UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER: 333-22141-03
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
CALIFORNIA 061-429737
------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2049 Century Park East, Suite 350, Los Angeles, California 90067
(310) 229-2600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Class Shares Outstanding at November 14, 1997
----- ---------------------------------------
Not Applicable Not Applicable
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
FORM 10-Q
TABLE OF CONTENTS
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PART 1 - FINANCIAL INFORMATION Page
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ITEM 1 FINANCIAL STATEMENTS
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Balance Sheets September 30, 1997 and December 31, 1996...................................... 2
Statements of Operations Three and nine months ended September 30, 1997 and 1996............. 3
Statements of Cash Flows Nine months ended September 30, 1997 and 1996....................... 4
Statement of Changes in Members' Equity Nine months ended September 30, 1997................. 5
Notes to Financial Statements................................................................. 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 9
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PART II OTHER INFORMATION
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ITEMS 1-6 NOT APPLICABLE
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SIGNATURES.................................................................................... 15
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FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
1
ITEM 1. FINANCIAL STATEMENTS
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1996
-------- -------- --------
ASSETS
------
Cash......................................................... $ -- $ -- $ --
Interest bearing deposits.................................... 2,705 2,705 2,594
Securities available for sale................................ 2,496 2,496 39,349
Loans and leases held for sale............................... 210,862 210,862 98,915
Retained interest in loan securitizations.................... 7,041 7,041 6,908
Premises and equipment, net.................................. 2,196 2,196 1,162
Goodwill..................................................... 4,430 4,430 4,332
Receivable from Imperial Credit Industries, Inc.............. 10,431 10,431 --
Accrued interest receivable.................................. 1,575 1,575 560
Other assets................................................. 5,993 5,993 6,356
-------- -------- --------
Total assets............................................ $247,729 $247,729 $160,176
======== ======== ========
LIABILITIES AND MEMBERS' EQUITY
- -------------------------------
Book overdraft............................................... $ 1,138 $ 1,138 $ 171
Payable to Imperial Credit Industries, Inc................... 3,000 -- 17,728
Borrowings................................................... 201,818 201,818 125,240
Deferred income taxes........................................ 11,115 -- --
Accrued interest payable..................................... 738 738 148
Other liabilities............................................ 9,022 7,235 2,432
-------- -------- --------
Total liabilities....................................... 226,831 210,929 145,719
-------- -------- --------
Members' equity:
Members' capital............................................. -- 5,792 5,792
Preferred stock, $.01 par value; 10,000,000 shares
authorized, none issued and outstanding actual or
pro forma................................................. -- -- --
Common stock, $.001 par value; 100,000,000 shares
authorized, none issued and outstanding actual;
21,887,500 shares issued and outstanding pro
forma..................................................... 22 -- --
Additional paid in capital................................... 20,876 -- --
Retained earnings............................................ -- 31,008 8,665
-------- -------- --------
Total members' equity..................................... 20,898 36,800 14,457
-------- -------- --------
Total liabilities and members' equity..................... $247,729 $247,729 $160,176
======== ======== ========
See accompanying notes to financial statements
2
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
REVENUE:
Gain on sale of loans and leases................ $20,690 $ 1,689 $40,497 $14,209
Interest income................................. 8,180 1,185 18,947 2,442
Interest expense................................ 6,394 1,260 15,788 2,215
------- ------- ------- -------
Net interest income (expense)................ 1,786 (75) 3,159 227
Loan servicing income........................... 854 478 2,230 1,127
Other income (loss)............................. (588) (64) (588) (1)
------- ------- ------- -------
Total other income........................... 266 414 1,642 1,126
------- ------- ------- -------
Total revenue............................. 22,742 2,028 45,298 15,562
------- ------- ------- -------
EXPENSES:
Personnel expense............................... 4,620 1,804 9,285 5,705
Professional services........................... 616 227 1,792 829
Travel.......................................... 499 190 1,022 392
