.
households in 1997, of which 35 million households rented their units. The
NMHC went on to report that apartment properties with 5 or more units make up
the single largest category of rental property types, accounting for over 15
million households and 30 million people.
The Insurance Services Sector
Insurance products can be offered to an assortment of businesses from small
organizations to Fortune 1000 companies serving an array of industries from
manufacturing to retail to financial services. All of these companies need and
require insurance. Insurance products vary from company to company as well,
including property, casualty, surety, life, health, and accident. The Company
acts only as a broker with respect to the offering of such products to its
customers.
As a part of its loan origination process, the Company requires its
Borrowers to maintain certain types of insurance in order to secure loans. The
Company believes that it has an inherent competitive advantage in marketing
insurance products to its Borrowers because its target market is identified
directly through its loan origination and servicing efforts.
Loan Originations
Types of Loan Products
The Company offers permanent commercial loans, short-term commercial loans
(DEVCO and Seasoning loans), multi-family loans, and equipment loans and
leases to those sectors in which it operates.
Permanent loans. Substantially all of the Company's permanent loans are
self-amortizing long-term fixed or adjustable rate loans provided for purposes
other than development and construction of business units. Permanent loans
generally have a maximum term and amortization of up to 20 years. Fixed rate
loans are tied to the U.S. Treasury rates plus a spread while adjustable rate
loans are tied to the London Interbank Offered Rate ("LIBOR") plus a spread
and generally reprice on a monthly basis. As a cash flow lender, the Company
maintains flexibility to tailor a loan program to fit the specific needs of
its Borrowers. The terms of the loans vary in part based on the collateral
pledged.
The Company focuses on the cash flow of the subject business, the continuing
ability of the Borrower to operate the business unit in a cash positive manner
and the Borrower's ability to repay the loan since neither the real property
mortgage nor the franchise or license agreement is generally assignable to
secure the loan. In determining enterprise value, in addition to a Borrower's
credit profile, the Company focuses on the following factors:
. Business Profitability. The Company seeks to lend to Borrowers whose
subject business operations provide adequate cash flow to support loan
payments.
. Strength of Business Concept. The Company emphasizes loans to Borrowers
whose subject business has significant national or regional market
penetration.
. Operating Experience. The Company emphasizes loans to Borrowers having
ownership of multiple business units with strong industry backgrounds.
. Site Considerations. The Company focuses on a business' location,
physical condition and environmental characteristics.
Location. The Company lends to Borrowers with business units located
in high traffic areas that it believes exhibit strong retail property
fundamentals.
9
<PAGE>
Physical Condition. The Company loans to Borrowers investing in well-
maintained existing properties or in newly constructed properties.
Each group uses third party appraisal professionals who conduct
physical site inspections of each subject property.
Environmental. The Energy Finance Group has an internal environmental
department, currently consisting of three experienced environmental
professionals. The Company's environmental process does not require
either Phase I or Phase II inspections, but a pragmatic detailed
questionnaire that requires the attachment of both federal and state
documentation and certification.
. Collateral. Loans are partially secured by taking a first lien on all
available furniture, fixtures and equipment. Where the available
collateral includes a building on a ground lease, the Company requires
an assignment of the lease in addition to a security interest on the
building and on the furniture, fixtures and equipment. If the collateral
includes owned real estate, the Company also obtains a first mortgage on
the property. Borrowers with additional collateral are generally
afforded better credit terms. Depending on the collateral provided, loan
to value ratios, up front fees and interest rates are adjusted to
properly reflect credit risk.
Development and Construction Loans. DEVCO loans are offered to fund the
development and construction of new business units. DEVCO loans generally
provide an interest-only period of up to 18 months that gives the Borrower the
opportunity to construct the unit, stabilize business unit performance, and
achieve a higher cash flow in the short-term. Fixed rate DEVCO loans are tied
to U.S. Treasury rates, while adjustable rate DEVCO loans are tied to LIBOR.
Adjustable rate DEVCO loans generally have an 18 month maturity and fixed
rate DEVCO loans generally have a 15 year maturity. Both adjustable and fixed
rate DEVCO loans generally provide an initial 18 month period necessary for
the unit to be constructed and sales to stabilize. Within the initial 18 month
period, the unit is appraised and a final loan amount is then determined,
using actual unit level performance. After 18 months, the Borrower can apply
for a permanent loan which will be re-underwritten, converting the adjustable
rate DEVCO to the permanent loan.
The Company believes that DEVCO loans create a pipeline for the Company's
permanent loans. As a result of fee incentives built into the adjustable rate
DEVCO loans, Borrowers generally look to convert into permanent loans on the
maturity date. DEVCO loans are secured by the real property mortgage or
leasehold interest as well as all available furniture, fixtures and equipment.
Seasoning Loans. Seasoning loans are offered to fund the acquisition of new
business units or the conversion of existing business units into a different
franchise concept. Seasoning loans generally provide an interest-only period
of up to 18 months that gives the Borrower the opportunity to stabilize
business unit performance and achieve a higher cash flow in the short-term.
Generally, other terms and conditions are similar to those of DEVCO loans.
Equipment Loans and Leases. The Company provides equipment financing to
experienced owners and operators in those sectors in which the Company
operates. Equipment loans are fixed rate products tied to U.S. Treasury rates.
These loans generally have a maximum term of up to 10 years. In addition, the
Company originates equipment leases with terms that generally range from 5 to
7 years. Substantially all of the leases originated by the Company are "direct
financing" leases in that they transfer substantially all of the benefits and
risks of equipment ownership to the lessee. Because the Company's leases are
classified as direct financing leases, the Company records total estimated
unguaranteed residual value and initial direct costs as the gross investment
in the lease. The difference between the gross investment in the lease and the
cost of the leased equipment is defined as "unearned income." Interest income
is recognized over the term of the lease by amortizing the unearned income and
deferred initial direct costs using the interest method.
Multi-Family Loans. Substantially all of the Companys multi-family loans are
long-term fixed rate loans provided for purposes of financing multi-family
income producing properties. Multi-family loans generally have a maximum term
and amortization of up to 30 years with a 9 years yield maintenance period.
Fixed rate loans are tied to the U.S. Treasury rates. Many of the Company's
multi-family loans require balloon payments at the maturity date, which
facilitates continual refinancing.
10
<PAGE>
Lending Groups
The Company's focus at inception was to provide secured financing to
franchisees of Taco Bell Corp. After establishing an infrastructure and credit
expertise, the Company began expanding its QSR concepts, loaning to casual
dining concepts and moving into other related lending sectors such as retail
energy, golf, death care, multi-family finance, and equipment finance. The
Company carefully reviews industry data seeking sectors with a combination of
large capital requirements, proven cash flow generating capabilities,
standardized operations, a scarcity of long term funding sources and
characteristics attractive to secondary market investors. This business
formula provides the template to identify, test and determine the potential
value of entering into new sectors.
The Company's lending groups currently include Diversified Finance, FMAC
Golf Finance Group LLC, Energy Finance, Multi-Family Finance, and Equipment
Finance. Each of these groups includes a core group of professionals who are
experts in the sector and can target selected borrowers in such sector.
Diversified Finance Group. During the first quarter of 1998, the Company
organized the Diversified Finance Group by combining its Restaurant, Golf, and
Funeral Divisions. For the year ended December 31, 1998, this group originated
$675 million of loans. From the Company's inception in 1991 through December
31, 1998, the Diversified Finance Group provided approximately $2.1 billion in
financing to Borrowers.
The following table sets forth the Diversified Finance Group's loan
originations for the periods indicated by franchise concept and loan type:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
-------------------------------- -------------------------------- --------------------------------
Number Principal % of Number Principal % of Number Principal % of
of Loans Amount Total of Loans Amount Total of Loans Amount Total
Originated Originated Originated Originated Originated Originated Originated Originated Originated
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant:
QSRs:
Taco Bell........... 255 $216,134 32.0% 281 $216,212 38.1% 237 $176,923 40.9%
Wendy's............. 78 63,371 9.4 56 43,426 7.7 41 34,249 7.9
Burger King......... 59 46,475 6.9 82 69,881 12.3 105 100,517 23.2
KFC................. 52 29,090 4.3 61 30,306 5.3 19 12,311 2.8
Other QSR(1)........ 89 48,357 7.2 146 66,270 11.7 105 66,450 15.5
--- -------- ----- ---- -------- ----- ----- -------- -----
Total QSR.......... 533 403,427 59.8 6264 26,095 75.1 507 390,450 90.3
Casual Dining:
Bojangles'.......... 131 78,000 11.6 -- -- -- -- -- --
Applebee's.......... 55 57,329 8.5 16 21,760 3.8 4,750 3 1.1
Golden Corral....... 12 19,607 2.9 6 10,082 1.8 5 14,450 3.3
Pizza Hut........... 29 18,033 2.7 3 1,919 0.3 16 8,093 1.9
Other Casual
Dining(1) 39 33,499 5.0 111 74,409 13.1 10 14,787 3.4
--- -------- ----- ---- -------- ----- ----- -------- -----
Total Casual
Dining............ 266 206,468 30.7 136 108,170 19.0 34 42,080 9.7
--- -------- ----- ---- -------- ----- ----- -------- -----
Total Restaurant... 799 609,895 90.5 762 534,265 94.1 541 432,530 100.0
Total Golf......... 5 8,850 1.3 9 33,218 5.9 -- -- --
Total Funeral...... 46 56,361 8.2 -- -- -- -- -- --
--- -------- ----- ---- -------- ----- ----- -------- -----
Grand Total........ 850 $675,106 100.0% 771 $567,483 100.0% 541 $432,530 100.0%
=== ======== ===== ==== ======== ===== ===== ======== =====
</TABLE>
- --------
(1) Concepts represent less than 2.0% of 1998 originations.
11
<PAGE>
FMAC Golf Finance Group LLC. FMAC Golf Finance Group LLC ("FGFG") was
established in April 1998 to provide loans to national, regional, and local
operators of golf courses and golf practice facilities. From its inception
through December 31, 1998, FGFG provided approximately $30.0 million in
financing to Borrowers.
Currently, the Company is not actively originating golf loans and is in the
process of winding down its golf operations.
Energy Finance Group. The Energy Finance Group was organized to provide
loans to national and regional businesses that distribute retail petroleum
products such as service stations, convenience stores, truck stops, car washes
and quick lube stores. For the year ended December 31, 1998, this group
originated $466 million of energy loans. From its inception in 1997 through
December 31, 1998, the Energy Finance Group provided approximately $647
million in financing to Borrowers.
The following table sets forth the Energy Finance Group's loan originations
for the periods indicated by franchise concept:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
-------------------------------- --------------------------------
Number Principal % of Number Principal % of
of Loans Amount Total of Loans Amount Total
Originated Originated Originated Originated Originated Originated
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Exxon................... 48 $ 77,375 16.6% 84 $ 77,058 42.6%
Texaco.................. 46 61,924 13.3 25 29,137 16.1
Citgo................... 97 57,920 12.4 9 8,758 4.8
Amoco................... 65 56,178 12.0 6 3,115 1.7
Chevron................. 59 50,118 10.7 21 16,322 9.0
Other(1)................ 207 162,975 35.0 67 46,444 25.8
--- -------- ----- --- -------- -----
Grand Total........... 522 $466,490 100.0% 212 $180,834 100.0%
=== ======== ===== === ======== =====
</TABLE>
- --------
(1) Concepts represent less than 10.0% of 1998 originations.
Multi-Family Finance Group. Multi-family loans from $250,000 to $3.0 million
are provided through the Company's Multi-Family Mid-Market Division. Loans
from $3.0 million to $50.0 million are provided through the Company's Multi-
Family Major Loan Division. From its inception in April 1998 through December
31, 1998, the Multi-Family Finance Group funded $887 million in multi-family
loans. Loan programs include Fannie Mae DUS, Bankers Capital and Freddie Mac
Program Plus. As of December 31, 1998, the multi-family loan servicing
portfolio had an unpaid principal balance of $2.8 billion with $4.1 million,
or 0.15%, which were 30--59 days delinquent.
Equipment Finance Group. The Equipment Finance Group was organized to
provide equipment financing to experienced owners and operators in sectors in
which the Company operates and other strategic complementary businesses. For
the year ended December 31, 1998, this group originated $85 million of loans
and leases. From its inception in 1996 through December 31, 1998, the
Equipment Finance Group provided approximately $140 million in financing to
Borrowers.
12
<PAGE>
The following table sets forth the Company's loan and lease origination
activity by sector for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
------------------------------------------------ ------------------------------------------------
% of % of
Weighted Principal Principal Weighted Principal Principal
Lending Sector Number of Average Amount Amount Number of Average Amount Amount
an Type of Originationd Originations Interest Rate Originated Originated Originations Interest Rate Originated Originated
- ----------------------- ------------ ------------- ---------- ---------- ------------ ------------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant Loans:
Fixed-rate
loans........... 788 8.89% $ 600,847 28.0% 635 10.04% $421,108 52.6%
Variable-rate
loans........... 11 9.23 9,048 0.4 127 9.55 113,157 14.1
----- ---------- ----- ----- -------- -----
Total (1)....... 799 8.90 609,895 28.4 762 9.93 534,265 66.7
Golf Loans(2):
Fixed-rate
loans........... 12 8.82 33,890 1.6 7 10.83 21,030 2.6
Variable-rate
loans........... 2 10.17 5,000 0.2 2 9.47 12,188 1.5
----- ---------- ----- ----- -------- -----
Total (3)....... 14 9.00 38,890 1.8 9 10.33 33,218 4.1
Funeral Loans:
Fixed-rate
loans........... 42 9.39 53,314 2.5 -- -- -- --
Variable-rate
loans........... 4 9.87 3,047 0.1 -- -- -- --
----- ---------- ----- ----- -------- -----
Total (4)....... 46 9.42 56,361 2.6 -- -- -- --
Retail Energy
Loans:
Fixed-rate
loans........... 498 9.13 432,060 20.2 181 10.08 158,726 19.8
Variable-rate
loans........... 24 9.83 34,430 1.6 31 9.84 22,108 2.8
----- ---------- ----- ----- -------- -----
Total (5)....... 522 9.18 466,490 21.8 212 10.05 180,834 22.6
Multi-Family
Loans:
Fixed-rate
loans........... 102 6.55 798,424 37.3 -- -- -- --
Variable-rate
loans........... 5 6.78 88,175 4.1 -- -- -- --
----- ---------- ----- ----- -------- -----
Total........... 107 6.57 886,599 41.4 -- -- -- --
Equipment
Finance:
Fixed-rate loans
and leases...... 384 10.73 85,079 4.0 254 12.14 52,722 6.6
----- ---------- ----- ----- -------- -----
Total loan and
lease
originations.... 1,872 8.09% $2,143,314 100.0% 1,237 10.12% $801,039 100.0%
===== ========== ===== ===== ======== =====
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------
% of
Weighted Principal Principal
Lending Sector Number of Average Amount Amount
an Type of Originationd Originations Interest Rate Originated Originated
- ----------------------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Restaurant Loans:
Fixed-rate
loans........... 292 10.24% $218,765 47.6%
Variable-rate
loans........... 249 9.31 213,765 46.5
------------ ---------- ----------
Total (1)....... 541 9.78 432,530 94.1
Golf Loans(2):
Fixed-rate
loans........... 2 10.95 14,200 3.1
Variable-rate
loans........... 3 9.74 10,251 2.2
------------ ---------- ----------
Total (3)....... 5 10.44 24,451 5.3
Funeral Loans:
Fixed-rate
loans........... -- -- -- --
Variable-rate
loans........... -- -- -- --
------------ ---------- ----------
Total (4)....... -- -- -- --
Retail Energy
Loans:
Fixed-rate
loans........... -- -- -- --
Variable-rate
loans........... -- -- -- --
------------ ---------- ----------
Total (5)....... -- -- -- --
Multi-Family
Loans:
Fixed-rate
loans........... -- -- -- --
Variable-rate
loans........... -- -- -- --
------------ ---------- ----------
Total........... -- -- -- --
Equipment
Finance:
Fixed-rate loans
and leases...... 16 12.14 2,539 0.6
------------ ---------- ----------
Total loan and
lease
originations.... 562 9.83% $459,520 100.0%
============ ========== ==========
</TABLE>
- ----
(1) For the year ended December 31, 1998, 88.7% and 11.3% of the Company's
restaurant loans consisted of permanent and DEVCO loans, respectively;
such percentages were 70.3% and 29.7% at December 31, 1997 and 75.4% and
24.6% at December 31, 1996.
(2) Includes loans originated through FGFG.
(3) For the years ended December 31, 1998, 1997 and 1996, all of the Company's
golf loans were permanent loans.
(4) For the year ended December 31, 1998, 94.6% and 5.4% of the Company's
funeral loans consisted of permanent and DEVCO loans, respectively.
(5) For the year ended December 31, 1998, 94.3% and 5.7% of the Company's
retail energy loans consisted of permanent and DEVCO loans, respectively
such percentages were 80.9% and 19.1% at December 31, 1997.
13
<PAGE>
Geographic Distribution--The following table sets forth by state the number
of loans and leases originated by the Company for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
---------------------------------- ---------------------------------- ----------------------------------
Principal % of Principal % of Principal % of
Number of Amount Total Number of Amount Total Number of Amount Total
Originations Originated Originated Originations Originated Originated Originations Originated Originated
------------ ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California(1).... 267 $ 971,238 45.3% 182 $114,488 14.3% 42 $ 33,209 7.2%
Texas............ 295 185,083 8.6 67 62,054 7.7 42 29,264 6.4
North Carolina... 153 105,277 4.9 78 48,097 6.0 21 23,106 5.0
Nevada........... 17 83,945 3.9 12 14,895 1.9 18 11,284 2.5
Virginia......... 86 70,905 3.3 47 34,883 4.4 17 35,913 7.8
South Carolina... 100 68,726 3.2 23 16,311 2.0 21 17,022 3.7
Tennessee........ 69 63,831 3.0 12 4,231 0.5 15 10,980 2.4
Michigan......... 48 60,580 2.8 64 43,890 5.5 7 4,848 1.1
Georgia.......... 79 52,307 2.4 115 85,281 10.6 11 11,052 2.4
Other
States(2)....... 758 481,422 22.6 637 376,909 47.1 368 282,842 61.5
----- ---------- ----- ----- -------- ----- --- -------- -----
Totals:......... 1,872 $2,143,314 100.0% 1,237 $801,039 100.0% 562 $459,520 100.0%
===== ========== ===== ===== ======== ===== === ======== =====
</TABLE>
- --------
(1) The increase in total originations in 1998 for the State of California was
primarily attributable to the addition of the Multi-Family Finance Group.
(2) Other states represent loan originations that are less than 2.0% of total
1998 originations.
Competition
The Company faces intense competition in the business of originating and
selling loans and leases. Traditional competitors in the financial services
business include commercial banks, thrift institutions, diversified finance
companies, asset-based lenders, franchise finance companies and real estate
investment trusts. Many of these competitors in the commercial finance
business are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. In addition, many
financial service organizations have formed national networks for loan and
lease originations substantially similar to the Company's loan and lease
programs. Competition can take many forms including convenience in obtaining a
loan or lease, customer service, marketing and distribution channels, amount
and term of the loan, and interest or credit ratings. In addition, the current
level of gains realized by the Company and its competitors on the sale of
loans and leases could attract additional competitors into this market with
the possible effect of lowering gains on future loan and lease sales due to
increased loan and lease origination competition.
The Company believes that its industry expertise and proprietary databases,
combined with its responsiveness to Borrowers, flexibility in structuring
transactions and broad product offerings give it a competitive advantage over
more traditional, highly regulated small business lenders.
Regulation
Lending Laws
Certain aspects of the Company's businesses are subject to regulation and
supervision at both the federal and state level. Regulated matters include
loan origination, credit activities, maximum interest rates and finance and
other charges, disclosure to customers, the collection, foreclosure,
repossession and claims handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions and other trade practices.
Future Laws
The laws, rules and regulations applicable to the Company are subject to
modifications and change. There can be no assurance that rules and
regulations, or other such laws will not be adopted in the future which could
make compliance more difficult or expensive, restrict the Company's ability to
originate or sell loans, the amount of interest and other charges earned on
loans originated or sold by the Company, or otherwise adversely affect the
business or prospects of the Company.
14
<PAGE>
Government Sponsored Enterprises
The Multifamily Finance Group is required to originate, underwrite and service
the loans in accordance with the standards as set forth in writing by
Government Sponsored Enterprises ("GSEs"). These standards, which are
continually updated, are important and allow for continuity in the secondary
market for the ultimate investors in the mortgage-backed securities. The
Multifamily Finance Group is subject to annual audits by GSEs. There has never
been a material finding associated with any audit from the GSEs.
