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 March 31, 1999 Commission File Number: 000-23283 [LOGO OF FMAC] Franchise Mortgage Acceptance Company (Exact name of registrant as specified in its charter) DELAWARE 95-4649104 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1888 Century Park East, Third Floor Los Angeles, California 90067 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 229-2600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest possible date: Class Shares Outstanding at April 30, 1999 ------------------------------ ------------------------------------ Common Stock, $0.001 par value 28,781,552 FRANCHISE MORTGAGE ACCEPTANCE COMPANY FORM 10-Q TABLE OF CONTENTS ----------------- Part I - Financial Information Page ------------------------------ ---- Item 1 Consolidated Financial Statements --------------------------------- Consolidated Balance Sheets - March 31, 1999 and December 31, 1998.......................... 3 Consolidated Statements of Income - Three months ended March 31, 1999 and 1998.............. 4 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998.......... 5 Notes to Consolidated Financial Statements.................................................. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............. 11 ------------------------------------------------------------------------------------- Item 3 Quantitative and Qualitative Disclosures About Market Risk........................................ 16 ---------------------------------------------------------- Part II - Other Information --------------------------- Items 1-6 Not Applicable -------------- Signatures........................................................................................ 18 ---------- Forward-Looking Statements Certain statements in this Form 10-Q 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 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data) March 31, December 31, --------- ------------ 1999 1998 ---- ---- ASSETS Cash and cash equivalents......................................................... $ 54,989 $ 33,425 Interest bearing deposits - restricted............................................ 6,365 5,757 Securities available for sale..................................................... 16,664 16,818 Loans and leases held for sale.................................................... 251,225 325,727 Loans and leases held for investment.............................................. 154,329 162,928 Retained interest in loan securitizations......................................... 30,037 29,952 Servicing rights.................................................................. 32,545 29,905 Premises and equipment, net....................................................... 6,968 6,854 Goodwill.......................................................................... 49,670 37,353 Accrued interest receivable....................................................... 2,351 2,587 Other assets...................................................................... 26,982 25,008 -------- -------- Total assets................................................................. $632,125 $676,314 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings........................................................................ $422,669 $483,763 Current income taxes payable...................................................... 1,365 1,661 Deferred income taxes............................................................. 21,221 18,045 Other liabilities................................................................. 34,903 26,140 -------- -------- Total liabilities............................................................ 480,158 529,609 -------- -------- Commitments and contingencies Minority interest in subsidiary................................................... 59 (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; 28,760,557 shares issued and outstanding at March 31, 1999 and 28,715,625 shares issued and outstanding at December 31, 1998................... 29 29 Additional paid-in capital...................................................... 126,041 118,330 Employee stock awards........................................................... (7,631) -- Retained earnings............................................................... 33,469 28,354 -------- -------- Total stockholders' equity................................................... 151,908 146,713 -------- -------- Total liabilities and stockholders' equity................................... $632,125 $676,314 ======== ======== See accompanying notes to consolidated financial statements. 3 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except income per share) Three Months Ended March 31, --------- 1999 1998 ---- ---- Revenue: Gain on sale of loans and leases............................. $11,210 $16,741 ------- ------- Interest income.............................................. 8,986 10,567 Interest expense............................................. 6,337 6,365 ------- ------- Net interest income....................................... 2,649 4,202 ------- ------- Loan servicing income........................................ 6,512 1,254 Trading income............................................... 1,641 -- Insurance services income.................................... 1,127 -- Other income (loss).......................................... 191 (42) ------- ------- Total revenue............................................. 