Business promotion.............................. 292 121 641 319
Occupancy....................................... 167 72 444 194
Goodwill amortization........................... 141 80 310 331
General and administrative expense.............. 1,705 301 3,139 796
------- ------- ------- -------
Total expenses............................ 8,040 2,795 16,633 8,566
------- ------- ------- -------
Net income (loss)............................... $14,702 $ (767) $28,665 $ 6,996
======= ======= ======= =======
PRO FORMA EARNINGS DATA:
Net income as reported.......................... 14,702 (767) 28,665 6,996
Pro forma income taxes.......................... 6,104 -- 12,039 2,938
------- ------- ------- -------
Pro forma net income (loss)..................... 8,598 (767) 16,626 4,058
======= ======= ======= =======
Pro forma net income (loss) per share........... 0.39 (0.04) 0.76 0.19
======= ======= ======= =======
SUPPLEMENTAL PRO FORMA EARNINGS:
Net income as reported.......................... 14,702 28,665
Establishment of deferred tax liability......... 11,115 12,902
------- -------
Supplemental pro forma net income............... 3,587 15,763
======= =======
Supplemental pro forma net income per share..... 0.16 0.72
======= =======
See accompanying notes to financial statements
3
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Cash flows from operating activities:
Net income.......................................................... $ 28,665 $ 6,996
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization....................................... 608 (122)
Loans and leases originated......................................... (510,821) (306,092)
Gain on sale of loans and leases.................................... (40,497) (14,209)
Loans and leases sold to affiliates and paid off.................... 27,875 299,565
Proceeds from loan and lease sales and securitizations.............. 411,496 174,848
Decrease (increase) in accrued interest receivable.................. (1,015) 731
Net change in other liabilities..................................... 5,393 (1,381)
Net change in other assets.......................................... 230 (2,038)
-------- --------
Net cash provided by (used in) operating activities................. (78,066) 158,298
-------- --------
Cash flows from investing activities:
Purchases of premises and equipment................................. (1,332) (628)
Increase in interest bearing deposits............................... (111) (2,034)
Purchase of securities available for sale........................... -- (47,837)
Sale of securities available for sale............................... 36,853 --
Purchase of other investments....................................... (408) --
-------- --------
Net cash provided by (used in) investing activities................. 35,002 (50,499)
-------- --------
Cash flows from financing activities:
Net change in receivable from Imperial Credit Industries, Inc....... (10,431) 1,045
Net change in payable to Imperial Credit Industries, Inc............ (17,728) 13,657
Increase (decrease) in borrowings................................... 76,578 (10,410)
Repayment of bonds.................................................. -- (111,995)
Member contributions (distributions)................................ (6,322) 70
-------- --------
Net cash provided by (used in) financing activities................. 42,097 (107,633)
-------- --------
Net change in cash.................................................. (967) 166
Book overdraft at beginning of period............................... (171) (445)
-------- --------
Book overdraft at end of period..................................... $ (1,138) $ (279)
======== ========
See accompanying notes to financial statements
4
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
TOTAL
MEMBERS' RETAINED MEMBERS'
CAPITAL EARNINGS EQUITY
------- -------- -------
Balance, December 31, 1996........................ $5,792 $ 8,665 $14,457
Tax Distribution--ICII -- (4,215) (4,215)
Tax Distribution--Knyal -- (2,107) (2,107)
Net income........................................ -- 28,665 28,665
------ ------- -------
Balance, September 30, 1997...................... $5,792 $31,008 $36,800
====== ======= =======
See accompanying notes to financial statements
5
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Franchise Mortgage Acceptance Company LLC's ("Company") predecessor, FLRT,
Inc. (formerly Franchise Mortgage Acceptance Corporation), was incorporated by
Wayne L. Knyal as a California corporation in April 1991 and was wholly owned by
him at that time. FLRT, Inc. and certain individuals formed a limited
partnership for the purpose of originating and securitizing franchise loans. As
the general partner of such limited partnership, FLRT, Inc. owned the sole
rights to service such loans (the "FLRT Servicing Contracts"). In March 1993,
Mr. Knyal entered into a joint venture with Greenwich Capital Financial
Products, Inc. ("Greenwich") pursuant to which Mr. Knyal became the president of
the Franchise Mortgage Acceptance Company division (the "FMAC Division") of
Greenwich. Between March 1993 and June 1995, the Company originated and
securitized franchise loans through the FMAC Division. However, FLRT, Inc.
retained all rights to the FLRT Servicing Contracts.