Environmental Liability Generally
Contamination of real property by hazardous substances may give rise to a
lien on that property to assure payment of the cost of clean-up or, in certain
circumstances subject the lender to liability. Such contamination may also
reduce the value of the business property. Under the laws of some states and
under the Comprehensive Environmental Response, Compensation, and Liability
Act, a lender may become liable for cleanup of a property and adjacent
properties that are contaminated by releases from the property if the lender
engages in certain activities.
Environmental Laws Affecting Borrowers in Specific Sectors
Environmental Regulations Affecting Franchises. The operation and management
of franchise businesses (whether pursuant to direct ownership, lease or
management contract) may involve the use and limited storage of certain
hazardous materials. Borrowers may be required to obtain various environmental
permits and licenses in connection with their operations and activities and
comply with various health and safety regulations adopted by federal, state,
local and foreign authorities governing the use and storage of such hazardous
materials.
Environmental Regulations Affecting Retail Energy Businesses. The operation
and management of retail energy businesses (whether pursuant to direct
ownership, lease or management contract) involves the use and limited storage
of certain hazardous materials. Specifically, the Company's Borrowers in the
retail energy sector incur ongoing costs to comply with federal, state and
local environmental laws and regulations governing Underground Storage Tanks
("USTs") used in their operations. The Company's loans may be secured by
convenience store and gas station locations with USTs and other environmental
risks. Borrowers may be required to obtain various environmental permits and
licenses in connection with their operations and activities and comply with
various health and safety regulations adopted by federal, state, local and
foreign authorities governing the use and storage of such hazardous materials.
Under various federal, state, local and foreign laws, ordinances and
regulations, various categories of persons, including owners, operators or
managers of real property may be liable for the costs of investigation,
removal and remediation of hazardous substances that are or have been released
on or in their property even if such releases were by former owners or
occupants. In addition, any liability to Borrowers for assessment and
remediation activities in connection with releases into the environment of
gasoline or other regulated substances from USTs or otherwise at such
Borrowers' gasoline facilities could adversely impact the Borrowers' ability
to repay their loans from the Company or the value of any pledged collateral.
Due to the nature of releases, the actual costs incurred may vary and the
ongoing costs of assessment and remediation activities may vary from year to
year and may adversely impact such Borrowers' ability to repay their loans.
Most states have funds which provide reimbursement to qualified storage tank
owners/operators for assessment and remediation costs associated with
petroleum releases (after the operator pays a set deductible and co-payment
amount). Most funds are supported by annual tank registration fees paid by the
station owners and a gasoline fee, included in the price of the gas, which is
paid by consumers. There have been an increasing number of UST replacements in
recent years. Consequently, some state funds have been drained of reserves.
The result is a delay in disbursement until the fund can be replenished with
fee collections, the effect of which may have an adverse effect on the
borrowers' financial condition and ability to repay its loan.
Environmental Regulations Affecting Golf Courses and Facilities. The
operation and management of golf courses and golf practice and instruction
facilities (whether pursuant to direct ownership, lease or management
contract) involve the use and limited storage of certain hazardous materials
such as herbicides, pesticides, fertilizers, motor oil, gasoline and paint.
Borrowers may be required to obtain various environmental permits and licenses
in connection with their operations and activities and comply with various
health and safety regulations adopted by federal, state, local and foreign
authorities governing the use and storage of such hazardous materials.
15
<PAGE>
Impaired Property Insurance Policy
The Company will be entitled to the benefit of a Secured Creditor Impaired
Property Insurance Policy (the Policy) issued by Commerce and Industry
Insurance Company, a member company of American International Group, Inc. (the
Insurer) with respect to energy loan mortgaged properties. The following
summary describes certain provisions of the Policy. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to the provisions of the Policy. The Policy will insure the Company,
subject to terms of the Policy, against the following claims, expenses, and
losses made or incurred during the Policy period which result from existing
and known environmental contamination that has been disclosed to the Insurer
or environmental contamination that is discovered during the effective period
of the Policy of energy loan mortgaged properties: either (i) certain clean-up
costs relating to certain pollution conditions required to be paid by the
Company with respect to any such mortgaged property, or (ii) loss resulting
from a default by a related borrower in an amount equal to the lesser of the
outstanding principal balance of the related energy loan and certain clean-up
costs with respect to such mortgaged properties where the pollution condition
is first discovered by the insured during the Policy period. The maximum
recovery under the Policy is $2 million per loss and $25 million overall, with
a $10,000 deductible on each loss. The Policy expires in the year 2017.
Employees
As of February 28, 1999, the Company had approximately 370 employees.
Management believes that its relations with these employees are satisfactory.
The Company is not party to any collective bargaining agreement.
Item 2. PROPERTIES
The Company's executive and administrative offices are located in the
Century City area of Los Angeles, California. The Diversified Finance Group is
headquartered in Englewood, Colorado; the Energy Finance Group is
headquartered in Morristown, New Jersey; the Equipment Finance Group is
headquartered in Greenwich, Connecticut; the Multi-Family Finance Group is
headquartered in Newport Beach, California; and the Insurance Services Group
is headquartered in the Company's Century City office. The Company leases 29
additional marketing offices nationwide and owns one office in Columbus,
Nebraska which is secured by a promissory note and deed of trust. Management
believes these properties are adequate and suitable for the Companys ongoing
operations.
Item 3. LEGAL PROCEEDINGS
The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among
others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on
November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an
accounting, monetary and punitive damages for alleged breach of contract,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing and fraud arising from an alleged business relationship. On March 25,
1999, the Superior Court entered an order in connection with the action, a
portion of which was stayed on March 29, 1999. The stayed portion included,
among other things, an order to dissolve Franchise Mortgage Acceptance Co.,
L.P. ("FMACLP"), a partnership of which FLRT, Inc. is the general partner and
which was formed in 1991 to originate and securitize franchise loans, and an
order requiring an accounting by FLRT, Inc. and Mr. Knyal to the limited
partners of FMACLP. The unstayed portion of the order includes a finding,
among other things, that Mr. Knyal and FLRT, Inc. breached the FMACLP
partnership agreement and that the limited partners of FMACLP have a right to
a portion of the shares of the Company owned by FLRT, Inc. or Mr. Knyal, and
of the proceeds realized from any sale of FLRT, Inc.'s or Mr. Knyal's Company
shares after November 1997. The order also states that Mr. Knyal and FLRT,
Inc. may not dispose of or encumber any shares of the Company held by either
of them, and that Mr. Knyal may not dispose of or encumber any shares of FLRT,
Inc. held by him. Counsel to the predecessor entity and Mr. Knyal and counsel
to FMACLP, which is not a party to the action, believe that the action is
without merit, and counsel to the predecessor entity and Mr. Knyal intend to
appeal the order and intend to vigorously defend the action. Although the
Company is not a party to the action, Imperial Credit Industries, Inc.
("ICII"), Mr. Knyal and FLRT, Inc. have agreed to indemnify the Company
against any and all liability that the Company and its stockholders (other
than ICII, Mr. Knyal and FLRT, Inc.) may incur as a result of this lawsuit.
The Company has been named as a defendant in other legal actions, which
legal actions have arisen in the ordinary course of business, none of which
management believes to be material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market System
under the symbol FMAX. The following table presents the quarterly high and low
bid quotations in the over-the-counter market as reported on the NASDAQ
National Market System for the period from November 18, 1997, when public
trading of the common stock commenced. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Market Price
-------------
High Low
------ ------
<S> <C> <C>
1998
1st Quarter................................................. $26.25 $16.00
2nd Quarter................................................. $28.25 $20.50
3rd Quarter................................................. $27.00 $ 6.25
4th Quarter................................................. $10.19 $ 3.50
1997
1st Quarter................................................. N/A N/A
2nd Quarter................................................. N/A N/A
3rd Quarter................................................. N/A N/A
4th Quarter (beginning November 18)......................... $20.00 $15.88
</TABLE>
According to the report of beneficial owners provided by the Depository
Trust Company, the approximate number of shareholders of record of the
Company's common stock on January 29, 1999 was 102. During the years ended
December 31, 1998 and 1997, the company neither declared nor paid any
dividends to its stockholders.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Predecessor
-----------------------
Six Months Six Months Year
Year Ended Ended Ended Ended
December 31, December 31, June 30, December 31,
------------------------- ------------ ---------- ------------
1998 1997 1996 1995 1995 1994
------- ------- ------- ------------ ---------- ------------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Gain on sales of loans
and leases(1)........ $40,146 $52,117 $18,671 $ -- $ -- $4,052
Net interest income... 17,119 5,156 1,641 239 154 37
Loan servicing
income............... 18,507 3,314 1,191 349 326 306
Loss on transfer of
loans to held for
investment........... (8,845) -- -- -- -- --
Other income (loss)... 650 (111) 63 -- -- 68
------- ------- ------- ----- ------- ------
Total revenues...... 67,577 60,476 21,566 588 480 4,463
------- ------- ------- ----- ------- ------
Expenses:
Personnel............. 26,306 13,636 8,270 356 931 1,723
General and
administrative....... 8,313 3,826 1,094 294 684 1,804
Other................. 19,147 7,293 2,878 597 776 1,664
------- ------- ------- ----- ------- ------
Total expenses...... 53,766 24,755 12,242 1,247 2,391 5,191
------- ------- ------- ----- ------- ------
Income (loss) before
income taxes and
minority interest in
subsidiary........... 13,811 35,721 9,324 (659) (1,911) (728)
Minority interest in
subsidiary............. (8) -- -- -- -- --
Income taxes(2)......... 5,528 15,001 -- -- -- --
------- ------- ------- ----- ------- ------
Net income (loss)... $ 8,291 $20,720 $ 9,324 $(659) $(1,911) $ (728)
======= ======= ======= ===== ======= ======
Basic and diluted income
per share(3)........... $ 0.29 $ 0.91
======= =======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
Predecessor
1998 1997 1996 1995 1994
-------- -------- -------- -------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.... $ 33,425 $ 7,335 $ -- $ -- $ 102
Securities available for
sale........................ 16,818 22,870 39,349 -- 9,541
Loans and leases held for
sale........................ 325,727 343,200 98,915 181,254 --
Loans and leases held for
investment.................. 162,928 -- -- -- --
Retained interest in loan
securitizations............. 29,952 21,652 6,908 -- --
Servicing rights............. 29,905 2,213 -- -- --
Accrued interest receivable.. 2,587 2,758 560 1,108 138
Goodwill..................... 37,353 4,315 4,332 4,226 --
Other assets................. 37,619 17,889 10,112 2,460 467
-------- -------- -------- -------- -------
Total assets............... 676,314 422,232 160,176 189,048 10,248
Payable to Imperial Credit
Industries, Inc............. -- -- 17,728 -- --
Overdraft.................... -- -- 171 445 --
Borrowings................... 483,763 256,220 125,240 181,632 13,548
Income taxes(2).............. 19,706 15,001 -- -- --
Other liabilities............ 26,140 12,589 2,580 3,198 1,543
-------- -------- -------- -------- -------
Total liabilities.......... 529,609 283,810 145,719 185,275 15,091
Minority interest in
subsidiary.................. (8)
Members' equity.............. -- -- $ 14,457 $ 3,773 $(4,843)
======== ======== =======
Total stockholders'
equity.................... $146,713 $138,422
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
Predecessor
1998 1997 1996 1995 1994
---------- ---------- -------- -------- -----------
(In thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Operating Statistics:
Loan originations:
Total loan
originations......... $2,058,235 $ 748,317 $456,981 $218,742 $109,166
Average initial
principal balance per
loan................. $ 1,383 $ 761 $ 837 $ 706 $ 635
Number of loans....... 1,488 983 546 310 172
Weighted average
interest rate:
Fixed rate loans.... 7.98% 10.08% 10.29% 10.12% 10.21%
Variable rate
loans.............. 7.88% 9.58% 9.34% 8.40% 8.13%
Equipment finance
originations:
Total equipment
finance
originations......... $ 85,079 $ 52,722 $ 2,539 $ -- $ --
Average principal
balance per
financing............ $ 222 $ 258 $ 159 $ -- $ --
Number of financings.. 384 250 16 -- --
Weighted average
interest rate........ 10.73% 12.14% 12.14% -- % -- %
Total loan and lease
originations:.......... $2,143,314 $ 801,039 $459,520 $218,742 $109,166
Loan sales:
Whole loan sales(1)... 14,394 $ 50,800 $ -- $ -- $ --
Loans sold through
securitizations(1)... 1,122,186 483,100 325,088 147,972 105,686
---------- ---------- -------- -------- --------
Total............... 1,136,580 $ 533,900 $325,088 $147,972 $105,686
Loans and leases held in
servicing
portfolio(4)........... $5,422,879 $1,629,067 $737,176 $358,579 $180,367
Net charge-offs as a
percentage of total
servicing portfolio.... 0.001% -- % -- % -- % -- %
</TABLE>
- --------
(1) Gain on sale for the years ended December 31, 1998, 1997 and 1996 includes
$23.8 million, $54.2 million and $11.5 million of cash gains before hedge
gains (losses) of ($31.1) million, ($5.1) million and $0.4 million, of
which $13.4 million, $6.1 million and $7.8 million, respectively,
represented loan fees. The gain on sale of loans for the December 1995
securitization was not recognized until the first quarter of 1996.
(2) From July 1, 1995 through November 18, 1997, the Company qualified to be
treated as a limited liability company, which is similar to a partnership,
for federal and state income tax purposes. As a result of terminating the
Company's LLC status upon completion of the Initial Public Offering, the
Company was
18
<PAGE>
required to record a one-time non-cash charge of $11.0 million against
historical earnings for deferred income taxes. This charge occurred in the
quarter ended December 31, 1997 and the year ended December 31, 1997.
(3) For the year ended December 31, 1998 and 1997, weighted average basic
outstanding shares of 28,715,625 and 22,669,949, respectively, and
weighted average diluted outstanding shares of 28,976,111 and 22,669,949,
respectively, were used in computing income per share.
(4) Delinquencies 90 or more days past due as a percentage of all loans and
leases held in the Company's servicing portfolio were 1.06% and 0.8% as of
December 31, 1998 and 1997, respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto appearing elsewhere herein.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Revenues:
Gain on sale of loans and leases.......................... $ 40,146 $ 52,117
Interest income........................................... 55,439 26,758
Interest expense.......................................... (38,320) (21,602)
-------- --------
Net interest income..................................... 17,119 5,156
Loan servicing income..................................... 18,507 3,314
Loss on transfer of loans to held for investment.......... (8,845) --
Other income (loss)....................................... 650 (111)
-------- --------
Total revenues.......................................... 67,577 60,476
-------- --------
Expenses:
Personnel................................................. 26,306 13,636
Professional services..................................... 4,057 2,416
Travel.................................................... 3,517 1,585
Business promotion........................................ 4,203 1,251
Provision for losses...................................... 2,644 933
Occupancy................................................. 2,504 683
Goodwill amortization..................................... 2,222 425
General and administrative................................ 8,313 3,826
-------- --------
Total expenses.......................................... 53,766 24,755
-------- --------
Income before tax and minority interest in subsidiary..... 13,811 35,721
Minority interest in subsidiary........................... (8) --
Income taxes.............................................. 5,528 15,001
-------- --------
Net income.............................................. $ 8,291 $ 20,720
======== ========
</TABLE>
Total revenues increased 11.7% to $67.6 million for the year ended December
31, 1998 from $60.5 million for the comparable period in 1997. During the same
periods, the Company's total expenses increased 117.2% to $53.8 million from
$24.8 million. As a result, net income decreased 60.0% to $8.3 million for the
year ended December 31, 1997 as compared to $20.7 million in 1996.
19
<PAGE>
The increase in revenues was primarily attributable to a $12.0 million
decrease in gain on sale of loans and leases, a $12.0 million increase in net
interest income, a $15.2 million increase in servicing income, and
$8.8 million of losses associated with the transfer of loans to held for
investment.
For the year ended December 31, 1998, the Company sold approximately $1.1
billion of loans and leases in five securitizations and one whole loan and
lease sale for a gain on sale of $31.5 million (of which $23.8 million was
cash, before hedge losses of $31.1 million) as compared to $533.9 million of
loans sold in three securitizations and five whole loan sales for a gain on
sale of $50.1 million (of which $54.2 million was cash, before hedge losses of
$5.1 million) for the year ended December 31, 1997. Additionally, $8.6 million
in net loan fees was recognized in 1998 as compared to $2.0 million in 1997.
The decreased gain on sale of loans was due to several factors, including the
composition of loans in the securitizations and whole loan sales, the
structure of the securitizations, as well as market conditions at the time of
the securitization transactions. The most significant reason for the decrease
in gain on sale was the amount of hedge losses, approximately $31.1 million
for the year ended December 31, 1998, sustained primarily as a result of
unanticipated changes in market conditions during the third and fourth
quarters of 1998.
Net interest income contributed to the increase in revenues, increasing
232.0% to $17.1 million for the year ended December 31, 1998 as compared to
$5.2 million for the same period in 1997. This increase is due to the
significant increase in loans and leases held for sale which resulted from
increased loan and lease originations as well as the addition of the Multi-
Family Finance Group.
Loan servicing income increased 458.4% to $18.5 million for the year ended
December 31, 1998 as compared to $3.3 million for the same period in 1997.
This was due to an increase in loans and leases serviced which resulted from
the securitization of $1.1 billion in loans and leases during 1998 with
servicing rights retained by the Company as well as an increase of $2.8
billion in loans directly related to the addition of Multi-Family Finance
Group.
The losses incurred as a result of transferring loans from held for sale to
held for investment were primarily related to hedge losses sustained as a
result of unanticipated changes in market conditions during the third and
fourth quarters of 1998.
Total expenses increased 117.2% to $53.8 million for the year ended December
31, 1998 as compared to $24.8 million for the same period of the prior year
primarily due to infrastructure additions needed to fund increased loan and
lease originations as well as the addition of the Multi-Family Finance Group.
Personnel expenses increased 92.9% to $26.3 million, professional services
increased 67.9% to $4.1 million, travel increased 121.9% to $3.5 million,
business promotion increased 236.0% to $4.2 million, provision for losses
increased 183.4% to $2.6 million, occupancy increased 266.6% to $2.5 million,
goodwill amortization increased 422.8% to $2.2 million and general and
administrative expenses increased 117.3% to $8.3 million for the year ended
December 31, 1998 as compared to the year ended December 31, 1997.
20
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
(In thousands)
<S> <C> <C>
Revenues:
Gain on sale of loans and leases.................... $ 52,117 $ 18,671
Interest income..................................... 26,758 16,130
Interest expense.................................... (21,602) (14,489)
-------- --------
Net interest income............................... 5,156 1,641
Loan servicing income............................... 3,314 1,191
Other income (loss)................................. (111) 63
-------- --------
Total revenues.................................... 60,476 21,566
-------- --------
Expenses:
Personnel........................................... 13,636 8,270
Professional services............................... 2,416 1,093
Travel.............................................. 1,585 614
Business promotion.................................. 1,251 450
Provision for losses................................ 933 --
Occupancy........................................... 683 310
Goodwill amortization............................... 425 411
General and administrative.......................... 3,826 1,094
-------- --------
Total expenses.................................... 24,755 12,242
-------- --------
Income before taxes................................. 35,721 9,324
Income taxes(1)..................................... 15,001 3,873
-------- --------
Net income(1)..................................... $ 20,720 $ 5,451
======== ========
</TABLE>
- --------
(1) Income tax and net income for 1996 are presented on a pro forma basis as
if the Company had been taxed as a corporation, for comparative purposes.
Total revenues increased 180.4% to $60.5 million for the year ended December
31, 1997 from $21.6 million for the comparable period in 1996. During the same
periods, the Company's total expenses increased 102.2% to $24.8 million from
$12.2 million. As a result, net income increased 280.1% to $20.7 million for
the year ended December 31, 1997 as compared to pro forma net income of $5.5
million in 1996.
The increase in revenues was primarily attributable to a $33.4 million
increase in gain on sale of loans and leases. For the year ended December 31,
1997, the Company sold $533.9 million of loans sold in three securitizations
and five whole loan sales for a gain on sale of $50.1 million (of which $54.2
million was cash, before hedge losses of $5.1 million) as compared to $430.3
million of loans sold in three securitizations for a gain on sale of $18.7
million (of which $11.5 million was cash, before hedge gains of $0.4 million)
for the year ended December 31, 1996. Additionally, $2.0 million in loan fees
was recognized in 1997 which was previously deferred due to the sales and
securitizations of loans and leases. The increased gain on sale of loans was
due to several factors, including the composition of loans in the
securitizations and whole loan sales, the structure of the securitizations,
market conditions at the time of the securitization transactions, and the fact
that the Company was successful in selling all classes of securitization
interests.