23,330 22,155 ------- ------- Expense: Personnel.................................................... 8,455 5,165 Professional services........................................ 492 596 Travel. .................................................... 844 567 Business promotion........................................... 845 657 Provision for losses......................................... 262 1 Occupancy.................................................... 823 356 Goodwill amortization........................................ 702 115 General and administrative................................... 2,315 2,261 ------- ------- Total expense............................................. 14,738 9,718 ------- ------- Income before income taxes and minority interest in subsidiary.................................................... 8,592 12,437 Minority interest in subsidiary............................... 67 -- Income taxes.................................................. 3,410 5,223 ------- ------- Net income............................................... $ 5,115 $ 7,214 ======= ======= Basic income per share........................................ $ 0.18 $ 0.25 ======= ======= Weighted average shares outstanding........................... 28,734 28,716 ======= ======= Diluted income per share...................................... $ 0.18 $ 0.25 ======= ======= Weighted average shares outstanding........................... 28,737 28,805 ======= ======= See accompanying notes to consolidated financial statements. 4 FRANCHISE MORTGAGE ACCEPTANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended March 31, --------- 1999 1998 ---- ---- Cash flows from operating activities: Net income......................................................................... $ 5,115 $ 7,214 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization................................................ 1,689 338 Decrease in accrued interest receivable...................................... 236 655 Provision for deferred income taxes.......................................... 3,176 5,223 Decrease in current income taxes payable..................................... (296) (869) Increase (decrease) in other liabilities and accrued interest payable........ 8,763 (643) (Increase) decrease in other assets.......................................... (1,974) 6,583 Increase in originated mortgage servicing rights............................. (3,518) -- Loan and lease operations Loans and leases originated.............................................. (450,992) (342,681) Loans sold to affiliates................................................. 248,049 19,038 Provision for loan and lease losses...................................... 188 1 Principal reductions..................................................... 15,651 4,862 Cash proceeds from loan sales and securitizations........................ 270,040 183,324 --------- --------- Net cash provided (used) by operating activities................................... 96,127 (116,955) --------- --------- Cash flows from investing activities: Purchases of premises and equipment.......................................... (756) (945) Decrease (increase) in interest bearing deposits............................. (608) 221 Sale of securities available for sale........................................ -- 22,870 Proceeds from securities available for sale.................................. 154 -- Increase in retained interests in securitizations............................ -- (283) Proceeds from retained interests in securitizations.......................... 613 621 Increase in Goodwill due to Bankers Mutual earn-out.......................... (13,019) -- Increase in minority interest................................................ 67 -- --------- --------- Net cash provided (used) by investing activities................................... (13,549) 22,484 --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock....................................... 80 -- Increase (decrease) in borrowings............................................ (61,094) 148,262 --------- --------- Net cash provided (used) by financing activities................................... (61,014) 148,262 --------- --------- Net change in cash.................................................................. 21,564 53,791 Cash at beginning of period......................................................... 33,425 7,335 --------- --------- Cash at end of period............................................................... $ 54,989 $ 61,126 ========= ========= See accompanying notes to consolidated financial statements 5 FRANCHISE MORTGAGE ACCEPTANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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 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 February 24, 1999, the Company issued an additional 44,932 shares of common stock to former employees of the Company. On March 10, 1999, Bay View Capital Corporation ("Bay View") and the Company executed an Agreement and Plan of Merger and Reorganization providing for the merger of the Company and Bay View. Following the merger, the Company will operate as a subsidiary of Bay View Bank. Consummation of the merger is subject to a number of closing conditions, including approval by both Bay View's and the Company's stockholders, obtaining necessary regulatory approvals and other closing conditions. (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 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) Supplemental Disclosure of Cash Flow Information Cash paid for interest for the three months ended March 31, 1999 and 1998 was $9.0 million and $6.5 million, respectively. Cash paid for taxes for the three months ended March 31, 1999 and 1998 was $0.5 million and $0.9 million, respectively. 