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                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                               ----------------

                                   FORM 10-K

                               ----------------

 MARK ONE

  [X]  Annual report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934 for the fiscal year ended December 31, 1997

                                      or

  [_]  Transition report pursuant to Section 13 or 15(d) of the
       Securities Exchange Act of 1934

                       COMMISSION FILE NUMBER: 333-34481

                               ----------------

                                     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 NO.)
   INCORPORATION OR ORGANIZATION)

                               ----------------

1888 CENTURY PARK EAST, THIRD FLOOR,                      90067
       LOS ANGELES, CALIFORNIA                         (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE
              OFFICES)

                               ----------------

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 229-2600

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

    COMMON STOCK, $.001 PAR VALUE                NASDAQ NATIONAL MARKET

                               ----------------

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                              Yes [X]     No [_]

  Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

  The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 1998 as reported on the NASDAQ National Market System, was approximately
$207,000,000. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

  As of February 28, 1998, registrant had 28,715,625 shares of Common Stock
outstanding.

  The following documents are incorporated by reference into this report:
Portions of registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within
120 days after the close of registrant's fiscal year, are incorporated herein
by reference in Part III of this Annual report.

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<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                         1997 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----

                                    PART I

<S>                                                                        <C>
Item 1. BUSINESS.........................................................    3
Item 2. PROPERTIES.......................................................   16
Item 3. LEGAL PROCEEDINGS................................................   16
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS................   16
Supplementary Item. EXECUTIVE OFFICERS OF REGISTRANT.....................   17

                                    PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
        MATTERS..........................................................   19
Item 6. SELECTED FINANCIAL DATA..........................................   19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS............................................   21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................   27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.............................................   50

                                   PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............   50
Item 11. EXECUTIVE COMPENSATION..........................................   50
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..   50
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................   50

                                    PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
        FORM 8-K.........................................................   51
</TABLE>

FORWARD-LOOKING STATEMENTS

  When used in this Form 10-K 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.

                                       2
<PAGE>

                                    PART I

ITEM 1. BUSINESS

  Franchise Mortgage Acceptance Company (the "Company") is a specialty
commercial finance company engaged in the business of originating and
servicing loans and equipment leases to small businesses, with a primary focus
on established national and regional franchise concepts and such other branded
concepts such as service stations or convenience stores.

  Unless the context indicates otherwise, all references hereinafter to the
Company refer to Franchise Mortgage Acceptance Company, along with all its
predecessor entities, including Franchise Mortgage Acceptance Company LLC
("Franchise Mortgage LLC").

GENERAL

  The Company's 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
("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 ("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 the FMAC Servicing Contracts. 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 owned by
Greenwich. Concurrent with the closing of the transactions described above,
ICII entered into an operating agreement with Mr. Knyal for the formation of
Franchise Mortgage LLC. Under the terms of the Franchise Mortgage LLC
operating agreement, in exchange for a 66 2/3% ownership interest in Franchise
Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.4
million in cash and all of the assets purchased from Greenwich. In exchange
for a 33 1/3% ownership interest in Franchise Mortgage LLC, Knyal caused his
wholly owned company, FLRT, Inc., to contribute to Franchise Mortgage LLC all
of its rights under a servicing contract pertaining to franchise loans that
were previously securitized by FLRT, Inc.

  On August 30, 1995, ICII completed the acquisition of certain net assets of
the FMAC Division for a net purchase price of $7.6 million which included $3.8
million in contingent consideration based on loan originations after the date
of acquisition up to a maximum principal amount of such loans equal to $250.0
million. The acquisition was recorded using the purchase method of accounting.
The excess of the purchase price over the fair value of the net assets
acquired was recorded as goodwill of $4.4 million.

  On November 18, 1997, the Company completed its initial public offering (the
"Offering") pursuant to which 10,000,000 shares of common stock were sold to
the public at a price of $18.00 per share. On November 28, 1997, 890,625
additional shares of common stock were sold to the public at the sale price of
$18.00 per share. Net proceeds to the Company after offering costs of $1.7
million were $112.6 million.