On June 30, 1995, Imperial Credit Industries, Inc. (ICII) acquired from
Greenwich certain assets of the FMAC Division, including all of Greenwich's
rights under certain servicing contracts entered into by the FMAC Division (the
"FMAC Servicing Contracts") and a $410 thousand obligation owed by Mr. Knyal to
Greenwich. The FMAC Servicing Contracts pertain to the servicing of franchise
loans that were previously securitized by Greenwich through the FMAC Division
and other franchise loans not yet securitized. Concurrent with the closing of
the transactions described above, ICII entered into an operating agreement with
Mr. Knyal for the formation of the Company. In connection with the acquisition,
the Company or its affiliates assumed certain liabilities related to the FMAC
Servicing Contracts and Greenwich agreed to act as the Company's exclusive agent
in connection with securitization of franchise loans for a period of 24 months.
The Company was formed to originate, securitize and service franchise
loans. Under the terms of the operating agreement, in exchange for a 66.7%
ownership interest in the Company, ICII was obligated to contribute to the
Company $1.3 million in cash and all of the assets purchased from Greenwich. In
exchange for a 33.3% ownership interest in the Company, Mr. Knyal caused his
FLRT, Inc. to contribute to the Company all of its rights under the FLRT
Servicing Contracts.
The Company has filed a registration statement relating to its initial
public offering of common stock. At the completion of such offering, the Company
will no longer be treated as a partnership for income tax purposes and its
income will become fully taxable. See Note 4.
Immediately prior to the public offering, the Company will merge into
Franchise Mortgage Acceptance Company. Franchise Mortgage Acceptance Company was
incorporated in August, 1997; it has not commenced operations and has no assets,
liabilities, or contingent liabilities. For accounting purposes, the merger will
be effected at historical cost and the historical financial statements of the
Company will become those of Franchise Mortgage Acceptance Company.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles and with the instructions to form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
6
In preparing the 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 sheets and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. Prior year's financial statements have been reclassified to conform
to the 1997 presentation.
3. FRANCHISE LOANS AND LEASES HELD FOR SALE
Franchise loans and leases held for sale are carried at the lower of
aggregate cost or market and consisted of the following at September 30, 1997
and December 31, 1996:
(In thousands) SEPTEMBER 30, DECEMBER 31,
------------- ------------
1997 1996
---- ----
Loans held for sale, net $187,705 $94,490
Equipment loans and leases 26,838 4,385
Net deferred loan fees.................................................. (1,461) (750)
Unearned lease income................................................... (3,946) (497)
Margin and deferred net losses on futures contracts used to hedge
loans and leases held for sale........................................ 1,726 1,287
-------- -------
$210,862 $98,915
======== =======
4. PRO FORMA INFORMATION
(a) Pro Forma Income Taxes
The Company has been treated as a partnership for federal and state income
tax purposes. Upon completion of the initial public offering discussed in Note
1, the Company will no longer be treated as a partnership for income tax
purposes and its income will be subject to federal and state income taxes. The
accompanying statements of operations for the three and nine months ended
September 30, 1997 and September 30, 1996, present pro forma income taxes and
net income reflecting the estimated income tax expense of the Company as if it
had been subject to normal federal and state income taxes for such periods.
If the Company had not been treated as a partnership for tax purposes on
September 30, 1997, a deferred income tax liability of approximately $11.1
million would have been recorded as a charge to earnings and a corresponding
decrease in retained earnings. The accompanying pro forma balance sheet as of
September 30, 1997, and the supplemental pro forma earnings data for the three
and nine months ended September 30, 1997, reflect the effect on retained
earnings and net income of establishing on September 30, 1997, the deferred tax
liabilities.