6 (4) Securities Available for Sale Securities available for sale consist of asset-backed securities issued by the Company. For the three months ended March 31, 1999 and the year ended December 31, 1998, activity in securities available for sale was as follows: (In thousands) For the Three Months Ended March 31, 1999 ----------------------------------------- Beginning Face Cash Hedging Ending Balance Amount Discount Received (Gain) Loss Sold Balance ------- ------ -------- -------- ----------- ---- ------- 1998-CE(2).......... $10,388 $ - $ - $ - $ - $ - $10,388 1998-CF(2).......... 3,547 - - - - - 3,547 1998-1(3)........... 2,883 - - (154) - - 2,729 ------- ------- ------- ----- ----------- -------- ------- Totals.............. $16,818 $ - $ - $(154) $ - $ - $16,664 ======= ======= ======= ===== =========== ======== ======= For the Year Ended December 31, 1998 ------------------------------------ Beginning Face Cash Hedging Ending Balance Amount Discount Received (Gain) Loss Sold Balance ------- ------ -------- -------- ----------- ---- ------- 1997-B(1)........... $22,870 $ - $ - $ - $ - $(22,870) $ - 1998-CE(2).......... - 13,090 (2,702) - - - 10,388 1998-CF(2).......... - 5,610 (2,063) - - - 3,547 1998-1(3)........... - 3,301 (283) (135) - - 2,883 ------- ------- ------- ----- ----------- -------- ------- Totals.............. $22,870 $22,001 $(5,048) $(135) $ - $(22,870) $16,818 ======= ======= ======= ===== =========== ======== ======= _____ (1) 1997-B is an interest-only strip that was purchased from CS First Boston in December 1997 and was subsequently sold in March 1998. (2) 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. (3) 1998-1 is the Class C certificate that was purchased by the Company as part of the 1998-1 equipment finance securitization. (5) Loans and Leases Held for Sale The Company offers permanent commercial loans, 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. At March 31, 1999 and December 31, 1998, loans and leases held for sale consisted of the following: (In thousands) March 31, December 31, 1999 1998 ---- ---- Permanent commercial loans............................................... $142,392 $149,222 Multi-family loans....................................................... 43,950 119,599 Loans in process......................................................... 2,772 7,410 Equipment loans and leases............................................... 81,339 63,671 Unearned lease income.................................................... (21,058) (17,834) Allowance for loan and lease losses...................................... (588) (445) Net deferred loan costs.................................................. 1,302 2,198 Margin and deferred net losses on futures contracts used to hedge loans and leases held for sale(1)...................................... 1,116 1,906 -------- -------- Loans and leases held for sale........................................ $251,225 $325,727 ======== ======== - ----- (1) The deferred hedge loss is related to loans financed as part of FMAC Golf Finance Group LLC. 7 Activity in valuation allowances for loans and leases held for sale for the three months ended March 31, 1999 and the year ended December 31, 1998 was as follows: (In thousands) March 31, December 31, 1999 1998 ---- ---- Balance, beginning of period....... $ 445 $ 998 Provisions......................... 143 1,699 Charge-offs........................ - - Transfer of allowance to loans held for investment.............. - (2,252) ----- ------- Balance, end of period............. $ 588 $ 445 ===== ======= (6) 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 March 31, 1999 and December 31, 1998, loans and leases held for investment consisted of the following: (In thousands) March 31, December 31, 1999 1998 ---- ---- Permanent commercial loans............. $ 10,311 $ 9,639 Short-term commercial loans............ 121,134 130,357 Multi-family loans..................... 25,167 25,233 Equipment loans and leases............. 598 598 Allowance for loan and lease losses.... (2,988) (2,988) Net deferred loan costs................ 107 89 -------- -------- Loans and leases held for sale...... $154,329 $162,928 ======== ======== Non-accrual loans, including impaired loans, totaled $17.7 million and $17.1 million at March 31, 1999 and December 31, 1998, respectively. Activity in valuation allowances for loans and leases held for investment for the three months ended March 31, 1999 and the year ended December 31, 1998 was as follows: (In thousands) March 31, December 31, 1999 1998 ---- ---- Balance, beginning of period........ $2,988 $ - Provisions (1)...................... 45 736 Charge-offs......................... (45) - Transfer of allowance from loans held for sale..................... - 2,252 ------ ------ Balance, end of period.............. $2,988 $2,988 ====== ====== - ------------ (1) Does not include provisions for recourse liabilities for sold loans. 