  Immediately prior to the Offering, Franchise Mortgage LLC merged into
Franchise Mortgage Acceptance Company, a Delaware corporation which was
incorporated in August 1997 for the purpose of succeeding to the business of
Franchise Mortgage LLC. As part of the initial public offering, 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.

                                       3
<PAGE>

  Since commencing business in 1991, the Company believes it has become a
leading lender to national and regional quick service restaurant ("QSR")
franchisees, and the Company has developed a growing presence in the casual
dining sector. More recently, the Company has expanded its focus to include
retail energy licensees (service stations, convenience stores, truck stops,
car washes and quick lube businesses), golf operating businesses (golf courses
and golf practice facilities), and the death care industry (funeral homes and
cemeteries). The Company originates long-term fixed- and variable-rate loan
and lease products and sells such loans and leases either through
securitizations or whole loan sales to institutional purchasers on a servicing
retained basis. The Company's loan and lease products are attractive
investments to institutional investors because of the credit profile of its
borrowers ("Borrowers"), relatively long loan and lease terms, call protection
through prepayment penalties and appropriate risk-adjusted yields. The Company
also periodically makes equity investments or receives contingent equity
compensation as part of its core lending and leasing business. The Company
originated loans and leases through 16 marketing offices in 10 states at
December 31, 1997. From the Company's inception through December 31, 1997, it
funded approximately $1.7 billion in loans and leases and at December 31,
1997, had a servicing portfolio, including loans and leases held for sale, of
$1.6 billion. The Company's loan and lease originations grew to $801.0 million
in 1997 from $459.5 million in 1996. At December 31, 1997, the Company's
average initial loan balance was $650,000.

  The Company's focus is to provide funding to industries that have been
historically underserved by banks and other traditional sources of financing.
This focus requires the Company to develop specific industry expertise in the
sectors which it serves in order to provide individualized financial solutions
for its Borrowers. The Company believes that its industry expertise, positive
market reputation, and proprietary databases, combined with its responsiveness
to Borrowers, flexibility in structuring transactions and broad product
offerings give it a competitive advantage over more traditional, highly
regulated small business lenders. The Company's Borrowers are generally small
business operators, 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.

  In 1991, the Company began making loans to franchisees of Taco Bell Corp. In
1992 and 1993, other national QSR concepts, such as Burger King, Wendy's,
Pizza Hut, KFC and Hardee's, were approved. The Company's principal loan
products at that time were fixed rate, 15-year, fully amortizing loans. In
1995, the Company began offering loans to casual dining concepts such as TGI
Friday's, Applebee's and Denny's as well as offering its Borrowers adjustable
rate loans. Also in 1995, the Company began offering development and
construction ("DEVCO") loans to its more experienced Borrowers to fund the
development and construction or acquisition of new business units or the
conversion of existing business units into a different franchise concept. In
1996, the Company expanded its approved concepts to include strong regional
restaurants such as Carl's, Jr., Church's Chicken and Golden Corral and
launched its Golf Finance Group to provide financing to owners and operators
of golf courses and golf practice facilities. The Equipment Finance Group also
commenced activities in 1996 to provide equipment loans and leases to the
sectors which the Company serves and other strategic markets. In February
1997, the Company created its Energy Finance Group to make loans to businesses
that distribute retail petroleum products. In the third quarter of 1997, the
Company created its Funeral Finance Group to make loans to funeral home and
cemetery owners.

  On March 9, 1998, the Company entered into a definitive agreement pursuant
to which the Company will purchase the assets and assume certain liabilities
of Bankers Mutual, a Mortgage Banking Corporation and Bankers Mutual Mortgage,
Inc. (collectively, "Bankers"). Bankers is a Federal National Mortgage
Association Delegated Underwriting and Servicing lender.

  With loan originations of more than $650 million in 1997 and a servicing
portfolio of approximately $2.5 billion, Bankers has a significant presence in
the multi-family income property lending market in the western United States,
primarily in California. Bankers has a strong reputation, with lending and
credit practices similar

                                       4
<PAGE>

to those of the Company, making Bankers a good fit with the Company's current
infrastructure. Among other potential benefits, the acquisition of Bankers is
expected to strengthen the Company's securitization program by enabling the
Company to further diversify its loan securitizations, enhancing the Company's
profile in the bond markets.