21
<PAGE>
Net interest income also contributed to the increase in revenues, increasing
214.2% to $5.2 million for the year ended December 31, 1997 as compared to
$1.6 million for the same period in 1996, primarily due to the significant
increase in loans and leases held for sale which resulted from increased loan
and lease originations.
Additionally, loan servicing income increased 178.3% to $3.3 million for the
year ended December 31, 1997 as compared to $1.2 million for the same period
in 1996. This was due to an increase in loans and leases serviced which
resulted from the securitization of $483.1 million in loans and leases during
1997 with servicing rights retained by the Company.
Total expenses increased 102.2% to $24.8 million for the year ended December
31, 1997 as compared to $12.2 million for the same period of the prior year
primarily due to infrastructure additions needed to fund increased loan and
lease originations. Personnel expenses increased 64.9% to $13.6 million,
professional services increased 121.0% to $2.4 million and general and
administrative expenses increased 249.7% to $3.8 million for the year ended
December 31, 1997 as compared to the year ended December 31, 1996.
Liquidity and Capital Resources
The Company requires access to short-term warehouse lines of credit and
repurchase facilities in order to fund loan and lease originations pending
sale or securitization of such loans and leases. Warehouse lines of credit,
repurchase facilities and working capital lines of credit at December 31, 1998
and December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------- ----------------------
Expiration Commitment Principal Commitment Principal
Lender Date Amount Outstanding Amount Outstanding
------ ---------- ---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Credit Suisse First
Boston(1)(2)........... 12/31/99 $ 300,000 $122,356 $300,000 $127,249
Morgan Stanley(1)....... 12/30/99 300,000 -- 200,000 94,031
Banco Santander(1)...... 08/31/99 50,000 34,669 50,000 21,649
Sanwa Bank(1)........... 06/30/99 25,000 14,369 25,000 4,506
Goldman Sachs Mortgage
Company(1) (3)......... 04/30/99 100,000 46,989 -- --
Residential Funding
Corporation(1) (4)..... 09/30/99 200,000 124,763 -- --
Bank of America(1) (5).. 01/29/99 35,000 18,776 -- --
Residential Funding
Corporation............ 05/31/99 50,000 31,432 -- --
Other Borrowings(6)..... -- 90,409 -- 8,785
---------- -------- -------- --------
Totals................ $1,060,000 $483,763 $575,000 $256,220
========== ======== ======== ========
</TABLE>
- --------
(1) The above borrowings are collateralized by the Company's loans and leases
held for sale and investment.
(2) The agreement with Credit Suisse First Boston requires the Company to
obtain a capital infusion of $100 million by May 31, 1999.
(3) The warehouse line of credit with Goldman Sachs Mortgage Company is used
to fund loans through FMAC Golf Finance Group LLC.
(4) The Residential Funding Corporation line of credit was temporarily
increased from $100 million to $200 million until January 31,1999.
(5) The Bank of America line of credit has subsequently been renewed until May
28, 1999.
(6) Other borrowings includes $55.3 million of sold loans that have been
accounted for as a financing at December 31, 1998, $29.0 million dollars
of loans that have been financed through FMAC Star Fund, LLP as of
December 31, 1998, a $6.1 million repurchase agreement with Deutsche Bank
as of December 31, 1998 for which the 1998-CE and 1998-CF certificates
were pledged as collateral, a $6.4 million sale of loans that has been
accounted for as a financing at December 31, 1997, and a $2.4 million loan
from Goldman Sachs Mortgage Company to finance a golf loan at December 31,
1997.
The above facilities, with the exception of Bank of America, have variable
interest rates based on London Interbank Offered Rate (LIBOR). The line of
credit with Bank of America has a fixed interest rate of 1.00% when minimum
deposit requirements are maintained. The weighted average interest rate on the
outstanding principal balances of these facilities was 6.96% and 8.23% at
December 31, 1998 and 1997, respectively.
22
<PAGE>
The Company also has a master purchase and sale agreement with Southern
Pacific Bank ("SPB"), a wholly owned subsidiary of Imperial Credit Industries,
Inc. ("ICII) to originate loans for SPB under mutual agreement, and subject to
SPB underwriting each such loan prior to sale of such loans. Under this
agreement, the Company also has the ability to repurchase loans, under mutual
agreement with SPB. There is no specified commitment by either party, and each
individual sale is negotiated separately as to pricing. This agreement has no
expiration date. For the year ended December 31, 1998, loans originated for
SPB (and not repurchased), including participations, totaled approximately
$26.5 million.
The Company's sources of operating cash flow include: (i) loan origination
income and fees; (ii) net interest income on loans and leases held for sale
and investment; (iii) cash servicing income; (iv) premiums obtained in sales
of whole loans and (v) cash proceeds from loan securitization. Cash from loan
origination fees, net interest income on loans held for sale and loan
servicing fees, as well as available borrowings generally provide adequate
liquidity to fund current operating expenses, excluding the difference between
the amount funded on loans originated and the amount advanced under the
Company's current warehouse facilities.
For the year ended December 31, 1998, net cash provided by operating
activities was $11.3 million. This excludes cash used in net loan origination
activities of $126.3 million, which was primarily attributable to the
Company's increased loan origination volume. For the year ended December 31,
1997, net cash provided by operating activities was $39.1 million, exclusive
of cash used in net loan origination activities of $246.0 million.
For the year ended December 31, 1998, net cash used in investing activities
was $68.0 million, which was primarily attributable to the purchase of
Bankers, the purchase of the E and F certificates relating to the 1998-C
securitization as well as an increase in retained interests in securitizations
of $21.8 million relating to the Company's 1998 securitizations, offset by the
sale of a $22.9 million security, which was related to the Company's 1997-B
securitization and proceeds from retained interests of $13.6 million. For the
year ended December 31, 1997, net cash used in investing activities was $2.1
million, which was primarily attributable to the sale of a $36.6 million
security related to the restructuring of the Company's 1991-A securitization,
offset by the purchase of a $22.9 million security, which was related to the
Company's 1997-B securitization and an increase in retained interests in
securitizations of $12.9 million relating to the Company's 1997
securitizations.
For the year ended December 31, 1998, net cash provided by financing
activities was $209.2 million, which was primarily attributable to increased
amounts of warehouse line borrowings resulting from increased loan and lease
originations during the period. For the year ended December 31, 1997, net cash
provided by financing activities was $216.5 million, which was primarily
attributable to an increase of $131.0 million in borrowings from warehouse
lines of credit and proceeds from the issuance of common stock of $112.6
million, offset by a decrease of $17.8 million in borrowings from ICII and
member distributions of $9.3 million.
The Company anticipates that its current cash, together with cash generated
from operations and funds available under its credit facilities, will be
sufficient to fund its operations for at least the next 12 months if the
Company's future operations are consistent with management's expectations.
However, the Company is dependent upon its ability to access warehouse lines
of credit and repurchase facilities to fund new loan originations. The Company
currently expects to be able to maintain existing warehouse lines of credit
and repurchase facilities as current arrangements expire or become fully
utilized; however, there can be no assurance that such financing will be
available on favorable terms, if at all.
Year 2000 Computer Issue
The Year 2000 ("Y2K") computer issue affects virtually all companies and
organizations. Many currently installed computer systems were designed to use
only a two-digit date field. This can cause problems in the systems
distinguishing a 21st century date (i.e. 20--) from a 20th century date (i.e.
19--). Until the date fields are updated, systems or programs could fail or
give erroneous results when referencing dates following December 31, 1999.
The Company is committed to ensuring that all of its computer systems,
operations, business partners, and supply chains are Y2K ready. The Company
has established its Year 2000 Readiness and Compliance Project ("Y2K Project")
as a major project internally, and as such has full support from the Company's
senior
23
<PAGE>
management and Board of Directors. Project awareness is continuously being
performed through meetings and documented communications. The Company is
committing the necessary internal and external resources along with the
necessary budgets to ensure successful completion of the Y2K Project.
The Company has organized a Y2K Project Steering Committee that includes
members of all Company operations groups. There is a dedicated Y2K Project
Core Team made up of full time internal and external resources to perform all
necessary project tasks. In addition, the Company has retained the services of
an outside independent consulting firm to assist on the project and provide
objective guidance. The committee meets regularly to review progress.
The Company has developed a comprehensive strategic plan for its Y2K
Project. The plan consists of the following three major phases: Phase I covers
awareness and impact assessment, which commenced in September 1998 and is
scheduled to conclude in March 1999; Phase II covers testing of all systems,
which commenced in January 1999 and is projected to conclude in April 1999;
Phase III covers remediation, which commenced in December 1998 and is
projected to conclude in July 1999.
The Company's plan is comprehensive, including an assessment and compliance
review of the following:
.Internal hardware and software systems, including data interchange with
external systems
.Business partners and value chain participants
.Business infrastructure (facilities)
.Customers, including Y2K readiness of potential new customers
Phase I of the Y2K Project is over 80% complete. All internal software and
hardware systems have been inventoried and are currently being reviewed for
compliance status. All mission and operations critical systems have been
clearly identified along with their current Y2K status. Business partner,
business infrastructure and customer assessments are concurrently taking
place.
Remediation and testing efforts on mission critical infrastructure hardware
systems have taken place for most all systems with the remaining to be
completed by the end of March 1999. All Company servers have been tested and
meet all Y2K compliance standards. Testing for the identified mission and
operations critical software systems, both third-party and in-house developed,
is currently in process. The Company anticipates completion of this testing by
the end of April 1999.
The Company has established dedicated budgets for its Y2K Project. There is
a defined budget for Phase I and preliminary budgets for Phases II and III.
The final budgets for Phases II and III will be determined after Phase I is
completed. Currently, the projected total cost of the Y2K Project is
approximately $900,000 but is subject to change if any unanticipated
situations arise. Any expenses related to Y2K issues are being expensed as
incurred. As of February 28, 1999, the Company has incurred approximately
$177,000 in Y2K Project related expenditures.
The Company has completed a preliminary assessment of internal computer
systems and believes that there is an effective program in place to resolve
the Y2K issue in an accurate and timely manner. Consequently, the Company
anticipates that the costs associated with Y2K compliance of internal systems
will not be material. However, the Company has not yet determined the
materiality of its relations with third parties and therefore cannot yet
determine costs that will result as a consequence of the Companys external
operations.
At this time, the risks associated with the Company's Y2K issues, both
internally and as related to third party business partners and suppliers are
not completely known. Through the Company's Awareness and Impact Assessment
phase, it expects to identify substantially all of its Y2K related risks.
Although the risks have not been completely identified, the Company believes
that the most realistic worst case scenario would be that the Company would
suffer from full or intermittent power outages at some or all of its sites.
Depending upon the sites affected and estimated duration, this would entail
recovery of the main application server systems at other sites and/or the move
to manual processes. Manual processes will have been developed as part of the
overall
24
<PAGE>
contingency plan. In relation to this, complete system data dumps will have
taken place prior to the millennium date change to ensure access to all
Company mission critical data should any system not be accessible due to power
failures.
The Company is incorporating and encompassing the Y2K area as part of the
Company's Business Continuity Plan. While the efforts to assess and correct
the Company's Y2K issues are expected to be complete prior to related
forecasted failure horizons, the Company is taking steps to develop the
necessary contingency plans. A formal process is being developed to assess
business critical functions and create action plans that will describe the
communications, operations and information technology activities that will be
conducted if the contingency plan must be executed, due to any possible Y2K
non-compliance issues. The Company's Y2K efforts are continual and the Project
is anticipated to evolve, as new information becomes available.
Inflation
The impact of inflation is reflected in the increased costs of the Company's
operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company's operations are monetary in nature. As a result,
interest rates have a greater impact on the Company's operations' performance
than do the effects of general levels of inflation. Inflation affects the
Company's operations primarily through its effect on interest rates, since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. During periods of significantly increasing
interest rates, demand for loans may be adversely affected.
Accounting Considerations
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 133, Accounting for Derivatives
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivatives
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Under SFAS No. 133, an
entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness
aspect of the hedge. Those methods must be consistent with the entity's
approach to managing risk. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management is in the process of
determining what effect, if any, adoption of SFAS No. 133 will have on the
Company's financial condition and results of operations.
25
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
Quantitative Information about Interest Rate Risk
The following table presents the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity and
the instruments' fair values at December 31, 1998:
<TABLE>
<CAPTION>
Total Fair
1999 2000 2001 2002 2003 Thereafter Balance Value
-------- ------- ------- ------ ------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive
assets:
Loans held for sale
Permanent commercial
loans................. $ 20,017 $ 2,667 $ 5,090 $ -- $ 631 $120,817 $149,222 $149,222
Average interest rate.. 10.03% 9.45% 9.53% -- 10.46% 9.34% 9.45%
Multi-family loans..... -- -- -- -- -- 119,599 119,599 119,599
Average interest rate.. 6.27% 6.27%
Equipment loans and
leases................ -- 37 779 2,245 5,493 37,283 45,837 45,837
Average interest rate.. -- 10.69% 11.50% 12.52% 12.00% 10.57% 10.86%
Loans held for
investment
Permanent commercial
loans................. -- -- -- -- 1,310 6,872 8,182 8,182
Average interest rate.. -- -- -- -- 11.6% 10.65% 10.81%
Short-term commercial
loans................. 109,106 15,067 -- -- -- 6,254 130,427 130,427
Average interest rate.. 9.48% 8.78% -- -- -- 9.18% 9.39%
Multi-family loans..... -- -- -- -- -- 25,233 25,233 25,233
Average interest rate.. -- -- -- -- -- 6.81% 6.81%
Equipment loans and
leases................ -- -- -- 114 126 239 478 478
Average interest rate.. -- -- -- 12.75% 10.75% 14.49% 13.09%
Securities available for
sale(1)................ 2,249 2,047 1,746 1,412 1,330 8,034 16,818 16,818
Retained interest in
loan
securitizations(2)..... 4,281 3,262 2,573 2,051 1,555 16,230 29,952 29,952
Servicing rights........ 3,739 3,585 3,240 2,924 2,801 13,616 29,905 29,905
-------- ------- ------- ------ ------- -------- -------- --------
Total interest-sensitive
assets................. $139,392 $26,665 $13,428 $8,745 $13,246 $354,176 $555,653 $555,653
======== ======= ======= ====== ======= ======== ======== ========
Interest-sensitive
liabilities:
Borrowings.............. $483,763 $ -- $ -- $ -- $ -- $ -- $483,763 $483,763
Average interest rate.. 6.96% -- -- -- -- -- 6.96%
-------- ------- ------- ------ ------- -------- -------- --------
Total interest-sensitive
liabilities............ $483,763 $ -- $ -- $ -- $ -- $ -- $483,763 $483,763
======== ======= ======= ====== ======= ======== ======== ========
</TABLE>
- --------
(1) As of December 31, 1998, the weighted average interest rate on securities
held for sale was 8.83%.
(2) Future cash flows from retained interest are dependent upon actual credit
losses and prepayment speed of the loans underlying the security. The
Company applies a discount rate to the expected cash flows of each
retained interest which includes estimated credit losses, prepayment speed
and time value of money. As of December 31, 1998, the weighted average
discount rate used on the retained interests was 18.0% with 8.96% weighted
average accretion of income.
Financial instruments include loans and leases held for sale, loans and
leases held for investment, securities available for sale, retained interest
in loan securitizations, servicing rights and borrowings. Fair value estimates
are subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. In addition, the fair value estimates
presented do not include the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
The carrying values of interest-bearing deposits approximate fair value due
to their short-term nature. The fair value of securities available for sale
was based on discounted cash flow. The fair value of loans and leases held for
sale and loans and leases held for investment are estimated by discounting
expected future cash flows at an estimated market rate of interest. A market
rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted
for credit risk and the Company's cost to administer such loans. The fair
value of retained interest
26
<PAGE>
in loan securitizations was estimated by discounting future cash flows using
rates that an unaffiliated third-party purchaser would require on instruments
with similar terms and remaining maturities. The fair values of borrowings
were estimated by discounting cash flows at interest rates for debt having
similar credit ratings and maturities.
Qualitative Information about Interest Rate Risk
The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties.
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse financing facilities or for securities issued in its
securitizations. The spread can be adversely affected because of interest rate
increases during the period from the date the loans are originated or
purchased until the closing of the sale or securitization of such loans.
The Company is required by its warehouse lending facilities to hedge all of
its fixed-rate principal loan balance securing such facilities. The Company's
hedging strategy normally includes selling U.S. Treasury futures in such
amounts and maturities as to effectively hedge the interest rate volatility of
its portfolio. The Company does not maintain naked or leveraged hedge
positions.
In addition, the Company from time to time may use various other hedging
strategies to provide a level of protection against interest rate risks on its
fixed-rate loans. These strategies may include forward sales of loans or loan-
backed securities, interest rate caps and floors and buying and selling of
futures and options on futures. The Company's management determines the nature
and quantity of hedging transactions based on various factors, including
market conditions and the expected volume of loan originations and purchases.
While the Company believes its hedging strategies are cost-effective and
provide some protection against interest rate risks, no hedging strategy can
completely protect the Company from such risks. Further, the Company does not
believe that hedging against the interest rate risks associated with variable-
rate loans is cost-effective, and does not utilize the hedging strategies
described above with respect to its variable-rate loans.
27
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
Independent Auditors' Report............................................ 29
Consolidated Balance Sheets............................................. 30
Consolidated Statements of Income....................................... 31
Consolidated Statements of Changes in Stockholders or Members' Equity... 32
Consolidated Statements of Cash Flows................................... 33
Notes to Consolidated Financial Statements.............................. 34
</TABLE>
Schedules are omitted because they are either inapplicable or the required
information is included in the consolidated financial statements or notes
thereto.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Franchise Mortgage Acceptance Company:
We have audited the accompanying consolidated balance sheets of Franchise
Mortgage Acceptance Company as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders or members' equity
and cash flows for each of the years in the three-year period ended December
31, 1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Franchise
Mortgage Acceptance Company as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Los Angeles, California
January 19, 1999, except as
to Notes 22, 23, and 20 to
the Consolidated Financial
Statements, which are as of
February 16, 1999, March 10,
1999 and March 29, 1999,
respectively.