8 (7) Retained Interest in Loan Securitizations Activity in retained interest in loan securitizations was as follows for the three months ended March 31, 1999 and the year ended December 31, 1998: (In thousands) For the Three Months Ended March 31, 1999 ----------------------------------------- Beginning Bond Cash Discount Valuation Ending Balance Amount Received Accretion(2) Allowance Balance ------- ------ -------- ------------ --------- ------- 1994-A.................. $ 1,281 $ - $ (99) $ 50 $ - $ 1,232 1995-A.................. 754 - - 27 - 781 1996-A.................. 6,196 - (3) - - 6,193 1996-B.................. 331 - - - - 331 1997-A.................. 379 - - 10 - 389 1997-B.................. 338 - - 9 - 347 1997-C.................. 295 - - 7 - 302 1998-A.................. 305 - - 8 - 313 1998-B.................. 3,628 - (231) 177 - 3,574 1998-C.................. 5,806 - (280) 290 - 5,816 1998-1(1)............... 2,423 - - - - 2,423 1998-D.................. 9,666 - - 120 - 9,786 Valuation Allowance..... (1,450) - - - - (1,450) ------- ------- -------- ------ ------- -------- Totals................ $29,952 $ - $ (613) $ 698 $ - $ 30,037 ======= ======= ======== ====== ======= ======== For the Year Ended December 31, 1998 ------------------------------------ Beginning Bond Cash Discount Valuation Ending Balance Amount Received Accretion(2) Allowance Balance ------- ------ -------- ------------ --------- ------- 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 ======= ======= ======== ====== ======= ======== - ------------ (1) Equipment Finance transaction. (2) The weighted average discount rate on retained interests was 19.2% and 18.0% at March 31, 1999 and December 31, 1998, respectively. (8) Servicing Rights Activity in servicing rights for the three months ended March 31, 1999 and the year ended December 31, 1998 was as follows: (In thousands) March 31, December 31, 1999 1998 ---- ---- Balance, beginning of period..................................... $29,905 $ 2,213 Originated....................................................... 3,546 8,190 Purchased........................................................ - 6 Amortization..................................................... (906) (2,291) Acquired as a result of Bankers Mutual acquisition............... - 21,787 ------- ------- Balance, end of period........................................... $32,545 $29,905 ======= ======= 9 (9) Borrowings Borrowings consisted of the following at March 31, 1999 and December 31, 1998: (dollars in thousands) Expiration Lender Date Index ------ ---- ----- Credit Suisse First Boston(1)(2)........... 12/31/99 One-month LIBOR plus 130 to 150 basis points Morgan Stanley(1).......................... 12/30/99 One-month LIBOR plus 150 to 175 basis points Banco Santander(1)......................... 08/31/99 One-month LIBOR plus 175 basis points Sanwa Bank(1).............................. 06/30/99 One-month LIBOR plus 160 basis points Goldman Sachs Mortgage Company(1).......... 04/30/99 One-month LIBOR plus 100 basis points Residential Funding Corporation(3)......... 09/30/99 One-month LIBOR plus 100 basis points Bank of America(1)(4)...................... 05/28/99 Fixed rate Residential Funding Corporation(5)......... 05/31/99 One-month LIBOR plus 225 basis points Other borrowings(6)........................ Totals................................... (dollars in thousands) March 31, 1999 December 31, 1998 -------------- ----------------- Interest Commitment Principal Interest Commitment Principal Lender Rate(7) Amount Outstanding Rate(7) Amount Outstanding ------ ------- ------ ----------- ------- ------ ----------- Credit Suisse First Boston(1)(2)........... 6.24% to $300,000 $ 72,199 6.38% to $ 300,000 $122,356 6.44% 6.58% Morgan Stanley(1).......................... 6.44% to 300,000 - 6.58% to 300,000 - 6.69% 6.83% Banco Santander(1)......................... 6.69% 50,000 37,983 6.83% 50,000 34,669 Sanwa Bank(1).............................. 6.54% 25,000 24,839 6.68% 25,000 14,369 Goldman Sachs Mortgage Company(1).......... 5.94% 100,000 46,342 6.08% 100,000 46,989 Residential Funding Corporation(3)......... 5.94% 100,000 52,867 6.08% 200,000 124,763 Bank of America(1)(4)...................... 1.00% 35,000 15,092 1.00% 35,000 18,776 Residential Funding Corporation(5)......... 7.19% 50,000 31,432 7.33% 50,000 31,432 Other borrowings(6)........................ - - 141,915 - - 90,409 -------- -------- ---------- -------- Totals................................... $960,000 $422,669 $1,060,000 $483,763 ======== ======== ========== ======== - --------- (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. The Company is currently in the process of obtaining a temporary waiver of this covenant from CSFB until the Bay View merger is completed. (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) As of March 31, 1999, other borrowings includes $26.5 million of sold loans that have been accounted for as a financing, $50.1 million dollars of loans that have been financed through FMAC Star Fund, LLP, a $7.3 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral, $57.1 million related to a participation agreement with Bay View Bank, and a $0.8 million loan with Far East Bank. As of December 31, 1998, other borrowings includes $55.3 million of sold loans that have been accounted for as a financing at, $29.0 million dollars of loans that have been financed through FMAC Star Fund, LLP, and a $6.1 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral. (7) The weighted average interest rate on borrowings was 6.10% and 6.96% at March 31, 1999 and December 31, 1998, respectively. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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"). On March 10, 1999, Bay View Capital Corporation ("Bay View") and the Company executed an Agreement and Plan of Merger and Reorganization providing for the merger of the Company and Bay View. Following the merger, the Company will operate as a subsidiary of Bay View Bank. Consummation of the merger is subject to a number of closing conditions, including approval by both Bay View's and the Company's stockholders, obtaining necessary regulatory approvals and other closing conditions. Results of Operations Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Total revenues increased 5.3% to $23.3 million for the three months ended March 31, 1999 from $22.2 million for the comparable period in 1998. During the same periods, the Company's total expenses increased 51.7% to $14.7 million from $9.7 million. As a result, net income decreased 29.1% to $5.1 million for the three months ended March 31, 1999 as compared to $7.2 million in 1998. The increase in revenues was primarily attributable to a $5.3 million increase in servicing income, a $1.6 million increase in trading income, a $1.1 million increase in insurance brokerage fees, offset by a $5.5 million decrease in gain on sale of loans and leases, and a $1.6 million decrease in net interest income. For the three months ended March 31, 1999, the Company sold approximately $270.0 million of loans in four whole loan sales for a gain on sale of $9.2 million (of which $9.2 million was cash) as compared to $183.3 million of loans and leases sold in one securitization for a gain on sale of $14.5 million (of which $14.2 million was cash) for the three months ended March 31, 1998. Additionally, $2.0 million in net loan fees was recognized in the three months ended March 31, 1999 as compared to $2.2 million in 1998. 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. Net interest income decreased 37.0% to $2.6 million for the three months ended March 31, 1999 as compared to $4.2 million for the same period in 1998. This decrease is primarily due to the addition of the Multi-Family lending group which originates its loan products at a lower net interest spread than the Company's other lending groups. Loan servicing income increased 419.3% to $6.5 million for the three months ended March 31, 1999 as compared to $1.3 million for the same period in 1998. This was due to an increase in loans and leases serviced which resulted from the securitizations and whole loan sales 1998 with servicing rights retained by the Company as well as an increase of serviced loans directly related to the addition of Multi-Family Finance Group. Trading income for the three months ended March 31, 1999 was $1.6 million. This income is recorded directly through operations as the Company's financial instruments used to hedge its loans and leases are classified as trading. Prior to December 31, 1998, the Company deferred its hedge gains and losses and recorded them as an addition or reduction to the gain on sale. 11 The Company also recorded $1.1 million in insurance brokerage fee income for the three months ended March 31, 1999. There was no insurance brokerage fee income for the same period of 1998 because the Company did not begin marketing insurance products until the third quarter of 1998. Total expenses increased 51.7% to $14.7 million for the year ended March 31, 1999 as compared to $9.7 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 63.7% to $8.5 million due to the aforementioned as well as the amortization of the employee stock awards, professional services decreased 17.4% to $0.5 million, travel increased 48.9% to $0.8 million, business promotion increased 28.5% to $0.8 million, provision for losses increased $0.3 million, occupancy increased 131.1% to $0.8 million, goodwill amortization increased 510.8% to $0.7 million and general and administrative expenses increased 2.4% to $2.3 million for the three months ended March 31, 1999 as compared to the same period in 1998. 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 March 31, 1999 and December 31, 1998 consisted of the following: (In thousands) March 31, 1999 December 31, 1998 -------------- ----------------- Expiration Commitment Principal Commitment Principal Lender Date Amount Outstanding Amount Outstanding ------ ---- ------ ----------- ------ ----------- Credit Suisse First Boston(1)(2)............. 12/31/99 $300,000 $ 72,199 $ 300,000 $122,356 Morgan Stanley(1)............................ 12/30/99 300,000 - 300,000 - Banco Santander(1)........................... 08/31/99 50,000 37,983 50,000 34,669 Sanwa Bank(1)................................ 06/30/99 25,000 24,839 25,000 14,369 Goldman Sachs Mortgage Company(1)(3)......... 04/30/99 100,000 46,342 100,000 46,989 Residential Funding Corporation(1)(4)........ 09/30/99 100,000 52,867 200,000 124,763 Bank of America(1)........................... 05/28/99 35,000 15,092 35,000 18,776 Residential Funding Corporation.............. 