BUSINESS STRATEGY

  The Company's goal is to become a leading national small business lender in
each of its target markets. The Company's growth and operating strategy is
based on the following key elements:

  Growth in Existing Sectors. The Company plans to replicate its success in
the restaurant sector in other business sectors that it has entered more
recently, such as retail energy, golf and death care, through focused product
development, customer service and support. The Company forms specialized teams
for each sector to assess customer needs, market opportunities, competitive
environment, business value, and credit quality; generate customer loyalty;
and enhance service and support. Management believes that its industry
leadership position, relationships with major Borrowers, franchisors and
vendors, and expertise within sectors will assist the Company in increasing
its market share.

  Controlled Expansion into New Sectors. Management believes that substantial
opportunities exist to extend the Company's expertise into other business
sectors. The Company believes that its experience in lending to restaurant
franchisees has allowed it to develop a template for efficiently originating
and servicing loans and leases in other industry sectors. The Company's
philosophy is to provide complete business solutions to identified industries
by developing strategies and financial products which are based on industry
characteristics and each Borrower's specific needs. The Company carefully
reviews industry data, seeking business sectors with a combination of large
funding requirements, proven cash flow generating capabilities, standardized
operations, a scarcity of long-term funding sources and characteristics
attractive to secondary market investors.

  Maintenance of Credit Quality. The Company's delinquency and loss experience
has been extremely low, due in part to its lending to experienced operators,
detailed industry knowledge, relationship with both franchisors and
franchisees system wide, active oversight of its existing servicing portfolio,
strict underwriting criteria and the Company's ability to locate qualified
replacement franchisees / borrowers to assume delinquent loans. From the
Company's inception in April 1991 through December 31, 1997, it has
experienced no net charge-offs.

  The following table sets forth amounts of loans and leases held in the
Company's servicing portfolio, including loans and leases held for sale, and
the combined delinquency and foreclosure experience for the periods indicated:

<TABLE>
<CAPTION>
                                           AS OF DECEMBER 31,
                          -----------------------------------------------------
                                1997              1996              1995
                          ----------------- ----------------- -----------------
                                    % OF              % OF              % OF
                                  LOANS AND         LOANS AND         LOANS AND
                          BALANCE  LEASES   BALANCE  LEASES   BALANCE  LEASES
                          ------- --------- ------- --------- ------- ---------
                                          (DOLLARS IN MILLIONS)
<S>                       <C>     <C>       <C>     <C>       <C>     <C>
Loans and leases held in
 servicing portfolio....  $1,629   100.00    $737    100.00    $359    100.00
30-59 days delinquent...     --       --      --        --      --        --
60-89 days delinquent...       3     0.15     --        --      --        --
90 days or more
 delinquent.............      13     0.81     --        --      --        --
                          ------   ------    ----    ------    ----    ------
  Total delinquencies...  $   16     0.96    $--        --     $--        --
                          ======   ======    ====    ======    ====    ======
Total foreclosed real
 estate.................  $  --       --     $--        --     $--        --
                          ======   ======    ====    ======    ====    ======
</TABLE>

  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

                                       5
<PAGE>

execution it has experienced to date is primarily the result of the attractive
terms and the credit quality of the loans and leases that it originates. Of
the $46.9 million in gain on sale from securitizations recognized by the
Company during 1997, $45.9 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 year ended December 31, 1997, the
Company completed three securitizations and five whole loan and lease sales
totaling $483.1 million and $50.8 million, respectively. In all such
transactions, the Company has retained the right to service the sold or
securitized 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.