29
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 33,425 $ 7,335
Interest bearing deposits--restricted....................... 5,757 2,744
Securities available for sale............................... 16,818 22,870
Loans and leases held for sale.............................. 325,727 343,200
Loans and leases held for investment........................ 162,928 --
Retained interest in loan securitizations................... 29,952 21,652
Servicing rights............................................ 29,905 2,213
Premises and equipment, net................................. 6,854 2,518
Goodwill.................................................... 37,353 4,315
Accrued interest receivable................................. 2,587 2,758
Other assets................................................ 25,008 12,627
-------- --------
Total assets............................................ $676,314 $422,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings.................................................. $483,763 $256,220
Current income taxes payable................................ 1,661 841
Deferred income taxes....................................... 18,045 14,160
Other liabilities........................................... 26,140 12,589
-------- --------
Total liabilities....................................... 529,609 283,810
-------- --------
Commitments and contingencies
Minority interest in subsidiary............................. (8) --
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.001 par value; 100,000,000 shares
authorized; 28,715,625 shares issued and outstanding..... 29 29
Additional paid in capital................................ 118,330 118,330
Retained earnings......................................... 28,354 20,063
-------- --------
Total stockholders' equity.............................. 146,713 138,422
-------- --------
Total liabilities and stockholders' equity.............. $676,314 $422,232
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Gain on sale of loans.............................. $40,146 $52,117 $18,671
------- ------- -------
Interest income.................................... 55,439 26,758 16,130
Interest expense................................... 38,320 21,602 14,489
------- ------- -------
Net interest income.............................. 17,119 5,156 1,641
------- ------- -------
Loan servicing income.............................. 18,507 3,314 1,191
Loss on transfer of loans to held for investment... (8,845) -- --
Other income (loss)................................ 650 (111) 63
------- ------- -------
Total revenue.................................... 67,577 60,476 21,566
------- ------- -------
Expense:
Personnel.......................................... 26,306 13,636 8,270
Professional services.............................. 4,057 2,416 1,093
Travel............................................. 3,517 1,585 614
Business promotion................................. 4,203 1,251 450
Provision for losses............................... 2,644 933 --
Occupancy.......................................... 2,504 683 310
Goodwill amortization.............................. 2,222 425 411
General and administrative......................... 8,313 3,826 1,094
------- ------- -------
Total expense.................................... 53,766 24,755 12,242
------- ------- -------
Income before income taxes and minority interest in
subsidiary 13,811 35,721 9,324
Minority interest in subsidiary.................... (8) -- --
Income taxes....................................... 5,528 15,001 --
------- ------- -------
Net income....................................... $ 8,291 $20,720 $ 9,324
======= ======= =======
Basic and diluted income per share................... $ 0.29 $ 0.91
======= =======
Unaudited pro forma earnings data:
Net income as reported............................. $ 9,324
Pro forma income taxes............................. 3,873
-------
Pro forma net income............................... $ 5,451
=======
Pro forma basic and diluted income per share....... $ 0.25
=======
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' OR MEMBERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
(Accumulated
Number of Additional Deficit) Total
Shares Members' Common Paid-In Retained Stockholders'
Outstanding Capital Stock Capital Earnings Equity
----------- -------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... -- $4,432 $-- $ -- $ (659) $ 3,773
Net income.............. -- -- -- -- 9,324 9,324
Members' contribution--
ICII................... -- 1,360 -- -- -- 1,360
------ ------ ---- -------- ------- --------
Balance, December 31,
1996................... -- 5,792 -- -- 8,665 14,457
Tax distribution--ICII.. -- -- -- -- (4,215) (4,215)
Tax distribution--
Knyal.................. -- -- -- -- (2,107) (2,107)
Members' distribution--
ICII................... -- -- -- -- (2,000) (2,000)
Members' distribution--
Knyal.................. -- -- -- -- (1,000) (1,000)
Issuance of common
stock, net of offering
costs.................. 28,716 (5,792) 29 118,330 -- 112,567
Net income.............. -- -- -- -- 20,720 20,720
------ ------ ---- -------- ------- --------
Balance, December 31,
1997................... 28,716 -- 29 118,330 20,063 138,422
Net income.............. -- -- -- -- 8,291 8,291
------ ------ ---- -------- ------- --------
Balance, December 31,
1998................... 28,716 $ -- $ 29 $118,330 $28,354 $146,713
====== ====== ==== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 8,291 $ 20,720 $ 9,324
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation and amortization........... 5,457 1,417 2,883
Decrease (increase) in accrued interest
receivable............................. 353 (2,198) 548
Provision for deferred income taxes..... 3,651 14,160 --
Increase in current income taxes
payable................................ 894 841 --
Increase (decrease) in other liabilities
and accrued interest payable........... 11,554 10,009 (618)
Increase in other assets................ (11,079) (6,271) (7,027)
Increase in valuation allowance for
retained interest in loan
securitizations........................ 1,050 400 --
Increase in originated mortgage
servicing rights....................... (8,878) -- --
Loan and lease operations
Loans and leases originated........... (2,143,314) (801,039) (459,520)
Loans sold to (purchased from)
affiliates........................... 786,878 (3,455) 220,434
Provision for loan and lease losses... 3,156 811 --
Principal reductions.................. 90,357 23,766 5,302
Cash proceeds from loan sales and
securitizations...................... 1,136,580 533,900 325,088
----------- --------- ---------
Net cash provided (used) by operating
activities............................... (115,050) (206,939) 96,414
----------- --------- ---------
Cash flows from investing activities:
Purchases of premises and equipment..... (5,268) (1,781) (1,190)
Decrease (increase) in interest bearing
deposits............................... 1,987 (150) (2,594)
Purchase of securities available for
sale................................... (16,953) (22,870) (41,704)
Sale of securities available for sale... 22,870 36,571 --
Proceeds from securities available for
sale................................... 135 -- --
Increase in retained interests in
securitizations........................ (21,820) (12,933) (9,691)
Proceeds from retained interests in
securitizations........................ 13,582 1,732 726
Sale (purchase) of servicing rights..... 488 (2,213) --
Changes in assets and liabilities due to
acquisition of Bankers Mutual and
Bankers Mutual Mortgage, Inc
Increase in interest bearing
deposits--restricted................. (5,000) -- --
Increase in loans held for sale....... (17,957) -- --
Increase in servicing rights.......... (21,933) -- --
Increase in other assets.............. (2,454) -- --
Increase in borrowings................ 18,388 -- --
Increase in other liabilities......... 1,188 -- --
Goodwill.............................. (35,260) -- --
Purchase of other investments........... -- (408) (4,383)
Decrease in minority interest........... (8) -- --
----------- --------- ---------
Net cash used by investing activities..... (68,015) (2,052) (58,836)
----------- --------- ---------
Cash flows from financing activities:
Repayment of bonds...................... -- -- (111,995)
Net change in borrowings from Imperial
Credit Industries, Inc................. -- (17,728) 17,728
Increase in borrowings.................. 209,155 130,980 55,603
Proceeds from issuance of common stock.. -- 112,567 --
Member (distributions) contributions.... -- (9,322) 1,360
----------- --------- ---------
Net cash provided (used) by financing
activities............................... 209,155 216,497 (37,304)
----------- --------- ---------
Net change in cash.......................... 26,090 7,506 274
Cash (book overdraft) at beginning of year.. 7,335 (171) (445)
----------- --------- ---------
Cash (book overdraft) at end of year........ $ 33,425 $ 7,335 $ (171)
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
(1) Organization
Unless the context indicates otherwise, all references hereinafter to the
Company refer to Franchise Mortgage Acceptance Company, along with all its
predecessor entities, including Franchise Mortgage Acceptance Company LLC
("Franchise Mortgage LLC").
On November 18, 1997, the Company completed its initial public offering (the
"Offering") pursuant to which 10,000,000 shares of common stock were sold to
the public at a price of $18.00 per share. On November 28, 1997, and December
3, 1997, 890,625 and 609,378 additional shares of common stock were sold to
the public, respectively, at the sale price of $18.00 per share. Net proceeds
to the Company after offering costs of $1.7 million were $112.6 million.
Immediately prior to the Offering, Franchise Mortgage LLC merged into
Franchise Mortgage Acceptance Company, a Delaware corporation which was
incorporated in August 1997 for the purpose of succeeding to the business of
Franchise Mortgage LLC. As part of the initial public offering, Imperial
Credit Industries, Inc. ("ICII") and FLRT, Inc. collectively sold to the
public 4,062,500 shares of Company common stock at $18.00 per share.
Subsequent to the sales of common stock described above, ICII owned 38.4% and
FLRT, Inc. owned 21.6% of the Company's outstanding shares of common stock.
On April 1, 1998, the Company acquired substantially all of the assets and
assumed the liabilities of Bankers Mutual and Bankers Mutual Mortgage, Inc.
(together, "Bankers"). The acquisition was made pursuant to an Asset Purchase
Agreement dated March 9, 1998 by and among the Company, Bankers, and the
holders of the outstanding shares of Bankers. Bankers is a Federal National
Mortgage Association and Federal Home Loan Bank lender and servicer. The
purchase price paid for the assets consisted of the following: (i) payment by
the Company to Bankers of $61.5 million in cash, (ii) delivery of a promissory
note in the principal amount of $5.0 million, (iii) contingent cash payments
of up to $30.0 million over three years dependent upon the achievement of
certain operating results, and (iv) the Company's assumption of Banker's
liabilities.
In April 1998, the Company formed a wholly owned insurance brokerage
subsidiary, FMAC Insurance Services Inc., which offers property, casualty, and
employee benefits policies and programs to businesses nationwide. In this
business, the Company acts only as a broker, taking no insurance risks.
In April 1998, the Company finalized a joint venture with MLQ Investors, LP
("MLQ") pursuant to which all loan and lease activities of the Company's Golf
Finance Group will be exclusively conducted by the new entity known as FMAC
Golf Finance Group LLC which is 50% owned by each of the Company and MLQ and
managed by the Company. In connection therewith, a $100.0 million warehouse
line of credit has been established with Goldman Sachs Mortgage Company to
provide FMAC Golf Finance Group LLC with financing. The line is a twelve-month
facility with interest based on London Interbank Offered Rate (LIBOR).
In July 1998, the Company finalized a joint venture with SFT Venturer, LLC
("SFT") to form FMAC Star Fund, LLP. The purpose of this entity is to engage
in the activity of financing the Company's loans. Each party has a 50%
ownership position with SFT contributing 80% of the $90 million mandatory
capital and the Company contributing the remaining 20%. Contributions of
mandatory capital can only be requested with joint consent of both the Company
and SFT. As of December 31, 1998, the Company had made capital contributions
of $3.1 million.
(2) Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. The consolidated financial
statements include the financial statements of Franchise Mortgage Acceptance
Company and FMAC Golf Finance Group LLC. All significant intercompany balances
and
34
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
of the dates of the balance sheet and revenues and expenses for the periods
presented. Significant balance sheet accounts which could be materially
affected by such estimates include securities available for sale, loans and
leases held for sale, loans and leases held for investment, retained interest
in loan securitizations and servicing rights. Actual results could differ
significantly from those estimates. Certain reclassifications were made to the
prior year balances to conform with the current year presentation.
(3) Summary of Significant Accounting Policies
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less at date of
acquisition to be cash equivalents.
Securities
The Company classifies securities as held to maturity or available for sale
at the time of acquisition. Held to maturity investments are reported at
amortized cost. Available for sale securities are reported at fair value with
unrealized gains and losses included as a separate component of stockholders
equity. Discounts and premiums on such securities are amortized to income
using the interest method over the life of the securities. Realized gains and
losses on securities available for sale are included in income at the time of
sale using the specific identification method for determining the cost of
securities sold.
Loans and Leases Held for Sale
Loans and leases held for sale are carried at the lower of aggregate
amortized cost or market value. Interest on loans and leases held for sale is
credited to income as earned. Interest is only credited if deemed collectible.
Loan origination fees and related incremental direct loan origination costs
are deferred and recognized as an adjustment to the gain on sale of loans and
leases when the related loans and leases are sold.
Loans and Leases Held for Investment
Loans and leases held for investment are recorded at cost, net of deferred
fees and costs and the allowance for loan and lease losses. Loan origination
fees and related incremental direct loan origination costs are deferred and
recognized as an adjustment of the yield of the related loan. The accrual of
interest on loans and leases held for investment is discontinued when, in
management's opinion, the borrower may not be able to meet the payments as
they become due, generally this occurs when the loan or lease becomes ninety
or more days past due. Accrued interest on loans that are ninety or more days
past due is reversed and charged against interest income. Interest income is
subsequently recognized only to the extent cash payments are received and the
principal balance is expected to be recovered. Such loans are restored to an
accrual status only if the loan is brought current and the borrower has
demonstrated the ability to make future principal and interest payments.
The allowance for loan and lease losses is maintained at an amount
management deems adequate to cover estimated losses. The allowance is
increased by charges to income and decreased by charge-offs (net of
recoveries). In determining the allowance for loan and lease losses,
management evaluates its allowance on an individual loan and lease basis,
including an analysis of the creditworthiness, cash flows and financial status
of the borrower, and the condition and estimated value of the underlying
collateral. In the opinion of management, and in accordance with the loan and
lease loss allowance methodology, the present allowance is considered adequate
to absorb estimable and probable loan and lease losses.
35
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Retained Interest in Loan Securitizations
Retained interests in securitizations of loans and leases are recorded as a
result of the sale of loans and leases through securitization. When the
Company sells loans and leases in securitizations, it may retain one or more
subordinated bonds, interest only strips, collateral (loans and leases sold in
securitization) in excess of the bonds and certificates issued and in some
cases cash reserve accounts, all of which are retained interests in
securitizations. Securitizations are generally structured as follows: First,
the Company sells a portfolio of loans and or leases either directly to a
securitization trust or to a special purpose entity established for the sole
purpose of purchasing and reselling the loans and leases to a securitization
trust. Next, the securitization trust then issues either bonds or certificates
collateralized by the loans and leases transferred to the securitization
trust. These bonds and certificates reflect the full spectrum of bond credit
ratings and the proceeds received from these bonds and certificates are used
to purchase the loans and leases from the Company. The gain on the sale of
loans and leases is recognized to the extent that the proceeds received
exceeds the carrying value of loans and leases sold based on the estimated
relative fair value of the assets transferred (loans and leases), assets
obtained (retained interest in securitizations) and liabilities incurred.
Subsequent to the sales, retained interests in securitizations are recorded
at estimated fair value, with unrealized gains or loss included in equity. The
Company generally structures these retained interests as a first loss
certificate at a substantial discount from unpaid principal balance of the
residual collateral. The Company is not aware of an active market for the
purchase and sale of these retained interests at this time, accordingly, the
Company estimates the fair value of the retained interest by calculating the
present value of the estimated expected future cash flows received by the
Company after being released by the Trust, using a discount rate commensurate
with the risks involved.
Each loan securitization has specific credit enhancement cash flow
requirements that must be met before the Company receives any cash on its
retained interest.
Retained interests in loan securitizations are accounted for as available
for sale securities and income is amortized using the interest method. To the
extent that actual future performance results are less than the Company's
original performance estimates, the Company's retained interest in loan
securitizations will be written down through a charge to equity in that
period. Such retained interests are reviewed for permanent impairment. Any
permanent impairment would be recognized through a charge to operations in
that period.
Servicing Rights
The total cost of the loans acquired through either purchase or origination
is allocated to the servicing rights and the loans (without the servicing
rights) based on their relative fair values. The Company also capitalizes the
cost of servicing rights acquired from third parties based on the purchase
price of the servicing rights. The amount capitalized does not exceed the fair
value of those rights.
The Company recognizes a servicing asset where the specified contractual
servicing fee exceeds the fee that would be required from a substitute
servicer. Should the specified contractual servicing fee be less than the fee
that would be required from a substitute servicer, a servicing liability would
be recognized.
Capitalized servicing rights are assessed for impairment based on the fair
value of those rights. The Company estimates fair value of the servicing
rights using quoted market prices (if available) or a discounted cash flow
analysis incorporating prepayment, default, cost to service and interest rate
assumptions that market participants use for similar instruments. At December
31, 1998 and 1997, the carrying value of servicing rights approximates their
estimated fair value. Impairment is to be recognized through a valuation
allowance. In determining impairment, the servicing portfolio is stratified
into the predominant risk characteristics of the underlying loans. The Company
has determined those risk characteristics to be loan type and interest rate.
These strata within the portfolio were then valued using the same assumptions
that were used to determine the fair
36
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value. Servicing rights are amortized in proportion to, and over the period
of, the estimated net servicing income. Servicing fees are earned on the cash
flow streams from various pools of sold or securitized loans and leases
serviced for others. Servicing fees are recognized as income when received.
Loan and Lease Sales and Related Gain or Loss
Loans and leases are sold through either securitizations or whole loan sales
with servicing generally retained by the Company. Securitizations typically
require credit enhancements in the form of cash reserves or
overcollateralization, some of which may be reflected as retained interest in
loan securitizations on the Company's consolidated balance sheet. Sales are
recognized when the transaction settles and the risks and rewards of ownership
are legally transferred to the purchaser.
Gain is recognized to the extent that the selling price exceeds the carrying
value of the loans or leases sold based on the estimated relative fair values
of the assets transferred, assets obtained and liabilities incurred. The
assets obtained in a sale include, generally, retained interest in
securitizations, servicing assets, and call options. Liabilities incurred in a
sale include, generally, recourse obligations, and servicing liabilities. In
the securitizations completed to date, the Company retained call options
giving it the right to repurchase loans sold when the outstanding amount of
such loans is 1% to 10% or less of the original amount sold, depending on the
terms of the related securitization. As these call options are equivalent to a
cleanup call, the Company has ascribed no value to them. Recourse obligations
are included in the retained interests through discounting. The
securitizations completed to date had no put option features.
In determining the estimated fair values of the retained interest in loan
and lease securitizations, the Company estimates the cash flows to be released
to the Company and discounts such cash flows at interest rates determined by
management to be rates market participants would use in similar circumstances,
the overall discount rate on retained interests was 18.0% at December 31,
1998. In estimating the present value of the cash flows, the Company considers
default and prepayment rates in the overall discount rate applied to the cash
flows. Management does, however, continually review the credit loss assumption
and makes changes to the assumptions based on portfolio trends and risks
associated with new products. Management believes the discount rate adequately
reflects a rate market participants would use in determining fair value plus
an appropriate discount for anticipated credit losses and future prepayments.
Historically, the Company has used zero prepayment and loss rates assumptions
because a prepayment penalty contained in the lending documents has deterred
borrower prepayments significantly and the Company has experienced nominal
losses to date.
Loan and lease Origination Fees
Origination fees received on loans and leases held for sale, net of direct
costs related to the origination of the loans and leases, are deferred as an
adjustment to the carrying value of loans and leases held for sale. At the
time of sale of the related loans and leases, such deferred fees are taken
into income and included with the gain or loss on sale of loans and leases.
Premises and Equipment, Net
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets
(three to seven years). Leasehold improvements are amortized over the terms of
their related leases or the estimated useful lives of improvements, whichever
is shorter.
37
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Prior to the Offering, the Company was organized as a Limited Liability
Company under the Internal Revenue Code and the corresponding state tax laws.
Accordingly, income was taxed directly to the members for Federal income and
state franchise tax purposes. In addition, the California Franchise Tax Board
imposed the minimum tax as well as an annual fee not to exceed $4,500 for
years ended prior to 1997. The Company converted its tax filing status from an
LLC to a C Corporation on November 18, 1997.
Income taxes are provided by the Company based on taxable income and are
adjusted for the change in deferred tax assets and liabilities which are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over its estimated
useful life of generally 15 years. Goodwill is reviewed for possible
impairment when events or changed circumstances may affect the underlying
basis of the asset.
Income Per Share Income Per Share
Basic and diluted income per common share are computed based on the weighted
average number of shares outstanding during the year plus common stock
equivalents deemed to be dilutive. The number of shares used in computations
are given retroactive effect for stock dividends and splits, if any, for all
periods presented. The following table reconciles the number of shares used in
computing basic and diluted income per share for the years ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Weighted average common shares outstanding during
the year used to compute basic income per share.... 28,715,625 22,669,949
Assumed common shares issued on exercise of stock
options............................................ 260,486 --
---------- ----------
Number of common shares used to compute diluted
income per share................................... 28,976,111 22,669,949
========== ==========
</TABLE>
Stock Option Plan
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price.
Deferred Compensation Plan
In January 1998, the Company implemented a non-qualified deferral plan for
highly compensated employees. The plan allows certain employees to defer a
portion of their compensation for tax purposes. Compensation deferrals are
recorded through a charge to operations and the related liability is reflected
in other liabilities.
38
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Hedging Program
The Company regularly securitizes and sells fixed- and variable-rate loans.
To mitigate the risk of the effects of interest rate fluctuations on the value
of its fixed-rate loans held for sale, the Company in certain cases will hedge
its interest rate risk related to loans held for sale by selling United States
Treasury futures contracts. Unrealized and realized gains and losses on such
positions are deferred as an adjustment to the carrying value of loans and
leases held for sale and included in income as gain or loss on sale of loans
when the related loans are sold.
Management has determined that hedge accounting is appropriate for the
Company's hedging program because the hedged loans expose the Company to price
risk, the futures contracts reduce that risk and are designated as hedges, and
at the inception of the hedge and throughout the hedge period where there is a
high correlation between the price of the futures contracts and the fair value
of the loans being hedged. In the event correlation does not remain high, the
futures contracts will cease to be accounted for as hedges and a gain or loss
will be recognized to the extent the futures results have not been offset by
the price changes of the hedged loans.
Recent Accounting Pronouncements
On January 1, 1998, the Company adopted the Financial Accounting Standards
Board's (FASB) Statement of Financial Standards (SFAS) No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. Under SFAS 131, management believes that the
Company meets all of the requirements to aggregate its Restaurant, Energy and
Multi-Family operating segments into a single operating segment because these
operating segments have similar economic characteristics and are similar in
each of the following areas: (a) nature of products and services, (b) nature
of production processes, (c) type or class of customer for their products or
services, (d) methods used to distribute their products or provide their
services, and (e) the nature of the regulatory environment.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivatives
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Under SFAS No. 133, an
entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness
aspect of the hedge. Those methods must be consistent with the entity's
approach to managing risk. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Management is in the process of
determining what effect, if any, adoption of SFAS No. 133 will have on the
Company's financial condition and results of operations.