(b) Pro Forma Balance Sheet Information
The pro forma information presented in the accompanying balance sheet as of
September 30, 1997 reflects (i) the distribution of $3.0 million by the Company
to members of its previously taxed and undistributed retained earnings, which
amount is expected to be distributed at the closing date of the proposed initial
public offering, subject to certain limitations (for purposes of the pro forma
presentation, the distribution funds were obtained through short-term borrowings
from ICII), (ii) increases in the Company's deferred and current income tax
liabilities of $11.1 million and $1.8 million, respectively, as if the Company
was not treated as a partnership for tax purposes on September 30, 1997, (iii)
the reclassification of member's capital and retained earnings as paid-in
capital and common stock, and (iv) 21,887,500 shares issued and outstanding.
7
(c) Pro Forma Earnings Per Share Data
The pro forma and supplemental pro forma earnings per share data is based
upon 21,887,500 shares outstanding, such shares being those outstanding
immediately after termination of the Company's partnership status for income tax
purposes and prior to the initial public offering referred to in Note1. Stock
options which are expected to be issued upon the completion of the initial
public offering referred to in Note1 do not add incrementally to shares
outstanding because the option price per share is equal to the initial public
offering price.
5. CONTINGENCIES
The Company, among other subsidiaries of ICII, has jointly and severally
and fully and unconditionally guaranteed ICII's $200 million 9.875% senior notes
due January 15, 2007 and ICII's $70 liquidation amount of remarketed par
securities. Such guarantees will terminate upon the deconsolidation of the
Company in the financial statements of ICII, effective upon the closing of the
Company's initial public offering.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Franchise Mortgage Acceptance Company LLC is a specialty commercial finance
company engaged in the business of originating and servicing loans and equipment
leases to small businesses, with a primary focus on established national and
regional franchise concepts. 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 retail energy licensees (service stations, convenience stores, truck stops,
car washes, and quick lube businesses) and golf operating businesses (golf
courses and golf practice facilities). 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 believes its loan and lease products are
attractive investments to institutional investors because of the credit profile
of its 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 11 marketing offices in 9 states at September 30, 1997. From
the Company's inception through September 30, 1997, it funded approximately $1.4
billion in loans and leases, and at September 30, 1997, had a servicing
portfolio of $1.2 billion. The Company's loan and lease originations grew to
$484.3 million for the nine month period ended September 30, 1997 from $305.6
million for the comparable period in 1996. At September 30, 1997, the Company's
average initial loan balance was $0.7 million and the percentage of its loans
that were ninety days or more delinquent was 0.7%.
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 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, most
of whom are independent, multi-unit franchisees, 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.
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 and golf, through focused product development,
customer service and support. The Company forms specialized teams for each
sector to assess customer needs, 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,
9
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 lending to experienced
operators, its detailed industry knowledge, 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.
At September 30, 1997, the Company had only two loans, representing 0.7% of all
loans and leases held in the Company's servicing portfolio as of such date, 90
days or more delinquent and from its inception in April 1991 through September
30, 1997 had experienced no net charge-offs.
Efficient 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 it originates. Of the $38.8 million gain
on sale from securitizations recognized by the Company since January 1, 1997,
$38.1 million was comprised of cash received by the Company at the time of
securitization and not the present value of anticipated cash flows on retained
interests. 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 nine months ended September 30, 1997, the Company completed two
securitizations and three whole loan sales totaling $343.7 million and $28.1
million respectively. In all such transactions, the Company has retained the
right to service the securitized or sold loans.
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.
LOAN AND LEASE ORIGINATIONS
LENDING GROUPS
The Company's lending groups currently include Restaurant Finance, Retail
Energy Finance, Golf 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.