INDUSTRY BACKGROUND

 Franchising

  A franchise is a business operating pursuant to a franchise agreement under
which the franchisee undertakes to conduct a business or sell a product or
service in accordance with methods and procedures prescribed by a franchisor
and the franchisor undertakes to assist the franchisee through advertising,
promotion and other advisory services. Although the term franchise is
typically associated with fast food restaurants, a multitude of franchise
businesses exist, offering a variety of products and services such as hotels
and motels, automotive parts, and cleaning services. Most franchise concepts
offer franchisees training and diverse levels of ongoing support and
oversight. Business format franchisors provide franchisees with a
comprehensive operating system, whereas product distribution arrangements
primarily license a trademark and/or logo. According to the International
Franchise Association, franchises comprise one out of every twelve businesses
in the United States. The Franchise Trade Association has estimated that by
the year 2000, over 50% of retail sales, or approximately $1 trillion, will be
generated by franchises. The Company believes that its customers' businesses
will perform similarly to the typical performance of franchisees in a system.
A proven franchise / brand tends to negate some of the risks associated with
small businesses.

 The Food Service Sector

  According to the National Restaurant Association ("NRA") data, in 1997 the
food service industry employed more than nine million people and had estimated
sales of $320.1 billion. According to the NRA, full service restaurants, QSRs,
commercial cafeterias, social caterers and ice-cream and frozen yogurt stands
("Eating Places") represented an estimated $215.2 billion, or 67.2%, of such
food service sales in 1997 and are expected to grow by 5.0% to $225.9 billion
in 1998. The QSR segment of Eating Places represents those restaurants that
offer fast food or take-out, without table service. Most QSR establishments
offer food products that lend themselves to quick service, such as pizza,
chicken, hamburgers and similar food items. Full service restaurants typically
represent casual and fine dining restaurants that accept major credit cards,
offer table service and provide full liquor service. The QSR segment
represented an estimated $100.6 billion, or 46.8%, of all Eating Places sales
in 1997, and is expected to grow by 5.1% to $105.7 billion in 1998. The full
service segment represented an estimated $105.1 billion, or 48.8% of all
Eating Places' sales in 1997, and is expected to grow by 5.0% to $110.3
billion in 1998.

  Development and maturation of the QSR segment of the food service industry
has led to a consolidation of restaurant operators. Increased competition has
decreased profit margins which has contributed to the emergence of
increasingly large and professionally managed restaurant operating companies.
Large operators typically have greater economies of scale and better
management systems which allow them to compete more effectively. As size and
diversification become increasingly important, many franchise restaurant
operators are becoming

                                       6
<PAGE>

affiliated with multiple restaurant systems. The Company believes that the
maturation of the fast food segment is likely to result in continued and
enhanced stability for this industry segment. Chain restaurant consolidation
has also created lending opportunities for the Company arising from the demand
by restaurant operators for acquisition financing.

 The Retail Energy Sector

  The United States retail petroleum sector is composed of service stations,
convenience stores, and other related retail establishments which provide
branded and independent fuel for motor vehicle consumption. According to the
National Petroleum News ("NPN"), retail petroleum sector sales for the year
ended December 31, 1996 approximated $265 billion. According to NPN's latest
count, the service station sector included approximately 188,000 units. The
Company believes that these units are generally well located as a result of
the early origins of these units relative to convenience stores and other
retail merchants. According to NPN, at December 31, 1996, there were
approximately 94,000 domestic convenience stores of which approximately 73%
distributed fuel. According to the NPN, convenience store industry sales grew
5.4% in 1996 as gasoline volume, fast food sales and merchandise sales per
customer increased due to retailers' focus on customer service needs.
According to the Federal Highway Administration, gasoline demand grew 1.8% in
1996 to 123.2 billion gallons and is projected to increase 1.5% in 1997. The
strength in demand reflects United States economic growth, the relaxation of
speed limits, the increase in the total United States vehicle fuel consumption
and the growing popularity of sport utility vehicles and minivans.

  The Company believes the retail energy sector is currently underserved by
traditional lenders. Increasing sales and profit margins for gasoline
retailers, the perceived diminished risk of lender liability for environmental
clean-up costs and heightened profitability in multi-profit service
stations/convenience store combinations should increase demand for financing.
In addition, the Company believes that service station consolidation has also
created lending opportunities arising out of the demand for acquisition
financing.