(4) Supplemental Disclosure of Cash Flow Information
Cash paid for interest for the years ended December 31, 1998, 1997 and 1996
was $35.2 million, $21.0 million and $15.6 million, respectively. During 1996,
ICII contributed $1.4 million to the Company by decreasing the balances of the
outstanding payable to ICII by the amount of the contribution. Cash paid for
taxes for the year ended December 31, 1998 was $0.8 million. For the years
ended December 31, 1997 and 1996, the Company did not make any tax payments
because it was treated as a limited liability company for federal and state
income tax purposes. During the year ended December 31, 1998, the Company
transferred $163.0 million of loans from held for sale to held for investment
and recognized a pre-tax loss on the transfer of $8.8 million.
39
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Securities Available for Sale
Securities available for sale consist of asset-backed securities issued by
the Company. For the year ended December 31, 1998 and 1997, activity in
securities available for sale was as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
------------------------------------------------------------------
Beginning Face Cash Hedging Ending
Balance Amount Discount Received (Gain) Loss Sold Balance
--------- ------- -------- -------- ----------- -------- -------
(In thousands)
<S> <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)............... -- 3,301 (283) (135) -- -- 2,883
------- ------- ------- ----- ---- -------- -------
Totals.................. $22,870 $22,001 $(5,048) $(135) $-- $(22,870) $16,818
======= ======= ======= ===== ==== ======== =======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
-----------------------------------------------------------------
Beginning Face Cash Hedging Ending
Balance Amount Discount Received (Gain) Loss Sold Balance
--------- ------- -------- -------- ----------- -------- -------
(In thousands)
<S> <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 Capital Financial Products, Inc. in
August 1996, and included a $1.5 million premium. This security was sold
in January 1997.
(2) 1997-B is an interest-only strip that was purchased from Credit Suisse
First Boston in December 1997 and was subsequently sold in March 1998.
(3) 1998-CE and 1998-CF represent the Class E and F certificates that were
purchased by the Company as part of the 1998-C securitization.
(4) 1998-1 is the Class C certificate that was purchased by the Company as
part of the 1998-1 equipment finance securitization.
(6) Loans and Leases Held for Sale
The Company offers permanent commercial loans, multi-family and equipment
loans and leases to those sectors in which it operates. Substantially all of
the Company's permanent commercial loans are self-amortizing, long-term fixed
or adjustable rate loans provided for purposes other than development and
construction of business units. Multi-family loans are generally fixed rate
loans amortized over 30 years. Equipment loans are fixed rate products tied to
U.S. Treasury rates that generally have a maximum term of up to 10 years. The
Company's equipment leases generally range in term from 5 to 7 years and are
substantially made up of direct financing leases. Loans and leases held for
sale were pledged as collateral for the borrowings of the Company.
40
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998 and 1997, loans and leases held for sale consisted of
the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Permanent commercial loans........................... $149,222 $149,699
Short-term commercial loans.......................... -- 177,723
Multi-family loans................................... 119,599 --
Loans in process..................................... 7,410 --
Equipment loans and leases........................... 63,671 19,801
Unearned lease income................................ (17,834) (5,520)
Allowance for loan and lease losses.................. (445) (998)
Net deferred loan (fees) costs....................... 2,198 (2,530)
Margin and deferred net losses on futures contracts
used to hedge loans and leases held for sale(1)..... 1,906 5,025
-------- --------
Loans and leases held for sale..................... $325,727 $343,200
======== ========
</TABLE>
- --------
(1) For the year ended December 31, 1998, the deferred hedge loss related to
loans financed as part of FMAC Golf Finance Group LLC.
Non-accrual loans, including impaired loans, totaled $0 million and $4.0
million at December 31, 1998 and 1997, respectively.
Activity in valuation allowances for loans and leases held for sale for the
years ended December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
------- ----
(In
thousands)
<S> <C> <C>
Balance, January 1.......................................... $ 998 $--
Provisions.................................................. 1,699 998
Charge-offs................................................. -- --
Transfer of allowance to loans held for investment.......... (2,252) --
------- ----
Balance, December 31........................................ $ 445 $998
======= ====
</TABLE>
As of December 31, 1998, the future minimum lease payments to be received
for each of the five succeeding fiscal years are represented in the table
below. Since the Company intends to sell its leases, there is no guarantee
that these lease payments will continue to be received.
<TABLE>
<CAPTION>
Future Lease
Year Payments
---- --------------
(In thousands)
<S> <C>
1999........................................................ $10,289
2000........................................................ 10,289
2001........................................................ 10,085
2002........................................................ 9,634
2003........................................................ 8,451
Thereafter.................................................. 14,923
-------
Total..................................................... $63,671
=======
</TABLE>
41
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Loans and Leases Held for Investment
The Company offers short-term commercial loans (DEVCO and Seasoning loans)
to those sectors in which it operates. DEVCO loans are short-term, interest-
only loans offered to fund the development and construction of new business
units. Seasoning loans are short-term, interest-only loans offered to fund the
acquisition of new business units or the conversion of existing business units
into a different franchise concept. The Company's permanent commercial loans,
multi-family loans, and equipment loans and leases that are classified as held
for investment are classified as such because they are not immediately salable
for reasons such as unique loan terms or delinquency status. The Company had
no loans and leases held for investment at December 31, 1997.
At December 31, 1998, loans and leases held for investment consisted of the
following:
<TABLE>
<CAPTION>
December 31,
1998
--------------
(In thousands)
<S> <C>
Permanent commercial loans.................................. $ 9,639
Short-term commercial loans................................. 130,357
Multi-family loans.......................................... 25,233
Equipment loans and leases.................................. 598
Allowance for loan and lease losses......................... (2,988)
Net deferred loan costs..................................... 89
--------
Loans and leases held for sale............................ $162,928
========
</TABLE>
Non-accrual loans, including impaired loans, totaled $17.1 million at
December 31, 1998.
Activity in valuation allowances for loans and leases held for investment
for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
1998
--------------
(In thousands)
<S> <C>
Balance, January 1.......................................... $ --
Provisions.................................................. 736
Charge-offs................................................. --
Transfer of allowance from loans held for sale.............. 2,252
------
Balance, December 31........................................ $2,988
======
</TABLE>
42
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Retained Interest in Loan Securitizations
Activity in retained interest in loan securitizations was as follows for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------------------------
Beginning Bond Cash Discount Valuation Ending
Balance Amount Received Accretion(2) Allowance Balance
--------- ------- -------- ------------ --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
1994-A.................. $ 1,599 $ -- $ (541) $ 223 $ -- $ 1,281
1995-A.................. 876 -- (241) 119 -- 754
1996-A.................. 6,626 -- (430) -- -- 6,196
1996-B.................. 331 -- -- -- -- 331
1997-A.................. 344 -- -- 35 -- 379
1997-B.................. 306 -- -- 32 -- 338
1997-C.................. 266 -- -- 29 -- 295
1997-1(1)............... 11,704 -- (11,704) -- -- --
1998-A.................. -- 283 -- 22 -- 305
1998-B.................. -- 3,652 (386) 362 -- 3,628
1998-C.................. -- 5,796 (280) 290 -- 5,806
1998-1(1)............... -- 2,423 -- -- -- 2,423
1998-D.................. -- 9,666 -- -- -- 9,666
Valuation Allowance..... (400) -- -- -- (1,050) (1,450)
------- ------- -------- ------ ------- -------
Totals................ $21,652 $21,820 $(13,582) $1,112 $(1,050) $29,952
======= ======= ======== ====== ======= =======
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------------------------
Beginning Bond Cash Discount Valuation Ending
Balance Amount Received Accretion(2) Allowance Balance
--------- ------- -------- ------------ --------- -------
(In thousands)
<S> <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 -- 6,626
1996-B.................. -- 331 -- -- -- 331
1997-A.................. -- 326 -- 18 -- 344
1997-B.................. -- 306 -- -- -- 306
1997-C.................. -- 266 -- -- -- 266
1997-1(1)............... -- 11,704 -- -- -- 11,704
Valuation Allowance..... -- -- -- -- (400) (400)
------- ------- -------- ------ ------- -------
Totals................ $ 9,686 $12,933 $ (1,732) $1,165 $ (400) $21,652
======= ======= ======== ====== ======= =======
</TABLE>
- --------
(1) Equipment Finance transaction.
(2) The weighted average discount rate on retained interests was 18.0% and
19.2% at December 31, 1998 and 1997, respectively.
(9) Acquisition
On April 1, 1998, the Company acquired substantially all of the assets and
assumed the liabilities of Bankers Mutual and Bankers Mutual Mortgage, Inc.
(together, Bankers). The acquisition was made pursuant to an Asset Purchase
Agreement dated March 9, 1998 by and among the Company, Bankers, and the
holders of the outstanding shares of Bankers. Bankers is a Federal National
Mortgage Association and Federal Home Loan Bank lender and servicer. The
purchase price paid for the assets consisted of the following: (i) payment by
the Company to Bankers of $61.5 million in cash, (ii) delivery of a promissory
note in the principal amount of
43
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$5.0 million, (iii) contingent cash payments of up to $30.0 million over three
years dependent upon the achievement of certain operating results, and (iv)
the Company's assumption of Bankers' liabilities.
The following table presents unaudited pro forma results of operations of
the Company for the years ended December 31, 1998 and 1997 as if the
acquisition of Bankers had been effective at the beginning of each year
presented. The unaudited pro forma summary of operations is intended for
informational purposes only and is not necessarily indicative of the future
operating results of the Company or of the operating results of the Company
that would have occurred had the Bankers acquisition been in effect for the
years presented.
Unaudited Pro Forma Combined Summary of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Gain on sale of loans and leases................... $ 41,730 $ 58,760
Interest income.................................... 56,223 30,705
Interest expense................................... (38,638) (23,873)
----------- -----------
Net interest income.............................. 17,585 6,832
Loan servicing income.............................. 20,611 12,291
Loss on transfer of loans to held for investment... (8,845) --
Other income (loss)................................ 832 750
----------- -----------
Total revenues................................... 71,913 78,633
----------- -----------
Expenses:
Personnel and commission........................... 29,069 24,969
General and administrative......................... 28,254 15,983
----------- -----------
Total expenses................................... 57,323 40,952
----------- -----------
Income before taxes and minority interest in
subsidiary........................................ 14,590 37,681
Minority interest in subsidiary.................... (8) --
Income taxes....................................... 5,839 15,826
----------- -----------
Net income....................................... $ 8,759 $ 21,855
=========== ===========
Basic and diluted earnings per share................. $ 0.30 $ 0.96
Weighted average shares outstanding:
Basic............................................ 28,716 22,670
Diluted.......................................... 28,976 22,670
</TABLE>
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>
44
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Servicing Rights
Activity in servicing rights for the years ended December 31, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
1998 1997
------- ------
(In thousands)
<S> <C> <C>
Balance, January 1........................................ $ 2,213 $ --
Originated................................................ 8,190 --
Purchased................................................. 6 2,213
Amortization.............................................. (2,291) --
Acquired as a result of Bankers acquisition............... 21,787 --
------- ------
Balance, December 31...................................... $29,905 $2,213
======= ======
</TABLE>
(11) Premises and Equipment
Premises and equipment consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997
------- ------
(In thousands)
<S> <C> <C>
Land...................................................... $ 30 $ --
Buildings................................................. 213 --
Furniture, fixtures and equipment......................... 6,945 2,359
Leasehold improvements.................................... 1,584 255
Construction in progress.................................. 1,128 453
------- ------
Total premises and equipment............................ 9,900 3,067
Accumulated depreciation and amortization................. (3,046) (549)
------- ------
Balance, December 31...................................... $ 6,854 $2,518
======= ======
</TABLE>
(12) Goodwill
Goodwill activity for the years ended December 31, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Balance, December 31, 1996.................................. $ 4,332
Purchase of Enterprise Financial Group.................... 408
Amortization.............................................. (425)
-------
Balance, December 31, 1997.................................. $ 4,315
Purchase of Bankers....................................... 35,260
Amortization.............................................. (2,222)
-------
Balance, December 31, 1998.................................. $37,353
=======
</TABLE>
(13) Hedging
As of December 31, 1998 and 1997, the Company had open positions of $50.5
million and $240.4 million, respectively, related to United States Treasury
futures contracts used to hedge loans and leases held for sale. At December
31, 1998 and 1997, the Company's deferred unrealized and realized net losses
on future contracts were $1.9 million and $5.0 million, respectively.
45
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Borrowings
Borrowings consisted of the following at December 31, 1998 and 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------- -------------------------------
Interest Commitment Principal Interest Commitment Principal
Warehouse Expiration Date Index Rate(7) Amount Outstanding Rate(7) Amount Outstanding
--------- ------------------ --------------------------- -------- ---------- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Credit Suisse December 31, 1999 One-month LIBOR plus 130 to 6.38% to $ 300,000 $122,356 7.32% to $300,000 127,249
First 150 basis points 6.58% 8.07%
Boston(1)(2).....
Morgan December 30, 1999 One-month LIBOR plus 150 to 6.58% to 300,000 -- 6.67% to 200,000 94,031
Stanley(1)....... 175 basis points 6.83% 7.27%
Banco August 31, 1999 One-month LIBOR plus 175 6.83% 50,000 34,669 7.32% 50,000 21,649
Santander(1)..... basis points
Sanwa Bank(1).... June 30, 1999 One-month LIBOR plus 160 6.68% 25,000 14,369 6.88% 25,000 4,506
basis points
Goldman Sachs April 30, 1999 One-month LIBOR plus 100 6.08% 100,000 46,989 -- -- --
Mortgage basis points
Company(1).......
Residential September 30, 1999 One-month LIBOR plus 100 6.08% 200,000 124,763 -- -- --
Funding basis points
Corporation(3)...
Bank of January 29, 1999 Fixed rate 1.00% 35,000 18,776 -- -- --
America(1)(4)....
Residential May 31, 1999 One-month LIBOR plus 225 7.33% 50,000 31,432 -- -- --
Funding basis points
Corporation(5)...
Other -- -- 90,409 -- -- 8,785
borrowings(6)....
---------- -------- -------- --------
Totals.......... $1,060,000 $483,763 $575,000 $256,220
========== ======== ======== ========
</TABLE>
- ----
(1) The above borrowings are collateralized by franchise loans and leases held
for sale and investment.
(2) The agreement with Credit Suisse First Boston requires the Company to
obtain a capital infusion of $100 million by May 31, 1999.
(3) The Residential Funding Corporation line of credit was temporarily
increased from $100,000 to $200,000 until January 31,1999.
(4) The Bank of America line of credit has a fixed interest rate of 1.00% when
the Company maintains minimum deposit requirements.
(5) The Residential Funding Corporation line of credit is collateralized by
the Company's loan servicing portfolio.
(6) Other borrowings includes $55.3 million of sold loans that have been
accounted for as a financing at December 31, 1998, $29.0 million dollars
of loans that have been financed through FMAC Star Fund, LLP as of
December 31, 1998, a $6.1 million repurchase agreement with Deutsche Bank
as of December 31, 1998 for which the 1998-CE and 1998-CF certificates
were pledged as collateral, a $6.4 million sale of loans that has been
accounted for as a financing at December 31, 1997, and a $2.4 million loan
from Goldman Sachs Mortgage Company to finance a golf loan at December 31,
1997.
(7) The weighted average interest rate on borrowings was 6.96% and 8.23% at
December 31, 1998 and 1997, respectively.
46
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(15) Income Taxes
The provision for income taxes for the year ended December 31, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
1998 1997
------ -------
(In thousands)
<S> <C> <C>
Current:
Federal..................................................... $ 788 $ 609
State....................................................... 855 232
------ -------
1,643 841
------ -------
Deferred:
Federal..................................................... 3,551 10,665
State....................................................... 334 3,495
------ -------
3,885 14,160
------ -------
Total....................................................... $5,528 $15,001
====== =======
</TABLE>
Actual income taxes differ from the amount determined by applying the
statutory Federal rate of 34% and 35% for the year ended December 31, 1998 and
1997, respectively, as follows:
<TABLE>
<CAPTION>
1998 1997
------ -------
(In thousands)
<S> <C> <C>
Computed expected income
taxes.................... $4,698 $ 3,508
Income tax related to
conversion from LLC to C
Corporation.............. -- 10,997
State tax, net of federal
benefit.................. 785 736
Other..................... 45 (240)
------ -------
Total................... $5,528 $15,001
====== =======
</TABLE>
The components of the deferred tax liability at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Depreciation......................................... $ 202 $ --
Provision for losses................................. 808 317
State taxes.......................................... 1,546 1,220
-------- --------
2,556 1,537
Deferred tax liabilities:
Deferred loan fees................................... (718) (1,002)
Depreciation......................................... -- (4)
Gain on sale of loans and leases deferred for income
tax purposes........................................ (19,410) (14,691)
Other................................................ (473) --
-------- --------
(20,601) (15,697)
-------- --------
Total net deferred tax liability....................... $(18,045) $(14,160)
======== ========
</TABLE>
47
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Employee Benefits Plans
Profit Sharing and 401(k) Plans
The Company's employees participate in a 401(k) plan sponsored by FMAC.
Under the plan, employees may elect to enroll at the beginning of any month
after which the employee has been employed for at least six months. Employees
may contribute up to 14% of their salaries. The Company will match 50% of the
employee's contribution up to 4% of the employee's compensation. The Company
may also make a discretionary contribution on an annual basis to be allocated
to participants who have contributed in excess of 4% of their compensation.
The allocation is based upon a formula set by the plan and requires a five-
year vesting period. All forfeitures are allocated to the remaining
participants in the plan. Distribution of vested benefits to a terminated
participant in the 401(k) is made in accordance with the contribution
allocation form signed by the employee. Distributions are made, by election of
the participant, in either certificates of deposit, FMAC common stock, stock
or bond mutual funds, or a combination thereof.
The Company contributed approximately $323,000, $163,000, and $88,000 to the
401(k) plan for the years ended December 31, 1998, 1997 and 1996,
respectively.
1997 Stock Option, Deferred Stock and Restricted Stock Plan
The Company's Board of Directors has adopted and its stockholders have
approved the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the
"Stock Option Plan"), which provides for the grant of qualified incentive
stock options ("ISOs") that meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), stock options not so
qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation
rights and limited stock appreciation rights awards ("Awards"). The Stock
Option Plan is administered by a committee of directors appointed by the Board
of Directors (the "Committee"). ISOs may be granted to the officers and key
employees of the Company or any of its subsidiaries. The exercise price for
any option granted under the Stock Option Plan may not be less than 100% (or
110% in the case of ISOs granted to an employee who is deemed to own in excess
of 10% of the outstanding Common Stock) of the fair market value of the shares
of Common Stock at the time the option is granted. The purpose of the Stock
Option Plan is to provide a means of performance-based compensation in order
to attract and retain qualified personnel and to provide an incentive to those
whose job performance affects the Company. The effective date of the Stock
Option Plan was November 18, 1997, the effective date of the Company's initial
public offering.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 10% of the shares of the Company's Common
Stock outstanding after the Company's initial public offering, but not less
than 2,700,000 shares. The number of shares reserved for issuance under the
Stock Option Plan is subject to anti-dilution provisions for stock splits,
stock dividends and similar events. If an option granted under the Stock
Option Plan expires or terminates, or an Award is forfeited or canceled, the
shares subject to any unexercised portion of such option or Award will again
become available for the issuance of further options or Awards under the Stock
Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Committee's approval, in connection with the
exercise of stock options granted under the Stock Option Plan. If shares of
Common Stock are pledged as collateral for such indebtedness, such shares may
be returned to the Company in satisfaction of such indebtedness. If so
returned, such shares shall again be available for issuance in connection with
future stock options and Awards under the Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan ten years after the effective date
of the Offering. Options vest under this plan at 20% on each anniversary from
the date of grant for the Company's officers and employees and 100% on the
first anniversary of the date of grant for the Company's directors.