To date, the Company has expanded its lending activities to the following
sectors:
Restaurant Finance Group. The Restaurant Finance Group was organized in 1991 to
provide loans to national and regional franchise concepts such as Taco Bell,
Burger King, Hardee's, KFC, Wendy's, and Pizza Hut. In 1995, the Company began
making loans to casual dining concepts such as TGIF, Applebee's, Denny's, and
others. In 1996, the Company expanded the approved concepts to include strong
regional restaurants such as Carl's Jr., Church's Chicken, and Golden Corral.
As of September 30, 1997, the Restaurant Finance Group originated loans through
a network of ten offices in seven states. For the nine month period ended
September 30, 1997, this group originated $378.5 million of restaurant loans,
including loans to borrowers that represent franchise concepts such as Taco
Bell, Burger King, KFC, and Wendy's. From the date of formation through
September 30, 1997, the Restaurant Finance Group provided approximately $1.2
billion in financing.
Retail Energy Finance Group. The Retail Energy Finance Group was organized in
February 1997 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. Customers to date have
included major national operators of retail petroleum businesses as well as
major national chains such as Texaco, Chevron, and Arco. As of September 30,
1997, the Retail
10
Energy Finance Group originated loans through a network of seven offices in five
states. For the nine months ended September 30, 1997, this group originated
$94.4 million of energy loans including loans to borrowers that represent
petroleum companies such as Texaco, Shell, British Petroleum, and Exxon.
Golf Finance Group. The Golf Finance Group is part of the Company's Diversified
Products Group, which focuses on potential expansion into other sectors which
are not related to the restaurant or retail energy sectors. The Golf Finance
Group was organized in 1996 to provide loans to experienced owners and operators
of golf courses and golf facilities, such as driving ranges and other practice
facilities. For the nine months ended September 30, 1997, this group originated
$11.5 million in golf loans.
Equipment Finance Group. The Equipment Finance Group was organized in 1996 to
provide equipment financing to experienced owners and operators in those sectors
in which the Company operates. For the nine months ended September 30, 1997,
this group originated $26.5 million in equipment loans and leases.
Other Activities. The Diversified Products Group focuses on potential expansion
into other sectors which are not related to the Restaurant Finance or Retail
Energy Groups, such as golf finance, funeral service finance, and other areas
which the Company believes could be served by its financing activities. The
Company recently commenced initial marketing efforts in the funeral service
finance area.
LOAN AND LEASE SERVICING
The Company's Servicing Department is responsible for loan and lease
accounting, compliance monitoring and, as necessary, collections. As of
September 30, 1997, the Company serviced approximately 1,720 loans representing
approximately $1.2 billion in principal balances. Of this amount, $102.3
million were subserviced by the Company under a subservicing arrangement with
Southern Pacific Bank. The Company's servicing operations are located in
Greenwich, Connecticut.
EQUITY INVESTMENTS
The Company periodically makes passive unsecured equity investments in
companies operating in the sectors served by its lending and leasing businesses.
Such investments may be made in conjunction with loans and leases or independent
of any borrowing relationship. The Company's equity investments, which are
generally made through subsidiary limited liability companies, have taken the
form of common stock equivalents, contingent equity interests such as warrants,
and combinations thereof. At September 30, 1997, the Company had investments in
entities operating 311 QSRs, including Taco Bell, Church's Chicken, KFC, Hot `N
Now, and Hardee's franchisees. In certain cases, concurrent equity investments
have been made by certain of the Company's officers and directors.
11
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1996
Total revenues increased 1,021.4% to $22.7 million for the three months
ended September 30, 1997 from $2.0 million for the comparable period in 1996.
During the same periods, the Company's total expenses increased 187.7% to $8.0
million from $2.8 million. As a result, the Company's net income increased to
$14.7 million for the three months ended September 30, 1997 as compared to a net
loss of $0.8 million for the same period in 1996.