05/31/99 50,000 31,432 50,000 31,432 Other Borrowings(5).......................... - 141,915 - 90,409 -------- -------- ---------- -------- Totals..................................... $960,000 $422,669 $1,060,000 $483,763 ======== ======== ========== ======== _____ (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 ("CSFB") requires the Company to obtain a capital infusion of $100 million by May 31, 1999. The Company is currently in the process of obtaining a temporary waiver of this covenant from CSFB until the Bay View merger is completed. (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) As of March 31, 1999, other borrowings includes $26.5 million of sold loans that have been accounted for as a financing, $50.1 million dollars of loans that have been financed through FMAC Star Fund, LLP, a $7.3 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral, $57.1 million related to a participation agreement with Bay View Bank, and a $0.8 million loan with Far East Bank. As of December 31, 1998, other borrowings includes $55.3 million of sold loans that have been accounted for as a financing at, $29.0 million dollars of loans that have been financed through FMAC Star Fund, LLP, and a $6.1 million repurchase agreement with Deutsche Bank for which the 1998-CE and 1998-CF certificates were pledged as collateral. The above facilities, with the exception of Bank of America, have variable interest rates based on London Interbank Offered Rate ("LIBOR") plus a spread. 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 6.10% and 6.96% at March 31, 1999 and December 31, 1998, respectively. 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 three 12 months ended March 31, 1999 and year ended December 31, 1998, loans originated for SPB (and not repurchased), including participations, totaled approximately $0 and $26.5 million, respectively. 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 three months ended March 31, 1999, net cash provided by operating activities was $179.0 million. This excludes cash provided by net loan origination activities of $82.9 million, which was primarily attributable to the sale of $518.1 million of the Company's loans. For the three months ended March 31, 1998, net cash provided by operating activities was $18.5 million, exclusive of cash used in net loan origination activities of $135.5 million. For the three months ended March 31, 1999, net cash used in investing activities was $13.5 million, which was primarily attributable to payment of $13.0 million to Bankers Mutual and Bankers Mutual Mortgage Inc. (together "Bankers") according to the earn-out clause of the Asset Purchase Agreement dated March 9, 1998 by and among the Company, Bankers, and the holders of the outstanding shares of Bankers. For the three months ended March 31, 1998, net cash provided by investing activities was $22.3 million, which was primarily attributable to the sale of a $22.9 million security, which was related to the Company's 1997-B securitization. For the three months ended March 31, 1999, net cash used in financing activities was $61.0 million, which was primarily attributable to decreased amounts of warehouse line borrowings resulting from the above referenced sales of loans during the period. For the three months ended March 31, 1998, net cash provided by financing activities was $148.3 million, which was primarily attributable to an increase in borrowings from warehouse lines of credit to finance loan originations during the period. 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 sell and securitize its loans as well as 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 and operations are Y2K ready. Further, the Company is making such efforts, as it deems appropriate, to determine that its value chain participants will also be 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 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 13 consulting firm to assist on the project and provide objective guidance. Both the Y2K Project Steering Committee and the Y2K Project Core Team meet 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 of all internal systems, which commenced in September 1998 and will continue until the Y2K Project is completed; Phase II covers testing and remediation of all mission critical systems, which commenced in January 1999 and concluded in April 1999; Phase III covers testing and remediation of all non-mission critical systems, which commenced in December 1998 and is projected to conclude in June 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 . Value chain participants . Business infrastructure . Customers, including Y2K readiness of potential new customers Borrower assessments are currently underway, with the mission critical borrower assessments to be completed by May 1999 and all others by September 1999. Currently, the Company has not identified any critical Y2K issues with either its value chain participants or its borrowers. The Company has established dedicated budgets for its Y2K Project. Currently, the projected total cost of the Y2K Project is approximately $1.0 million but is subject to change if any unanticipated situations arise. Any expenses related to Y2K issues are being expensed as incurred. As of April 30, 1999, the Company has incurred approximately $327,000 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 Company's external operations. Subject to completion of final assessments, the risks associated with the Company's internal Y2K issues do not appear to be material due to the current compliance status of most all hardware and the vendor assurances on the third- party supplied software systems. Risks related to third-party business partners and borrowers are not completely known at this time. The Company's ongoing Awareness and