48
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1998 and 1997, stock option activity and
prices were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
Weighted Weighted
Average Average
Number of Option Number of Option
Shares Price Shares Price
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding, January 1..... 1,464,500 $17.71 -- $ --
Options granted.................... 3,118,755 $15.11 1,466,300 $17.71
Options exercised.................. -- $ -- -- $ --
Options canceled................... (2,204,158) $19.82 (1,800) $18.00
---------- ---------
Options outstanding, December 31... 2,379,097 $12.35 1,464,500 $17.71
========== =========
Options exercisable................ 266,000 $17.84 -- $ --
</TABLE>
The Company adopted the disclosure requirements of SFAS 123 and continues to
measure its employee stock-based compensation arrangements under the
provisions of APB 25. Accordingly, no compensation expense has been recognized
for the stock option plan. Had compensation expense for the Companys stock
option plan been determined based on the fair value at the grant date for
awards in 1998 and 1997 consistent with provisions of SFAS 123, the Company's
net income and income per share would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1998 1997
----------------------
(In thousands,
except per share data)
<S> <C> <C>
Net income:
As reported........................................ $ 8,291 $ 20,720
Pro forma.......................................... $ 254 $ 20,280
Basic and diluted income per share:
As reported........................................ $ 0.29 $ 0.91
Pro forma.......................................... $ 0.01 $ 0.89
</TABLE>
The weighted average fair value at date of grant of options granted during
1998 and 1997 was $9.19 and $13.73 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1998 1997
------ ------
<S> <C> <C>
Expected life (years)....................................... 5.57 5.00
Interest rate(1)............................................ 4.55% 5.73%
Volatility.................................................. 96.30% 52.11%
Dividend yield.............................................. 0.00% 0.00%
</TABLE>
- --------
(1) Based on 5-year U.S. Treasury rate at the dates indicated.
49
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Transactions with Affiliates
In the ordinary course of business, the Company has conducted transactions
with affiliated companies. In the opinion of management all such transactions
are conducted at "arm's length" in accordance with the Company's policies.
The Company purchased $15.5 million in franchise loans at par value from
Southern Pacific Bank ("SPB") on June 26, 1997. These franchise loans were
purchased at par value by SPB from the Company in 1996 and 1997. The Company
purchased $45.1 million in franchise loans at par value from SPB on December
24, 1997. These franchise loans were purchased at par value by SPB from the
Company in 1996 and 1997. On December 30, 1997, the Company sold $1.8 million
of participation loans at par value to SPB.
The Company also has a master purchase and sale agreement with SPB to
originate loans for SPB under mutual agreement, and subject to SPB
underwriting each such loan prior to sale of such loans. Under this agreement,
the Company also has the ability to repurchase loans, under mutual agreement
with SPB. There is no specified commitment by either party, and each
individual sale is negotiated separately as to pricing. This agreement has no
expiration date. For the year ended December 31, 1998 and 1997, loans
originated for SPB (and not repurchased), totaled approximately $26.5 million
and $7.4 million, respectively.
No cash was paid to SPB for interest for the years ended December 31, 1998
and 1997 and approximately $10.3 million was paid in the year ended December
31, 1996.
(18) Equity Investments
The Company periodically makes equity investments which are included in
other assets. These investments represent interests in limited liability
companies ("LLCs") or limited partnerships (collectively, the "investees")
which were formed to own and operate restaurant franchise concepts, and are
owned through investor LLCs, the members of which consist of the Company, the
Company's chief executive officer, and ICII. Member ownership percentages in
the investor LLCs range from 50% to 100% for the Company, from 0% to 0.33% for
the chief executive officer, and from 0.67% to 50% for ICII. The Company
consolidates all investor LLCs in which it has a greater than 50% ownership
interest because the terms of the operating agreements vest control with the
Company. The investor LLC in which the Company has a 50% ownership interest is
accounted for under the equity method because the operating agreement provides
for joint and equal management by the Company and the other 50% owner. These
investments are accounted for by the Company under the equity method as the
terms of the investment agreements do not place the investor LLCs or the
Company in a position of control over the investees. A director of the Company
owns 60% of one investee and the investor LLC owns 40%; such investor LLC is
owned 50% by the Company and 50% by ICII.
50
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Companys activity in equity investments was as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
--------------------------------------------------------------------
Additional
Investment FMAC Investment Beginning Additional Income Ending
Date Interest Obligation Balance Investment (Loss) Balance
---------- -------- ---------- --------- ---------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Summerwood Ltd.......... 6/10/96 40.0% $ -- $1,285 $2,000 $ (834) $2,451
Restaurant Management of
Carolina(1)............ 11/19/96 32.5 2,000 889 -- (889) --
Family Eats............. 12/20/96 49.0 -- 1,644 1,550 (174) 3,020
Atlanta Franchise
Development(2)......... 3/24/97 39.6 -- 144 -- (144) --
Hot 'N Now.............. 4/16/97 20.0 -- 6 -- 139 145
Pate Restaurant
Enterprises(3)......... 4/29/97 40.0 -- (63) -- 63 --
Park Meadows(4)......... 6/26/97 30.0 -- -- -- -- --
------ ------ ------ ------- ------
Totals................ $2,000 $3,905 $3,550 $(1,839) $5,616
====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
-------------------------------------------------------------------
Additional
Investment FMAC Investment Beginning Additional Income Ending
Date Interest Obligation Balance Investment (Loss) Balance
---------- -------- ---------- --------- ---------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Summerwood Ltd.......... 6/10/96 40.0% $2,000 $2,000 $-- $(715) $1,285
Restaurant Management of
Carolina............... 11/19/96 32.5 2,000 933 -- (44) 889
Family Eats............. 12/20/96 49.0 1,550 1,450 -- 194 1,644
Atlanta Franchise
Development............ 3/24/97 39.6 -- -- -- 144 144
Hot 'N Now.............. 4/16/97 20.0 -- -- -- 6 6
Pate Restaurant
Enterprises............ 4/29/97 40.0 -- -- -- (63) (63)
Park Meadows............ 6/26/97 30.0 -- -- -- -- --
------ ------ ---- ----- ------
Totals................ $5,550 $4,383 $-- $(478) $3,905
====== ====== ==== ===== ======
</TABLE>
- --------
(1) Loss on Restaurant Management of Carolina includes a writedown of
$624,000.
(2) Additional losses of $700,000 have been posted as an allowance against the
related loan included in loans held for investment.
(3) Additional losses of $133,000 have been posted as an allowance against the
related loan included in loans held for investment.
(4) Additional losses of $445,000 have been posted as an allowance against the
related loan included in loans held for sale.
The December 31, 1998, unpaid balances of loans to the investees made by the
Company total approximately $263.6 million, of which $227.3 million has been
securitized and sold and $25.8 million is included in loans held for sale and
$10.5 million is included in loans held for investment. The December 31, 1997,
unpaid balances of loans to the investees made by the Company total
approximately $110.2 million. As of December 31, 1997, $96.3 million of these
loans had been securitized and sold and $13.9 million was included in loans
held for sale. At December 31, 1998 and 1997, none of these loans were past
due.
51
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(19) Fair Value of Financial Instruments
Financial instruments include interest bearing deposits, securities
available for sale, loans and leases held for sale, loans and leases held for
investment, futures contracts used to hedge loans held for sale, retained
interest in loan securitizations, and borrowings. Fair value estimates are
subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. In addition, the fair value estimates
presented do not include the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
The carrying values of interest-bearing deposits approximate fair value due
to their short-term nature. The fair value of securities available for sale
was based on discounted cash flow. The fair value of loans and leases held for
sale and loans and leases held for investment are estimated by discounting
expected future cash flows at an estimated market rate of interest. A market
rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted
for credit risk and the Company's cost to administer such loans. The fair
value of retained interest in loan securitizations was estimated by
discounting future cash flows using rates that an unaffiliated third-party
purchaser would require on instruments with similar terms and remaining
maturities. The fair values of borrowings were estimated by discounting cash
flows at interest rates for debt having similar credit ratings and maturities.
The estimated fair values of the Company's financial instruments as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Interest bearing deposits........ $ 5,757 $ 5,757 $ 2,744 $ 2,744
Securities available for sale.... 16,818 16,818 22,870 22,870
Loans and leases held for sale... 325,727 325,727 343,200 343,200
Loans and leases held for
investment...................... 162,928 162,928 -- --
Retained interest in loan
securitizations................. 29,952 29,952 21,652 21,652
Liabilities:
Borrowings....................... 483,763 483,763 256,220 256,220
Off Balance Sheet:
Deferred hedge losses............ 1,906 1,906 5,025 5,025
</TABLE>
(20) Commitments and Contingencies
Leases
Minimum rental commitments under noncancelable operating leases at December
31, 1998, were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1999............................................................... $ 2,917
2000............................................................... 2,921
2001............................................................... 2,770
2002............................................................... 2,386
2003............................................................... 2,229
Thereafter......................................................... 3,423
-------
Total............................................................ $16,646
=======
</TABLE>
52
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the year ended December 31, 1998, 1997 and 1996 was $2.2
million, $0.6 million, and $0.3 million, respectively.
Litigation
The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among
others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on
November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an
accounting, monetary and punitive damages for alleged breach of contract,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing and fraud arising from an alleged business relationship. On March 25,
1999, the Superior Court entered an order in connection with the action, a
portion of which was stayed on March 29, 1999. The stayed portion included,
among other things, an order to dissolve Franchise Mortgage Acceptance Co.,
L.P. ("FMACLP"), a partnership of which FLRT, Inc. is the general partner and
which was formed in 1991 to originate and securitize franchise loans, and an
order requiring an accounting by FLRT, Inc. and Mr. Knyal to the limited
partners of FMACLP. The unstayed portion of the order includes a finding,
among other things, that Mr. Knyal and FLRT, Inc. breached the FMACLP
partnership agreement and that the limited partners of FMACLP have a right to
a portion of the shares of the Company owned by FLRT, Inc. or Mr. Knyal, and
of the proceeds realized from any sale of FLRT, Inc.'s or Mr. Knyal's Company
shares after November 1997. The order also states that Mr. Knyal and FLRT,
Inc. may not dispose of or encumber any shares of the Company held by either
of them, and that Mr. Knyal may not dispose of or encumber any shares of FLRT,
Inc. held by him. Counsel to the predecessor entity and Mr. Knyal and counsel
to FMACLP, which is not a party to the action, believe that the action is
without merit, and counsel to the predecessor entity and Mr. Knyal intend to
appeal the order and intend to vigorously defend the action. Although the
Company is not a party to the action, Imperial Credit Industries, Inc.
("ICII"), Mr. Knyal and FLRT, Inc. have agreed to indemnify the Company
against any and all liability that the Company and its stockholders (other
than ICII, Mr. Knyal and FLRT, Inc.) may incur as a result of this lawsuit.
The Company has been named as a defendant in other legal actions, which
legal actions have arisen in the ordinary course of business, none of which
management believes to be material.
Loan Servicing
Related fiduciary funds held in trust for investors in non-interest bearing
accounts at unaffiliated financial institutions totaled approximately $6.4
million as of December 31, 1998. These funds are segregated in special bank
accounts and are held as deposits in such financial institutions. At December
31, 1998 and 1997, the Company serviced loans and leases of $5.1 billion and
$1.3 billion, respectively for affiliates and others.
Loan Commitments
As of December 31, 1998, the Company had open short-term lending commitments
amounting to approximately $70.1 million in process subject to credit
approval. There is no exposure to credit loss in this type of commitment until
the loans are funded. Interest rate risk is mitigated by the use of hedging
strategies applied to each loan at the time of funding.
53
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(21) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data are presented below by quarter for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31 September 30, June 30, March 31,
1998 1998 1998 1998
----------- ------------- -------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Gain (loss) on sale of loans
and leases................. $ (3,832) $ 4,320 $22,917 $16,741
Interest income............. 3,063 5,977 3,877 4,202
Loan servicing income....... 7,827 4,812 4,614 1,254
Insurance income............ 720 -- -- --
Loss on transfer of loans to
held for investment........ (8,845) -- -- --
Other income (loss)......... (633) 404 201 (42)
-------- ------- ------- -------
Total revenues............ (1,700) 15,513 31,609 22,155
Expenses:
Total operating expenses.... 16,222 13,292 14,534 9,718
-------- ------- ------- -------
Income (loss) before taxes and
minority interest in
subsidiary................... (17,922) 2,221 17,075 12,437
Minority interest in
subsidiary................... (63) (55) 110 --
Income taxes.................. (7,777) 956 7,126 5,223
-------- ------- ------- -------
Net income (loss)......... $(10,082) $ 1,320 $ 9,839 $ 7,214
======== ======= ======= =======
Basic and diluted income
(loss) per share............. $ (0.35) $ 0.05 $ 0.34 $ 0.25
======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31 September 30, June 30, March 31,
1997 1997 1997 1997
----------- ------------- -------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Gain (loss) on sale of loans
and leases................. $11,619 $20,690 $19,821 $ (13)
Interest income............. 1,998 1,786 730 642
Loan servicing income....... 1,084 854 736 640
Other income (loss)......... 477 (588) -- --
------- ------- ------- -------
Total revenues............ 15,178 22,742 21,287 1,269
Expenses:
Total operating expenses.... 8,122 8,040 4,533 4,060
------- ------- ------- -------
Income (loss) before taxes.... 7,056 14,702 16,754 (2,791)
Income taxes.................. 15,001 -- -- --
------- ------- ------- -------
Net income (loss)......... $(7,945) $14,702 $16,754 $(2,791)
======= ======= ======= =======
Basic and diluted income
(loss) per share............. $ (0.32) $ 0.67 $ 0.77 $ (0.13)
======= ======= ======= =======
</TABLE>
(22) Subsequent Event
Restricted Stock Grant, Options Grant and Options Cancellation
On February 16, 1999, the Company's Board of Directors approved a grant of
1,197,000 shares of restricted stock and options to purchase 380,000 shares of
stock at $7.00 per share to the Company's employees. The closing stock price
on the date of grant was $6.31. Along with these stock grants, the Board of
Directors approved the cancellation of options to purchase 1,240,500 shares of
stock at a weighted average share price of
54
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$11.30. The restricted stock grants vest over a period of eight years and the
vesting is accelerated contingent upon the occurrence of certain events.
Deferred compensation expense of $7.6 million will be amortized over the
vesting period of the stock award. Upon stockholder approval of change of
control of the Company, the stock awards will immediately vest and any
unamortized deferred compensation will be charged to operations. All of these
grants and cancellations were transacted in accordance with the Companys 1997
Stock Option, Deferred Stock and Restricted Stock Plan.
(23) Subsequent Event
Merger with Bay View Capital Corporation
On March 10, 1999, Bay View Capital Corporation ("Bay View") and the Company
executed an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") providing for the merger of the Company and Bay View. Following
the merger, the Company will operate as a subsidiary of Bay View Bank ("BVB").
In accordance with the terms of the Merger Agreement, Bay View will acquire
all of the common stock of the Company for consideration currently valued at
approximately $309 million. Each share of the Company's stock will be entitled
to receive, at the election of the holder, either $10.25 in cash or .5125
shares of Bay View's common stock. The Company's stockholder elections are
subject to the aggregate number of shares of the Company's common stock to be
exchanged for Bay View's common stock being equal to 60% of the number of
shares of the Company's common stock outstanding immediately prior to closing
the transaction and no Company stockholder owning more than 9.99% of Bay
View's common stock, on a pro forma basis.
The Merger Agreement also provides for an additional payment of up to $30
million by Bay View in connection with the earn-out provision of the Company's
April 1998 acquisition of Bankers.
Simultaneous with the merger, Bay View will contribute substantially all of
the assets and liabilities of the Company to a newly organized and wholly
owned subsidiary of BVB. The transaction is expected to close during the third
quarter of 1999, subject to approval by both the Company's stockholders and
Bay View's shareholders and subject to necessary regulatory approvals.
In connection with the merger, BVB has purchased $209.3 million in
commercial loans from the Company and additionally may purchase up to another
$150 million in commercial loans through the end of the first quarter of 1999.
BVB may also purchase additional levels of commercial loans through the
closing date of the transaction.
A Voting Agreement has been executed with one of the Company's stockholders,
ICII, which provides that this stockholder may not sell its Company stock
during the term of the Merger Agreement and will vote in favor of the merger.
In conjunction with the merger, Wayne Knyal will have an ownership interest in
Bay View in excess of 5% and will hold a seat on Bay View's Board of
Directors.
Consummation of the merger is subject to a number of closing conditions,
including approval by both Bay View's shareholders and the Company's
stockholders, obtaining necessary regulatory approvals and other closing
conditions.
55
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
The Board of Directors of the Company consists of eight members. Directors
are elected annually to serve until the next annual meeting and until their,
successors are elected and qualified. As of February 28, 1999, the Company's
Board of Directors consisted of the following individuals:
Name, Age and Year First Principal Occupation, Business Experience
Became a Director and Other Directorships
- ------------------------ -----------------------------------------
H. Wayne Snavely*
(58).................... Mr. Snavely has been Chairman of the Board of the
1997 Company since its inception. He was a Manager of
Franchise Mortgage LLC from its inception in June
1995 until November 1997, at which time the Company
was formed to succeed to the business of Franchise
Mortgage LLC. Mr. Snavely has been Chairman of the
Board and Chief Executive Officer of Imperial Credit
Industries, Inc. ("ICII") since December 1991 and
President of ICII since February 1996. From 1986 to
February 1992, Mr. Snavely served as Executive Vice
President of Imperial Bancorp and Imperial Bank. From
1983 through 1986, Mr. Snavely was employed as Chief
Financial Officer of Imperial Bancorp and Imperial
Bank. Mr. Snavely served as a Director of Imperial
Bank from 1975 to 1983. Mr. Snavely is also Chairman
of the Board of Imperial Credit Commercial Mortgage
Holdings, Inc.
Wayne L. "Buz" Knyal
(52).................... Mr. Knyal has been the President, Chief Executive
1997 Officer and a Director of the Company since its
inception and was the President, Chief Executive
Officer and a Manager of Franchise Mortgage LLC from
its inception in June 1995 until November 1997. Prior
to founding the Company's predecessor in 1991, Mr.
Knyal founded and owned CBI Insurance Services, Inc.
and concurrently served as President of CBI Mortgage
Company, a residential mortgage banker. From 1968 to
1980, Mr. Knyal was an Executive Vice President of
Krupp/Taylor Advertising and served clients in the
fast food industry. Mr. Knyal is also a Director of
New Riders, Inc., a restaurant company.
Ronald V. Davis**
(52).................... Mr. Davis has been a Director of the Company since
1997 its inception and was a Manager of Franchise Mortgage
LLC from its inception in June 1995 until November
1997. Mr. Davis is the Chairman of the Board of Davis
Capital LLC, a private equity investment company.
From 1980 to 1994, Mr. Davis was the President and
Chief Executive Officer of the Perrier Group of
America, Inc. Mr. Davis is also a Director of
Celestial Seasonings and Staff Leasing, Inc. Mr.
Davis is on the Foundation Board and Chairman of
Guardian Scholars at California State University,
Fullerton.
56
<PAGE>
Name, Age and Year First Principal Occupation, Business Experience
Became a Director and Other Directorships
- ------------------------ --------------------------------------------------
Perry A. Lerner**
(56).................... Mr. Lerner has been a Director of the Company since
1997 its inception and was a Manager of Franchise Mortgage
LLC from its inception in June 1995 until November
1997. He has been a principal in the investment firm
of Crown Capital Group, Inc. since 1996. Mr. Lerner
was with the law firm of O'Melveny & Myers from 1982
through 1996, having been a partner with the firm
from 1984 through 1996. Mr. Lerner was an Attorney-
Advisor of the International Tax Counsel of the
United States Treasury Department from 1973 to 1976.
Mr. Lerner is also a Director of ICII and Vista 2000,
Inc.
Richard J. Loughlin*
(66).................... Mr. Loughlin has been a Director of the Company since
1997 its inception. Mr. Loughlin co-founded Century 21
Real Estate of Northern California, Inc. in 1973 and
served as President and Regional Director until 1981,
when he was appointed President and Chief Executive
Officer of Century 21 Real Estate Corporation. He
held that position until November 1995 when he
retired and was appointed President Emeritus to serve
as a consultant and spokesperson. Mr. Loughlin is a
Director of Inspectech Corporation. Mr. Loughlin's
prior affiliations include Chairman of Western
Relocation Management, Inc., Chairman of the Real
Estate National Networks, Director of the National
Easter Seal Society, Director of the Housing
Roundtable, Director of the National Association of
Realtors and member of the Policy Advisory Board of
the Center for Real Estate and Urban Economics for
the University of California at Berkeley. Mr.
Loughlin is a founding partner of the National
Football League's Carolina Panthers.
John E. Martin* (53).... Mr. Martin has been a Director of the Company since
1997 its inception. Mr. Martin served as Chairman and
Chief Executive Officer of Taco Bell Worldwide from
1983 through October 1986, and then as Chairman and
Chief Executive Officer of PepsiCo Casual Restaurants
until June of 1997. In November 1997, Mr. Martin was
appointed Chairman of Diedrich Coffee. In addition,
he became Chairman of Easyriders, Inc. in September
1998 and is the majority partner and Chairman of
Culinary Adventures Incorporated formed in November
of 1998. Mr. Martin also serves as a Director of The
Good Guys! Inc. and Williams-Sonoma, Inc.