Total revenues increased 191.1% to $45.3 million for the nine months ended
September 30, 1997 from $15.6 million for the comparable period in 1996. During
the same periods, the Company's total expenses increased 94.2% to $16.6 million
from $8.6 million. As a result, the Company's net income increased to $28.7
million for the nine months ended September 30, 1997 as compared to $7.0 million
for the same period in 1996.
Gain on sale of loans
The increase in revenues for the three months ended September 30, 1997 as
compared to the same period last year was primarily attributable to a $19.0
million increase in gain on sale of loans. For the three months ended September
30, 1997, the Company sold approximately $185.2 million of loans in a
securitization ("1997-B"), a sale of $6.2 million of equipment loans and leases,
and a whole loan sale of $6.5 million as compared to no loans sold or
securitized in the same period last year.
The increase in revenues for the nine months ended September 30, 1997 as
compared to the same period last year was primarily attributable to a $26.3
million increase in gain on sale of loans. For the nine months ended September
30, 1997, the Company sold approximately $343.8 million of loans in two
securitizations ("1997-A" and "1997-B") for a gain on sale of $38.8 million (of
which $38.1 million was cash) as compared to $272.6 million of loans sold in two
securitizations ("1995-B" and "1996-A") for a gain on sale of $12.5 million (of
which $5.8 million was cash) for the nine months ended September 30, 1996. The
Company also recognized a gain on sale of $1.7 million in the nine months ended
September 30, 1997 from two whole loan sales of approximately $21.8 million and
a sale of equipment loans and leases of approximately $6.2 million. The
increased gain on sale of loans was due to several factors, including the
composition of loans in the sales and securitizations, the structure of the
securitizations, and market conditions at the time of the securitization
transactions as well as the fact that the Company was successful in selling all
classes of securitization interests. There can be no assurance that the Company
can recognize comparable gains on sale in any future periods.
Net interest income
Net interest income also contributed to the increase in revenues,
increasing 2,481.3% to $1.8 million for the three months ended September 30,
1997 and 1,291.6% to $3.2 million for the nine months ended September 30, 1997
as compared to a loss of $0.1 million and income of $0.2 million for the same
periods in 1996. The increase was primarily due to the significant increase in
loans and leases held for sale which resulted from an increase in loan and lease
originations.
Loan servicing income
Loan servicing income increased 78.7% to $0.9 million for the three months
ended September 30, 1997 and 97.9% to $2.2 million for the nine months ended
September 30, 1997 as compared to $0.5 million and $1.1 million for the same
periods in 1996. This was due to the increase in loans and leases serviced
which resulted from the securitization of $483.7 million in loans from June 1996
through June 1997, with servicing rights retained by the Company.
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Other income (loss)
During the three months ended September 30, 1997, a loss of $588 thousand
was recorded in other income (loss) as compared to a loss of $64 thousand for
the same period in 1996. This was primarily due to a writedown for losses
incurred on the Company's equity investments of $590 thousand.
During the nine months ended September 30, 1997, a loss of $588 thousand
was recorded in other income (loss) as compared to a loss of $1 thousand for the
same period in 1996. This was primarily due to aforementioned writedown for
losses incurred on the Company's equity investments of $590 thousand.
EXPENSES
Total expenses increased 187.7% to $8.0 million for the three months ended
September 30, 1997 as compared to $2.8 million for the same period of the prior
year primarily due to infrastructure additions needed to fund increased loan
originations as well as the following. Personnel expenses increased 156.1% to
$4.6 million which included an executive and management bonus accrual of $1.5
million, professional services increased 171.4% to $0.6 million, and general and
administrative expenses increased 466.4% to $1.7 million for the three months
ended September 30, 1997 as compared to the three months ended September 30,
1996. During the three months ended, September 30, 1997, the Company also
recorded a $0.4 million adjustment to the carrying value of the retained
interest on the 1996A securitization resulting from an increase in the credit
loss assumption from zero to ten basis points. Management believes it is
prudent to assume some credit loss factor (none had been originally computed)
even though the Company has not experienced any losses to date. During the
three months ended, September 30, 1997, the Company also recorded a $0.3 million
allowance for loan losses for its Devco loans, which represents approximately 30
basis points of the outstanding balance of Devco loans of $130.6 million.