Impact Assessment phase will result in the identification of substantially all Y2K related risks in these areas. There can be no guarantee that the systems of other organizations on which the Company's systems rely will be Y2K compliant or will be compatible with the Company' systems, each of which could have a material adverse effect on the Company. The Company is currently building specific contingency plans as they relate to the Y2K issues. A formal process is currently underway to address all determined business risks in a comprehensive contingency plan. This plan will address all system, facilities, business partner and borrower areas as they specifically relate to the Y2K risks that are identified. The Company is working to identify and analyze the most reasonably likely worst case scenarios for third-party relationships affected by the Y2K issues. These scenarios could include possible infrastructure collapse, unforeseen product shortages, major transportation disruptions, any one of which could have major and material effects on the Company's business. While the Company is developing contingency plans to address most issues under its control, an infrastructure problem outside of its control could result in a delay in the Company's delivering its products and services depending on the nature and severity of the problems. Although the Company is dedicating substantial resources towards obtaining Y2K readiness, there is no assurance that it will be successful in its efforts to identify and address all Y2K issues. Even if the Company acts in a 14 timely manner to complete all of its assessments, identify, develop and implement remediation plans believed to be adequate, and develop contingency plans, some problems may not be identified or corrected in time to prevent material adverse consequences to the Company. The estimates and conclusions herein are forward-looking statements and are based on management's best estimates of future events. Risks of completing the plan include the availability of resources, the ability to discover and correct potential Y2K sensitive problems which could have a serious impact on certain operations and the ability of the Company's service providers to bring their systems into Y2K compliance. As the Company continues to progress with its Y2K initiatives, it may discover that actual results will differ materially from these estimates. The Company's Y2K efforts are continual and the Y2K Project will 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. 15 ITEM 3. 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 March 31, 1999: Total Fair (Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Balance Value ---- ---- ---- ---- ---- ---------- ------- ----- Interest-sensitive assets: Loans held for sale Permanent commercial loans.... $ 16,935 $ 147 $ 5,083 $ - $ 246 $119,981 $142,392 $142,392 Average interest rate..... 9.93% 8.75% 9.43% - 11.60% 9.45% 9.51% Multi-family loans............ - - - - - 43,950 43,950 43,950 Average interest rate..... - - - - - 6.94% 6.94% Equipment loans and leases.... - 33 727 3,069 6,011 50,441 60,281 60,281 Average interest rate..... - 10.69% 11.52% 12.30% 11.99% 11.03% 11.20% Loans held for investment Permanent commercial loans.... 1,000 2,500 - - - 6,330 9,830 9,830 Average interest rate..... 10.69% 9.47% - - - 10.67% 10.37% Short-term commercial loans... 98,018 17,838 - - - 3,786 119,642 119,642 Average interest rate..... 9.43% 8.66% - - - 9.36% 9.31% Multi-family loans............ - - - - - 25,167 25,167 25,167 Average interest rate..... - - - - - 6.81% 6.81% Equipment loans and leases.... - - - 114 126 176 416 416 Average interest rate..... - - - 12.75% 10.75% 14.49% 13.09% Securities available for sale(1). 1,722 2,047 1,746 1,411 1,330 8,408 16,664 16,664 Retained interest in loan securitizations(2).............. 3,638 3,309 2,956 1,980 1,453 16,701 30,037 30,037 Servicing rights................. 3,006 3,866 3,521 3,207 3,086 15,859 32,545 32,545 ----------------------------------------------------------------------------------------------- Total interest-sensitive assets.. $124,319 $29,740 $14,033 $9,781 $12,252 $290,799 $480,924 $480,924 =============================================================================================== Interest-sensitive liabilities: Borrowings....................... $422,669 $ - $ - $ - $ - $ - $422,669 $422,669 Average interest rate..... 6.10% - - - - - 6.10% ----------------------------------------------------------------------------------------------- Total interest-sensitive liabilities..................... $422,669 $ - $ - $ - $ - $ - $422,669 $422,669 =============================================================================================== - -------- (1) As of March 31, 1999, the weighted average interest rate on securities held for sale was 8.82%. (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 March 31, 1999, the weighted average discount rate used on the retained interests was 19.19% 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 16 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. 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 balances 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. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANCHISE MORTGAGE ACCEPTANCE COMPANY Date: May 12, 1999 By: /s/ Raedelle Walker -------------------------------------------- Raedelle Walker Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 18