Michael L. Matkins**
(53).................... Mr. Matkins has been a Director of the Company since
1997 its inception and was a manager of Franchise Mortgage
LLC from its inception in June 1995 until November
1997. Mr. Matkins is a founding partner with the law
firm of Allen, Matkins, Leck, Gamble & Mallory LLP.
Mr. Matkins has advised institutional investors,
lenders, property owners and developers in all
aspects of purchase, sale, financing, leasing and
construction of real estate properties ranging from
office and retail to recreational and mixed-use
projects for more than 25 years. He has also
represented institutional investors in the
restructuring of investments in real property as well
as institutional developers in acquiring, entitling
and developing master-planned communities. Mr.,
Matkins is a member of the Executive Committee of the
Urban Land Institute.
57
<PAGE>
Name, Age and Year First Principal Occupation, Business Experience
Became a Director and Other Directorships
- ------------------------ ------------------------------------------
Brad S. Plantiko*(43)... Mr. Plantiko became a Director of the Company in
1998 November 1998, replacing G. Louis Graziadio, III
after his resignation. Mr. Plantiko has been
Executive Vice President and Chief Financial Officer
of ICII since July 1998. From October 1980 to July
1998, Mr. Plantiko was with KPMG LLP where he was
partner in-charge of its finance company services for
the western United States. Mr. Plantiko has over 17
years of experience serving banks, thrifts, mortgage
banks and finance companies. He serves on the Board
of Visitors of the Graduate School of Business
Management at Pepperdine University and holds a
Bachelor's of Science Degree from California State
University, Long Beach. Mr. Plantiko is a member of
the American Institute and the California Society of
Certified Public Accountants.
- --------
* Member of Compensation Committee* Member of Compensation Committee
** Member of Audit Committee
The business and affairs of the Company are managed under the direction of
its Board of Directors. Directors are elected annually to serve until the next
Annual Meeting of stockholders and until their successors are elected and
qualified. Directors will not be able to stand for reelection unless they have
attended at least 75% of Board meetings and committee meetings, as applicable.
No family relationships exist between any of the executive officers or
directors of the Company.
Executive Officers
The following table sets forth certain information as of February 28, 1999
with respect to each person who is an executive officer of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Wayne L. "Buz" Knyal.. 52 President, Chief Executive Officer and Director
Kevin T. Burke........ 41 Executive Vice President, Capital Markets
Thomas P. Kaplan...... 33 Executive Vice President, Corporate Development
Peter A. Mozer........ 36 Executive Vice President and Chief Credit Officer
Executive Vice President and Chief Financial
Raedelle Walker....... 44 Officer
</TABLE>
All officers of the Company are elected or appointed by the Board of
Directors and shall hold office until their successors are elected or
appointed, except that the Board of Directors may remove any officer at
anytime at its discretion.
Wayne L. "Buz" Knyal is President, Chief Executive Officer, Director, and
founder of the Company. Prior to founding the Company's predecessor in 1991,
Mr. Knyal founded and owned CBI Insurance Services, Inc. and concurrently
served as President of CBI Mortgage Company, a residential mortgage banker.
From 1968 to 1980, Mr. Knyal was an Executive Vice President of Krupp/Taylor
Advertising and served clients in the fast food industry. Mr. Knyal is a
Director of New Riders, Inc., a restaurant company.
Kevin T. Burke, Executive Vice President, Capital Markets, has been with the
Company since March of 1997. Mr. Burke served as a consultant for Koll Real
Estate from November 1996 to February 1997. Mr. Burke was a Managing Director
at McNeil Capital from July 1996 to November 1996 and the Director of Treasury
Operations at ICN Pharmaceuticals, Inc. from July 1995 to June 1996. From
September 1994 to June 1995, Mr. Burke was a Vice President at Merrill Lynch.
From August 1993 to September 1994, Mr. Burke was a Senior Vice President at
O'Connor & Company, an investment banking firm.
Thomas P. Kaplan, Executive Vice President, Corporate Development, has been
with the Company since October of 1997. Mr. Kaplan was a Senior Vice President
in the Asset-Backed Finance group at Greenwich Capital Markets from September
1995 to October 1997. From 1990 to 1995, Mr. Kaplan was a Director at Credit
Suisse First Boston, where he was a trader for the firm's subordinate
mortgage- and asset-backed securities and asset-backed whole loan positions.
58
<PAGE>
Peter A. Mozer, Executive Vice President and Chief Credit Officer, has been
with the Company since May 1998. From July 1994 until May 1998, Mr. Mozer
served as a Vice President within the Fixed Income division at Morgan Stanley
Dean Witter & Company working as a mortgage portfolio manager and within the
third-party financing group. From June 1989 until July 1994, Mr. Mozer served
as Deputy Treasurer of Dime Savings Bank, a New York savings and loan.
Raedelle Walker, Executive Vice President and Chief Financial Officer, has
been with the Company since February of 1997. From 1995 until joining the
Company, Ms. Walker served as the Chief Financial Officer of Southern Pacific
Bank. From 1985 to 1995, Ms. Walker served as a Senior Manager with KPMG LLP,
providing accounting and consulting services to clients in the firm's
financial services practice. Ms. Walker is a Certified Public Accountant.
Item 11. EXECUTIVE COMPENSATION
Annual and Long-Term Compensation
The following table sets forth information concerning the annual and long-
term compensation earned by the Company's Chief Executive Officer and the
other four most highly compensated executive officers of the Company (the
"Named Executive Officers") for services rendered by them in all capacities in
which they served the Company during 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Securities
----------------------------- Underlying
Name Year Salary ($) Bonus ($) Options (#)
---- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Wayne L. Buz Knyal(1)... 1998 $400,000 $ 82,000 $ 8,892(2) --
1997 100,000 665,292 13,940(3) --
1996 100,000 150,000 47,709(4) --
Kevin T. Burke.......... 1998 199,833 100,000 -- 75,000
1997 133,830 205,000 -- 75,000
1996 -- -- -- --
Thomas P. Kaplan........ 1998 225,000 100,000 -- --
1997 51,202 375,000 -- 150,000
1996 -- -- -- --
Peter A. Mozer(5)....... 1998 126,538 200,000 -- 100,000
1997 -- -- -- --
1996 -- -- -- --
Raedelle Walker......... 1998 160,000 100,000 3,200(6) --
1997 122,436 161,000 7,940(7) 55,000
1996 -- -- -- --
</TABLE>
- --------
(1) Does not include distributions received by FLRT, Inc. as a member of
Franchise Mortgage Acceptance Company LLC.
(2) Represents a car allowance of $5,692 and a $3,200 contribution by the
Company under its 401(k) Plan.
(3) Represents a car allowance of $6,000 and a $7,940 contribution by the
Company under its 401(k) Plan.
(4) Represents a car allowance of $6,000, reimbursement of living expenses of
$36,000 and a $5,709 contribution by the Company under its 401(k) Plan.
(5) Peter A. Mozer joined the Company in May 1998 and serves as Executive Vice
President and Chief Credit Officer at an annual base salary of $200,000.
(6) Represents a $3,200 contribution by the Company under its 401(k) Plan.
(7) Represents a $7,940 contribution by the Company under its 401(k) Plan.
59
<PAGE>
Options Granted in 1998
The following table sets forth information with respect to grants of options
to purchase shares of the Company's Common Stock to the Named Executive
Officers during 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------
Potential Realized Value at
Number of Percent of Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to Exercise or for Option Term($)(4)
Options Employees in Base Price Expiration ---------------------------
Name Granted(#)(1) Fiscal Year(%)(2) ($/Share) Date(3) 5% 10%
- ---- ------------- ----------------- ----------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Wayne L. "Buz" Knyal.... -- N/A N/A N/A N/A N/A
Kevin T. Burke.......... 150,000 4.81% $11.00 10/01/2004 $561,158 $1,273,076
Thomas P. Kaplan........ -- N/A N/A N/A N/A N/A
Peter A. Mozer.......... 100,000 3.21 11.00 10/01/2004 374,105 848,717
Raedelle Walker......... -- N/A N/A N/A N/A N/A
</TABLE>
- --------
(1) Each of these options vests 20% per year on each anniversary date of the
date of grant.
(2) Based upon 3,118,755 options granted in 1998 under the 1997 Stock Option,
Deferred Stock and Restricted Stock Plan.
(3) Such stock options expire six years from the date of grant or earlier upon
termination of employment.
(4) The dollar amounts set forth are the result of calculations of the 5% and
10% rates set forth in the Securities and Exchange Commission's rules
regarding the disclosure of executive compensation, and therefore are not
intended to forecast possible future appreciation of the Company's Common
Stock.
1998 Year-End Option Values
The following table sets forth the number and dollar value of unexercised
options held by the Named Executive Officers at December 31, 1998:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at Fiscal Year-End(#) At Fiscal Year-End($)
------------------------------ ---------------------------
Name Exercisable / Unexercisable Exercisable / Unexercisable
---- ------------------------------ ---------------------------
<S> <C> <C>
Wayne L. "Buz" Knyal.... 0 / 0 N/A
Kevin T. Burke.......... 0 / 150,000 0 / 0
Thomas P. Kaplan........ 30,000 / 120,000 0 / 0
Peter A. Mozer.......... 0 / 100,000 0 / 0
Raedelle Walker......... 14,000 / 41,000 0 / 0
</TABLE>
60
<PAGE>
1998 Option Repricings
The following table sets forth information with respect to the repricing of
options to purchase shares of the Company's Common Stock to the Named
Executive Officers during 1998:
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Length of
Original
Number of Option Term
Securities Market Price Remaining at
Underlying of Stock at Exercise Price Date of
Options/SARs Time of at Time of New Repricing or
Repriced or Repricing or Repricing or Exercise Amendment
Name Date Amended (#) Amendment($) Amendment($) Price ($) (Months)
- ---- ------- ------------ ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Wayne L. "Buz" Knyal.... N/A N/A N/A N/A N/A N/A
Kevin T. Burke.......... 10/1/98 50,000 5.28 18.00 11.00 61.5
Kevin T. Burke.......... 10/1/98 25,000 5.28 16.32 11.00 63.0
Kevin T. Burke.......... 10/1/98 75,000 5.28 22.86 11.00 67.5
Thomas P. Kaplan........ N/A N/A N/A N/A N/A N/A
Peter A. Mozer.......... 10/1/98 100,000 5.28 22.86 11.00 67.5
Raedelle Walker......... N/A N/A N/A N/A N/A N/A
</TABLE>
Employment Agreement
In November 1997, the Company and Mr. Knyal entered into a five-year
employment agreement terminating on October 31, 2002 pursuant to which Mr.
Knyal agreed to act as the President and Chief Executive Officer of the
Company for an annual base salary of $400,000, an annual bonus of not less
than $82,000 and not to exceed $682,000, and customary benefits. Commencing
June 1998, an amount of $82,000 per year will be deducted from the bonus
payable to Mr. Knyal in order to repay certain amounts owed by Mr. Knyal to
the Company, pursuant to the terms of a promissory note. If Mr. Knyal's
employment is terminated by the Company without cause or by Mr. Knyal for good
reason (meaning the Company's uncured breach of any material term of the
agreement, the removal of Mr. Knyal as Chief Executive Officer (other than for
cause) or any diminution by the Company of Mr. Knyal's powers, duties or
authority), Mr. Knyal would be paid his annual salary and provided with all
customary benefits through October 31, 2002. In addition, in such event, FLRT,
Inc. a stockholder of the Company of which Mr. Knyal owns an 85% beneficial
interest, would have registration rights similar to those granted to ICII
under the ICII Registration Rights Agreement described herein under "Certain
Transactions," without volume limitations.
Compensation of Directors Compensation of Directors
Directors who are not employees of the Company receive a fee of $12,000 per
year, payable quarterly, $1,000 for each board meeting attended. Non-employee
directors who are members of the Compensation and Audit Committees receive a
fee of $1,000 for each committee meeting attended. Directors are reimbursed
reasonable expenses incurred in attending Board and committee meetings per
meeting attended. Concurrently upon the initial public offering of the
Company's Common Stock in November 1997, the Company granted each non-employee
director options to purchase 30,000 shares of Common Stock under the Company's
1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option
Plan") at an exercise price of $18.00 per share. Such options vest 100% upon
the first anniversary of the date of grant.
Compensation Committee Interlocks and Insider Participation
Mr. Lerner is currently a member of ICII's compensation committee. None of
the executive officers of the Company has served on the Board of Directors or
on the compensation committee of any other entity which had officers who
served on the Company's Board of Directors or on the Company's Compensation
Committee.
61
<PAGE>
Profit Sharing and 401(k) Plans
The Company's employees participate in a 401(k) plan sponsored by FMAC.
Under the plan, employees may elect to enroll at the beginning of any month
after which the employee has been employed for at least six months. Employees
may contribute up to 14% of their salaries. The Company will match 50% of the
employee's contribution up to 4% of the employee's compensation. The Company
may also make a discretionary contribution on an annual basis to be allocated
to participants who have contributed in excess of 4% of their compensation.
The allocation is based upon a formula set by the plan and requires a five-
year vesting period. All forfeitures are allocated to the remaining
participants in the plan. Distribution of vested benefits to a terminated
participant in the 401(k) is made in accordance with the contribution
allocation form signed by the employee. Distributions are made, by election of
the participant, in either certificates of deposit, FMAC common stock, stock
or bond mutual funds, or a combination thereof.
The Company contributed approximately $323,000, $163,000, and $88,000 to the
401(k) plan for the years ended December 31, 1998, 1997 and 1996,
respectively.
1997 Stock Option, Deferred Stock and Restricted Stock Plan
The Company's Board of Directors has adopted and its stockholders have
approved the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the
"Stock Option Plan"), which provides for the grant of qualified incentive
stock options ("ISOs") that meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), stock options not so
qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation
rights and limited stock appreciation rights awards ("Awards"). The Stock
Option Plan is administered by a committee of directors appointed by the Board
of Directors (the "Committee"). ISOs may be granted to the officers and key
employees of the Company or any of its subsidiaries. The exercise price for
any option granted under the Stock Option Plan may not be less than 100% (or
110% in the case of ISOs granted to an employee who is deemed to own in excess
of 10% of the outstanding Common Stock) of the fair market value of the shares
of Common Stock at the time the option is granted. The purpose of the Stock
Option Plan is to provide a means of performance-based compensation in order
to attract and retain qualified personnel and to provide an incentive to those
whose job performance affects the Company. The effective date of the Stock
Option Plan was November 18, 1997, the effective date of the Companys initial
public offering.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 10% of the shares of the Company's Common
Stock outstanding after the Company's initial public offering, but not less
than 2,700,000 shares. The number of shares reserved for issuance under the
Stock Option Plan is subject to anti-dilution provisions for stock splits,
stock dividends and similar events. If an option granted under the Stock
Option Plan expires or terminates, or an Award is forfeited or canceled, the
shares subject to any unexercised portion of such option or Award will again
become available for the issuance of further options or Awards under the Stock
Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Committee's approval, in connection with the
exercise of stock options granted under the Stock Option Plan. If shares of
Common Stock are pledged as collateral for such indebtedness, such shares may
be returned to the Company in satisfaction of such indebtedness. If so
returned, such shares shall again be available for issuance in connection with
future stock options and Awards under the Stock Option Plan. Unless otherwise
determined by the Committee, upon stockholder approval of change of control of
the Company, the stock awards will immediately vest and any unamortized
deferred compensation will be charged to operations.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan ten years after the effective date
of the Offering. Options vest under this plan at 20% on each anniversary from
the date of grant for the Company's officers and employees and 100% on the
first anniversary of the date of grant for the Company's directors.
62
<PAGE>
On February 16, 1999, the Company's Board of Directors approved a grant of
1,197,000 shares of restricted stock and options to purchase 380,000 shares of
stock at $7.00 per share to the Company's employees. The closing stock price
on the date of grant was $6.31. The Board of Directors also approved the
cancellation of options to purchase 1,240,500 shares of stock at a weighted
average share price of $11.30. The restricted stock grants vest over a period
of eight years and the vesting is accelerated contingent upon the occurrence
of certain events. Deferred compensation expense of $8.4 million will be
amortized over the vesting period of the stock award. All of these grants and
cancellations were transacted in accordance with the Company's 1997 Stock
Option, Deferred Stock and Restricted Stock Plan.
Report of the Compensation Committee
The Company's Compensation Committee was established in November 1997 and
currently consists of Messrs. Snavely, Loughlin, Martin and Plantiko. The
Compensation Committee sets and administers the policies governing the
Company's compensation program, including incentive and stock option plans.
The Company participates in studies and surveys of compensation practices for
comparable companies in similar industries. The Committee considers these
studies and surveys in determining base salary, bonus and long-term stock-
based compensation. The Committee discusses and considers executive
compensation matters and makes its decisions, subject to review by the
Company's Board of Directors.
The Company's compensation policies are structured to link the compensation
of the Chief Executive Officer, Executive Vice Presidents and other executives
of the Company with corporate performance. Through the establishment of short-
and long-term compensation programs, the Company has attempted to align the
financial interests of its executives with the results of the Company's
performance, which is designed to put the Company in a competitive position
regarding executive compensation and also to ensure corporate performance,
which will enhance stockholder value.
The Company's executive compensation philosophy is to set base salary at a
market rate and then to provide performance-based variable compensation which
allows total compensation to fluctuate according to the Company's earnings as
well as value received by stockholders. Targeted levels of executive
compensation are set at levels that the Committee believes to be consistent
with others in the Company's industry, with such compensation increasingly
weighted towards programs contingent upon the Company's level of annual and
long-term performance. As a result, the Named Executive Officers actual
compensation levels in any particular year may be above or below those of the
Company's competitors, depending on the Company's performance.
Section 162(m) of the Internal Revenue Code limits the Company's tax
deduction for compensation paid to any one of the five most highly compensated
executive officers in excess of $1 million, unless such compensation was based
upon attainment of pre-established, objective performance goals, the
Compensation Committee consists only of outside directors as defined for
purposes of Section 162(m), and such performance-based compensation has been
approved by stockholders. All of the members of the Compensation Committee
qualify as outside directors. The Committee will review the Company's existing
compensation program to determine the deductibility of future compensation
paid or awarded pursuant thereto and will seek guidance with respect to
changes to the Company's existing compensation program that will enable the
Company to continue to attract and retain key individuals while optimizing the
deductibility to the Company of amounts paid as compensation.
The Committee believes that its overall executive compensation program
should be successful in providing competitive compensation appropriate to
attract and retain highly qualified executives and also to encourage increased
performance from the executive group which will create added stockholder
value.
COMPENSATION COMMITTEE:
H. Wayne Snavely
Richard J. Loughlin
John E. Martin
Brad S. Plantiko
63
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following Performance Graph compares the Company's cumulative return on
its Common Stock (i.e., change in price plus reinvestment of dividends) with
the Standard & Poor's 500 Index and a peer group index of companies engaged in
the Company's business focus (consisting of Conti Financial Corp., Franchise
Finance Corporation of America, Captec Net Lease Realty and Sirrom Capital
Corp.) (the "Peer Group Index"). The Performance Graph assumes that $100 was
invested on November 18, 1997 (the date of the Company's initial public
offering) in each of the Common Stock, the Standard & Poor's 500 Index and the
Peer Group Index. The stock price performance shown in this graph is not
necessarily indicative of and is not intended to suggest future stock price
performance.
64
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders and Ownership by Management
As of February 28, 1999, there were 28,760,557 shares of the Company's
Common Stock outstanding. The following table sets forth certain information
known to the Company with respect to the beneficial ownership of the Company's
Common Stock as of February 28, 1999, by (i) each director of the Company,
(ii) each of the Named Executive Officers of the Company, (iii) each person
who is known to the Company to beneficially own more than 5% of the Company's
Common Stock, and (iv) all directors and executive officers of the Company as
a group:
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent
Beneficial Owner Ownership of Class
---------------- ---------- --------
<S> <C> <C>
Imperial Credit Industries, Inc.(l)..................... 11,023,492 38.3%
FLRT, Inc. (2).......................................... 7,004,633 24.4
Wellington Management Company, LLP(3)................... 2,047,750 7.1
Wayne L. Knyal(4)(5).................................... 5,953,938 20.7
Kevin T. Burke(4)....................................... -- --
Thomas P. Kaplan(4)..................................... -- --
Peter A. Mozer(4)....................................... -- --
Raedelle Walker(4)...................................... -- --
H. Wayne Snavely(4)..................................... -- --
Ronald V. Davis(4)...................................... -- --
Perry A. Lerner(4)...................................... -- --
Richard J. Loughlin(4).................................. -- --
John E. Martin(4)....................................... -- --
Michael L. Matkins(4)................................... -- --
Brad S. Plantiko(4)..................................... -- --
All Directors and Officers as a Group(12 Persons)(4).... 5,953,938 20.7
</TABLE>
- --------
(1) Imperial Credit Industries, Inc. may be reached at 23550 Hawthorne
Boulevard, Building One, Suite 110, Torrance, California, 90505.