Management believes this allowance is appropriate considering the length of time
Devco loans are held for sale (12 to 18 months) and the degree of risk
represented by the Devco loans.
Total expenses increased 94.2% to $16.6 million for the nine months ended
September 30, 1997 as compared to $8.6 million for the same period of the prior
year primarily due to infrastructure additions needed to fund increased loan
originations as well as the additional factors discussed in the preceding
paragraph. Personnel expenses increased 62.8% to $9.3 million, professional
services increased 116.2% to $1.8 million, and general and administrative
expenses increased 294.3% to $3.1 million for the nine months ended September
30, 1997 as compared to the nine months ended September 30, 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. At September 30, 1997, the Company
had the following warehouse lines of credit and repurchase facilities, each of
which was guaranteed by ICII: (In thousands)
INTEREST
RATE COMMITMENT OUTSTANDING INDEX
-------- ---------- ----------- -----
Banco Santander........... 7.25% 50,000 19,575 Libor + 160 bp's
Sanwa Bank................ 7.64% 15,000 12,507 Eurodollars + 200 bp's
CS First Boston........... 7.25% 300,000 169,736 Libor + 160 to 235 bp's
-------- --------
$365,000 $201,818
======== ========
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The Company's sources of cash flow include: (i) loan origination income and
fees, (ii) net interest income on loans held for sale, (iii) cash servicing
income, (iv) premiums obtained in sales of whole loans, and (v) cash proceeds
from loan securitization. Cash from loan origination fees, net interest income
on loans held for sale and loan servicing fees, as well as available borrowings,
generally provide adequate liquidity to fund current operating expenses,
excluding the difference between the amount funded on loans originated and the
amount advanced under the Company's current warehouse facilities (the
"haircut").
The Company expects to add new credit facilities, as well as renew and
expand its existing credit facilities, in order to finance its growing levels of
loan and lease origination activities.
The Company is currently negotiating with a major investment bank to form a
joint venture pursuant to which all loan and lease activities of the Company's
Golf Finance Group would be exclusively conducted by a new entity which would be
50% owned and managed by each of the Company and the investment bank. In
connection therewith, the investment bank would make available to the new entity
a 12 month $100.0 million warehouse line of credit bearing interest at Libor
plus 100 basis points. The parties could by mutual agreement utilize the joint
venture, if formed, to exclusively originate other types of loans and leases,
which may include loans and leases in the Company's existing or in new sectors.
Any income distributed by the new entity would be shared equally by the Company
and the investment bank.
The Company's excess liquidity needs are funded by ICII. Excess liquidity
needs of the Company have primarily included the haircut on loan originations
and investments in certain equity ownership interests. The Company has no
significant debt service obligations, lease payments or capital expenditures
which are not covered by normal operating income. The interest rate on
borrowings from ICII is fixed at 12% annually. At September 30, 1997, the
Company had no outstanding borrowings with ICII. The Company's whole loan sales
and loan securitizations generally result in significant amounts of cash. The
excess cash flow from these transactions is used to repay borrowings from ICII.
For the nine months ended September 30, 1997, net cash provided by
operating activities was $33.9 million. This excludes cash used in net loan
originations of $111.9 million, which was attributable to the Company's
increased loan origination volume.
For the nine months ended September 30, 1997, net cash provided by
investing activities was $35.0 million, which was primarily attributable to the
sale of securities relating to the restructuring of the Company's 1991-A
securitization.
For the nine months ended September 30, 1997, net cash provided by
financing activities was $42.1 million, which was primarily attributable to
increased amounts of warehouse line borrowings resulting from increased loan
originations during the period, offset by a $6.3 million LLC distribution to its
members.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
Date: November 18, 1997 By: /s/ Raedelle Walker
--------------------
Raedelle Walker
Executive Vice President and CFO
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