(2) FLRT, Inc. may be reached through the Company at 1888 Century Park East,
Third Floor, Los Angeles, California, 90067.
(3) Based upon Schedule 13G filed with the Securities and Exchange Commission
on February 8, 1999. Wellington Management Company, LLP ("WMC"), in its
capacity as investment advisor, may be deemed to beneficially own the
Company's shares which are held of record by clients of WMC. WMC may be
reached at 75 State Street, Boston, Massachusetts 02109.
(4) Franchise Mortgage Acceptance Company and each of such persons may be
reached at 1888 Century Park East, Third Floor, Los Angeles, California,
90067.
(5) Wayne L. Knyal is deemed to beneficially own 85% of the shares of the
Company's Common Stock held by FLRT, Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
Company's Directors, officers and persons holding more than 10% of the
Company's Common Stock are required to file forms reporting their beneficial
ownership of the Company's Common Stock and subsequent changes in that
ownership with the Securities and Exchange Commission. Such persons are also
required to furnish the Company copies of the forms so filed. Based solely
upon a review of copies of such forms filed with the Company, the Company
believes that during 1998 its officers and Directors complied with the Section
16(a) filing requirements.
65
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Arrangements with ICII and its Affiliates
The Company and ICII have entered into agreements for the purpose of
defining their ongoing relationships. The agreements have been developed in
the context of a parent/subsidiary relationship and therefore are not the
result of arm's-length negotiations between independent parties. It is the
intention of the Company and ICII that such agreements and the transactions
provided for therein, taken as a whole, are fair to both parties, while
continuing certain mutually beneficial arrangements. However, there can be no
assurance that each of such agreements, or the transactions provided for
therein, have been effected on terms at least as favorable to the Company as
could have been obtained from unaffiliated parties.
Additional or modified arrangements and transactions may be entered into by
the Company, ICII and their respective subsidiaries. Any such future
arrangements and transactions will be determined through negotiation between
the Company and ICII, and it is possible that conflicts of interest will be
involved. All transactions by and between the Company and ICII must be
approved by a majority of the disinterested directors of the Company.
Following is a summary of certain arrangements and transactions between the
Company and ICII. Unless the context indicates otherwise, all references
herein to the Company refer to Franchise Mortgage Acceptance Company and its
predecessor entities, including Franchise Mortgage LLC.
Services Agreement
The Company and ICII entered into a services agreement (the "Services
Agreement") effective as of November 18, 1997, the date of the Company's
initial public offering (the "Effective Date") under which ICII provides human
resource administration, securitization capability and certain accounting
functions to the Company.
ICII charges fees for each of the above services which it provides under the
Services Agreement at a rate equal to $100 per month per employee employed by
the Company at the end of each month. The Services Agreement has an initial
term that ends one year from the Effective Date and is renewable annually
thereafter. The Company may terminate the Services Agreement, in whole or in
part, upon one month's written notice. As part of the services to be provided
under the Services Agreement, ICII provides the Company, with insurance
coverage and self insurance programs, including health insurance. The charge
to the Company for insurance coverage is based upon a pro rata portion of the
costs to ICII of the various policies. ICII's total insurance expense is
allocated among ICII and its subsidiaries based on the number of employees at
each entity. The expense is annualized and charged to each entity monthly.
Management believes that the terms of the Services Agreement are as favorable
to the Company as could be obtained from independent third parties. The
Services Agreement has been terminated effective December 31, 1998.
ICII Registration Rights Agreement
The Company has entered into a registration rights agreement with ICII (the
"ICII Registration Rights Agreement") pursuant to which the Company has agreed
to file one or more registration statements under the Securities Act of 1933,
as amended, in the future for shares of the Company held by ICII, subject to
certain conditions set forth therein. Pursuant to the ICII Registration Rights
Agreement, the Company will use its reasonable efforts to cause such
registration statements to be kept continuously effective for the public sale
from time to time of the shares of the Company held by ICII. Also, under the
ICII Registration Rights Agreement, FLRT, Inc. has certain piggyback
registration rights with respect to a demand registration statement initiated
by ICII concerning shares of the Company's Common Stock held by ICII; provided
however than for a period of three years following the Effective Date, FLRT,
Inc. is limited in the amount of shares of the Company's Common Stock it can
sell to that amount authorized pursuant to Rule 144. Thereafter, or in the
event that Mr. Knyal's employment is terminated by the Company without cause
or by Mr. Knyal for good reason (as defined in his employment agreement),
FLRT, Inc. shall have registration rights similar to those granted to ICII
under the ICII Registration Rights Agreement without volume limitations.
66
<PAGE>
Transactions Involving Southern Pacific Bank
The Company purchased $15.5 million in franchise loans at par value from
Southern Pacific Bank ("SPB") on June 26, 1997. These franchise loans were
purchased at par value by SPB from the Company in 1996 and 1997. The Company
purchased $45.1 million in franchise loans at par value from SPB on December
24, 1997. These franchise loans were purchased at par value by SPB from the
Company in 1996 and 1997. On December 30, 1997, the Company sold $1.8 million
of participation loans at par value to SPB.
The Company also has a master purchase and sale agreement with SPB to
originate loans for SPB under mutual agreement, and subject to SPB
underwriting each such loan prior to sale of such loans. Under this agreement,
the Company also has the ability to repurchase loans, under mutual agreement
with SPB. There is no specified commitment by either party, and each
individual sale is negotiated separately as to pricing. This agreement has no
expiration date. For the year ended December 31, 1998 and 1997, loans
originated for SPB (and not repurchased), totaled approximately $26.5 million
and $7.4 million, respectively.
No cash was paid to SPB for interest for the years ended December 31, 1998
and 1997 and approximately $10.3 million was paid in the year ended December
31, 1996.
ICII Options Granted to Executive Officers
In December 1995 and July 1996, ICH granted Raedelle A. Walker incentive
stock options to purchase an aggregate of 30,000 shares of ICII common stock.
The exercise price of all such options was the fair market value of ICII
common stock at the time of the grants and the number of shares subject to
options granted by ICII as described herein have been adjusted to reflect
stock splits.
Borrowings and Guarantees
In consideration of ICII's guarantee of the Company's warehouse lines of
credit during the year ended December 31, 1998, the Company paid to ICII
monthly a fee equal to 15 basis points on the Company's outstanding commitment
amounts covered by such guarantee. For the years ended December 31, 1998, 1997
and 1996, the amounts of such guarantee fees were $459,000, $555,000 and $0,
respectively.
Equity Investments
Franchise Equity Fund L.L.C. The Company, ICII and Mr. Knyal are parties to
an Operating Agreement, dated April 1, 1996, pursuant to which such parties
organized Franchise Equity Fund L.L.C., a Delaware limited liability company
("FEF LLC"), for the purpose of making equity investments in franchisees of
PepsiCo related businesses. The Company owns a 99% membership interest in, and
is the manager of FEF LLC. ICH and Mr. Knyal own 0.67% and 0.33% membership
interests, respectively, in FEF LLC.
In June 1996, FEF LLC, Mr. Knyal and certain other investors entered into an
agreement to organize five limited partnerships in New Jersey and Pennsylvania
(the "Summerwood Partnerships") for the purpose of acquiring and operating 68
Taco Bell and KFC restaurant units. FEF LLC made a loan of $2.0 million to the
Summerwood Partnerships in exchange for warrants to purchase a 40% limited
partner interest in each of the Summerwood Partnerships. In December 1996, FEF
LLC exercised the warrants in full, the $2.0 million loan was converted into
capital contributions and FEF LLC acquired a 40% limited partner interest in
each of the Summerwood Partnerships. During the year ended December 31, 1998,
the general partner of the Summerwood Partnerships required FEF LLC to make
additional capital contributions to the Summerwood Partnerships in the
aggregate amount of $2.0 million. The other investors have certain rights to
purchase FEF LLC's limited partner interest after the fifth anniversary of the
acquisition, and FEF LLC has certain rights to sell its limited partner
interest to the other investors after the seventh anniversary of the
acquisition. In addition, pursuant to the terms of the agreement, Mr. Knyal is
required to personally guarantee any obligations of the Summerwood
Partnerships that the limited partners of such partnerships are required to
personally guarantee. In connection with the acquisition, the Company made 58
loans to the Summerwood Partnerships in the initial aggregate amount of $40.6
million. The loans bear interest at annual rates ranging from 8.55% to 10.80%
and are due on dates ranging from July 2001 to July 2011. At December 31,
1998, the outstanding balance of such loans was $37.1 million.
67
<PAGE>
In November 1996, FEF LLC and certain other investors organized Restaurant
Management of Carolina, L.P., a Delaware limited partnership ("Restaurant
Management LP"), for the purpose of acquiring and operating 37 Taco Bell
restaurant units. FEF LLC made an initial capital contribution of $3.0 million
($2.0 million of which has been repaid to FEF LLC) to, and owns a 32.5%
limited partner interest in, Restaurant Management LP. Under certain
circumstances, the general partner may require FEF LLC to make additional
capital contributions to Restaurant Management LP in the aggregate amount of
$2.0 million until the third anniversary of the acquisition. The purchase
price for the units was funded in part through 27 loans from the Company in
the initial aggregate amount of $23.2 million. The loans bear interest at
annual rates ranging from 8.55% to 10.00% and are due on dates ranging from
June 1998 to January 2012. At December 31, 1998, the outstanding balance of
such loans was $21.9 million. The other investors have certain rights to
purchase FEF LLC's limited partner interest after the fifth anniversary of the
acquisition, and FEF LLC has certain rights to sell its limited partner
interest to the other investors after the seventh anniversary of the
acquisition. In addition, in March and August 1996, prior to the acquisition,
the Company made 15 loans to certain affiliates of Restaurant Management LP in
the initial aggregate amount of $9.9 million. The loans bear interest at
annual rates ranging from 10.25% to 10.45% and are due on dates ranging from
September 2008 to September 2011. At December 31, 1998, the outstanding
balance of such loans was $9.1 million.
In December 1996, FEF LLC and certain other investors organized Family Eats
Limited Partnership, a Delaware limited partnership ("Family Eats LP"), for
the purpose of acquiring and operating 19 Taco Bell units. FEF LLC made a
capital contribution of $1.45 million to, and owns a 49% limited partner
interest in, Family Eats LP. During the year ended December 31, 1998, the
general partner required FEF LLC to make additional capital contributions to
Family Eats LP in the aggregate amount of $1.55 million. The purchase price
for the units was funded in part through 18 loans from Franchise Mortgage LLC
in the initial aggregate amount of $10.1 million. The loans bear interest at
annual rates ranging from 9.66% to 10.25% and are due on dates ranging from
July 1998 to January 2012. At December 31, 1998, the outstanding balance of
such loans was $10.0 million. The other investors have certain rights to
purchase FEF LLC's limited partner interest after the fifth anniversary of the
acquisition, and FEF LLC has certain rights to sell its limited partner
interest to the other investors after the seventh anniversary of the
acquisition.
CVB, LLC. The Company, ICII and Mr. Knyal are parties to an Operating
Agreement, dated February 6, 1997, pursuant to which such parties organized
CVB, L.L.C., a Delaware limited liability company ("CVB LLC"), for the purpose
of making equity investments in franchisees of Church's Chicken units. The
Company owns a 99% membership interest in, and is the manager of, CVB LLC.
ICII and Knyal own 0.67% and 0.33% membership interests, respectively, in CVB
LLC.
In April 1997, CVB LLC and another investor organized Atlanta Franchise
Development Company, LLC, a Delaware limited liability company ("Atlanta
Franchise LLC"), for the purpose of acquiring and operating 100 Church's
Chicken units. CVB LLC made a nominal capital contribution to, and owns a 40%
membership interest in, Atlanta Franchise LLC. The purchase price for the
units was funded in part through 72 loans from Franchise Mortgage LLC in the
initial aggregate amount of $25.1 million. The loans bear interest at an
annual rate of 11.72% and are due in April 2012. At December 31, 1998, the
outstanding balance of such loans was $23.7 million.
The other investor has certain rights to purchase CVB LLC's membership
interest after the fifth anniversary of the acquisition, and CVB LLC has
certain rights to sell its membership interest to Atlanta Franchise LLC after
the seventh anniversary of the acquisition.
HNN Equity, LLC. The Company and ICII are parties to an Operating Agreement,
dated March 27, 1997, pursuant to which such parties organized HNN Equity,
L.L.C., a Delaware limited liability company ("HNN Equity LLC"), for the
purpose of making an equity investment in Hot N Now, L.L.C., a Delaware
limited liability company ("Hot 'N Now LLC"). The Company and ICII each own a
50% membership interest in, and share joint management of, HNN Equity LLC. In
April 1997, HNN Equity LLC and Davis/HNN, L.L.C. ("Davis/HNN LLC"), a limited
liability company principally owned by Ronald V. Davis, a director of the
Company, organized Hot 'N Now LLC under the laws of the state of Delaware for
the purpose of acquiring all franchisor and tradename rights to a quick
service restaurant concept named "Hot 'N Now" as well as acquiring and
operating 36 Not 'N Now units. HNN Equity LLC owns a 40% membership interest
in Hot 'N Now LLC.
68
<PAGE>
Davis/HNN LLC owns a 60% membership interest in, and is the manager of, Hot
'N Now LLC. The purchase price for the Units was $2.0 million and was funded
through a capital contribution of $ 1.5 million by Davis/HNN LLC and a loan of
$600,000 from Davis/HNN LLC. The loan bears interest at an annual rate of 8%
and is payable out of distributable cash from the operations of Hot 'N Now
LLC. Mr. Davis is the Chief Executive Officer of Hot 'N Now LLC and Davis/HNN
LLC is entitled to an annual base fee of $60,000 per year in his capacity as
manager of Hot 'N Now LLC. The manager may require the members to make
additional capital contributions to Hot 'N Now LLC to satisfy the obligations
of Hot 'N Now LLC to make rent payments under real estate leases for 19 units.
Such obligations are also guaranteed by ICII.
PRG Equity,L.LC. On April 14,1997, the Company organized PRG Equity, L.L.C.,
a Delaware limited liability company ("PRG Equity LLC"), for the purpose of
making an equity investment in Pate Restaurant Enterprises, Ltd., a Florida
limited partnership which owns and operates seven Hardee's units ("Pate
Restaurant LP"). The Company owns all of the membership interests in and
manages PRG Equity LLC. In April 1997, Franchise Mortgage LLC made seven loans
to Pate Restaurant LP in the initial aggregate amount of $3.5 million. In
connection with such loans, PRG Equity LLC acquired a 40% limited partner
interest in Pate Restaurant LP. The loans bear interest at annual rates
ranging from 9.94% to 10.79% and are due on dates ranging from November 1998
to May 2012. At December 31, 1998, the outstanding balance of such loans was
$3.3 million. The other investors in Pate Restaurant LP have certain rights to
purchase PRG Equity LLC's limited partner interest after the seventh
anniversary of the acquisition, and PRG Equity LLC has certain rights to sell
its limited partner interest to the other investors after the seventh
anniversary of the acquisition.
Certain Loans
In connection with the purchase of certain of the assets and liabilities of
the FMAC Division from Greenwich in June 1995, the Company assumed as a
receivable a $410,000 unsecured non-interest bearing note made by Mr. Knyal in
favor of Greenwich. The note was restructured in August 1997 to be payable in
five annual installments of $82,000 commencing June 30, 1998 out of the bonus
due to Mr. Knyal under his employment agreement with the Company.
On July 15, 1997 the Company loaned Kevin T. Burke $170,000 for the purposes
of assisting Mr. Burke to purchase a home. The loan is evidenced by a
promissory note executed by Mr. Burke in favor of the Company that bears
interest at an annual rate of 8%. On March 17, 1998, this loan was increased
to $320,000 and is payable in one installment on June 30, 1999.
On October 24, 1997 the Company loaned Donald Hakes $150,000 for the
purposes of assisting Mr. Hakes to purchase a home. The loan is evidenced by a
promissory note executed by Mr. Hakes in favor of the Company that bears
interest at an annual rate of 8%. On March 17, 1998, this loan was increased
to $170,000 and is payable in one installment on June 30, 1999.
Other Matters
Michael L. Matkins, a Director of the Company, is a partner in the law firm
Allen, Matkins, Leck, Gamble & Mallory LLP, which provides legal services to
the Company.
69
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
3.3* Form of Articles of Incorporation of the Company.
3.4* Form of Bylaws of the Company.
4.1* Form of Specimen Common Stock Certificate.
10.1* Form of 1997 Stock Option, Deferred Stock and Restricted Stock Plan
and Form of Option Agreement.
10.2* Form of Employment Agreement dated August 26, 1997 by and between
the Company and Wayne L. Knyal.
10.3** Form of Asset Purchase Agreement dated March 9, 1998 by and among
the Company and Bankers Mutual and Bankers Mutual Mortgage, Inc.
10.4*** Form of Agreement and Plan of Merger and Reorganization dated March
10, 1999, by and between the Company and Bay View Capital
Corporation.
10.5*** Form of Voting Agreement dated March 10, 1999, between the Company
and Bay View Capital Corporation.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to, and all such Exhibits have the corresponding
Exhibit number filed as part of, the Company's Registration Statement on
Form S-1 (Commission File No. 333-34481) and Amendments No. 1, 2, and 3
filed with the SEC on August 27, 1997, October 10, 1997, October 24, 1997,
and November 6, 1997, respectively.
** Incorporated by reference to Form 8-K filed with the SEC on April 13,1998.
*** Incorporated by reference to Form 8-K filed with the SEC on March 12, 1999.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Franchise Mortgage Acceptance
Company
By /s/ Wayne L. Knyal
_____________________________________
Wayne L. Knyal
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Wayne L. Knyal President, Chief Executive March 31, 1999
____________________________________ Officer and Director
Wayne L. Knyal (Principal Executive
Officer)
/s/ Raedelle A. Walker Executive Vice President and March 31, 1999
____________________________________ Chief Financial Officer
Raedelle A. Walker (Principal Financial
Officer and Principal
Accounting Officer)
/s/ H. Wayne Snavely Chairman of the Board March 31, 1999
____________________________________
H. Wayne Snavely
/s/ Ronald V. Davis Director March 31, 1999
____________________________________
Ronald V. Davis
/s/ Perry A. Lerner Director March 31, 1999
____________________________________
Perry A. Lerner
/s/ Richard J. Loughlin Director March 31, 1999
____________________________________
Richard J. Loughlin
/s/ John E. Martin Director March 31, 1999
____________________________________
John E. Martin
/s/ Michael L. Matkins Director March 31, 1999
____________________________________
Michael L. Matkins
/s/ Brad S. Plantiko Director March 31, 1999
____________________________________
Brad S. Plantiko
</TABLE>
71
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Franchise Mortgage Acceptance Company:
We consent to incorporation by reference in the registration statement (No.
333-74375) on Form S-8 of Franchise Mortgage Acceptance Company of our report
dated January 19, 1999, except as to notes 22, 23, and 20 to the consolidated
financial statements, which are as of February 16, 1999, March 10, 1999, and
March 29, 1999, respectively, relating to the consolidated balance sheets of
Franchise Mortgage Acceptance Company as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' or members'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998, which report appears in the December 31, 1998, annual report
on Form 10-K of Franchise Mortgage Acceptance Company.
KPMG LLP
Los Angeles, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 39,182 10,079
<SECURITIES> 46,770 44,522
<RECEIVABLES> 491,242 345,958
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 577,194 400,559
<PP&E> 9,900 3,066
<DEPRECIATION> (3,046) (548)
<TOTAL-ASSETS> 676,314 422,232
<CURRENT-LIABILITIES> 511,564 269,650
<BONDS> 0 0
0 0
0 0
<COMMON> 29 29
<OTHER-SE> 146,684 138,393
<TOTAL-LIABILITY-AND-EQUITY> 676,314 422,232
<SALES> 67,577 60,476
<TOTAL-REVENUES> 67,577 60,476
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 53,766 24,755
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 13,819 35,721
<INCOME-TAX> 5,528 15,001
<INCOME-CONTINUING> 8,291 20,720
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,291 20,720
<EPS-PRIMARY> 0.29 0.91
<EPS-DILUTED> 0.29 0.91
</TABLE>