 The Golf Sector

  In the United States, golf courses handled approximately 477 million rounds
in 1996. The number of rounds played has increased by 6.5% since 1975.
Currently, 26% of golfers are over 50 years of age, with 48% between the ages
of 18 and 39. The National Golf Foundation ("NGF") statistics show that
golfers in their 50's play three times as much as golfers between the ages of
18 and 39. The number of rounds played should significantly increase as the
baby-boomer segment of the population heads toward retirement age. In
addition, for the past 10 years, the game has added approximately two million
beginners a year, with the 18 to 29 age group producing the largest single
sub-segment.

  According to NGF, 429 new golf courses were opened in 1997, of which 285
were new facilities and 144 were expansions of existing facilities. As of
December 31, 1997, there were 932 courses under construction, of which 655
were new facilities and 277 were expansions of existing facilities. According
to NGF data, there were 719 courses in the planning stages (not yet under
construction), of which 576 were new facilities while 143 were expansions of
existing facilities. Of the courses under construction at the end of 1997, it
is estimated that as many as 485 courses will open in 1998. NGF defines a golf
facility as a facility with at least one nine-hole course and that may include
different types of courses, such as regulation-length courses, executive-
length courses, and par-3 length courses. In 1996, there were a total of
30,044 golf facilities in the United States including 15,703 golf courses of
which 70% were classified as public access.

  The Company believes that the golf sector has the following similar
characteristics to other sectors that the Company currently lends to: positive
cash flow from operations, golf course and facility ownership is broad and
diverse geographically, and the industry is underserved by traditional
lenders. Increased golf usage has driven demand for loans for renovation and
construction, while increased dollars spent at golf courses has driven demand
for loans for golf course and facilities acquisitions.


                                       7
<PAGE>

 The Funeral Services Sector

  The funeral services industry (more generally referred to as the death care
industry) includes funeral homes, cemeteries, crematoria and memorial parks,
as well as merchandise such as urns, caskets, memorials, and vaults. There are
an estimated 23,000 funeral homes and 10,500 private cemeteries in the United
States. A funeral home or cemetery builds a customer base that can last for
several generations.

  The industry is highly fragmented and undergoing intense consolidation.
Acquisition activity has accelerated dramatically over the past few years both
in the U.S. and abroad. Owners of funeral homes and cemeteries have had few
alternatives to finance their businesses at their true value and are in
general under leveraged. Finance sources have historically consisted primarily
of local banks, the Small Business Administration, and one specialty lender.
This lack of readily available financing has made it difficult for operators
to remain independent. Based on research conducted in the latter half of 1997,
the Company has determined that a large portion of funeral home owners desire
to remain independent, to have a succession plan for their businesses and to
have an alternative to selling out.

  The number of deaths in the U.S is increasing roughly 1% per year, a rate
that is expected to remain fairly steady for the next 10 years. The death rate
should begin to accelerate in 15 years with the aging of the baby boomer
generation. Essentially, death care is a non-cyclical business, with modest
but steady volume growth. A seasonality is present in the industry with deaths
increasing during colder months, and death rates can vary by region. According
to the 1995 U.S. Census report, average deaths in the U.S. were 8.8 per 1,000
population. Roughly 2.3 million deaths occurred in 1995 which is expected to
grow to 2.4 million by 2000, 2.6 million by 2010, and 4.0 million by 2050.

  In an industry where demand is growing only 1% annually, local market share
is the key to growth in profitability, as incremental margins are exceedingly
high when fixed costs are covered. In addition, revenue enhancement and
opportunities for cost savings are important to profit growth on a "same-
store" basis.

  Publicly traded funeral service and cemetery companies now represent roughly
20% of the domestic funeral service and cemetery revenue. The aggregate
revenue base of the five public companies is now over $4 billion, with a
combined market capitalization of over $12.5 billion. Roughly translated into
per property numbers, this suggests average revenue of approximately $600,000
per property and a market value of $1.8 million per property. Data received
from the National Funeral Directors Association and supported by a Company
survey to the industry suggest that over 95% of funeral home operators own the
land and building on which their businesses reside, the average business has
been under the same ownership for in excess of 20 years, and death care
businesses generate significant amounts of cash flow.

  The Company believes that the funeral services sector offers similar
characteristics to other sectors to which the Company currently lends,
including positive cash flow from operations, broad and geographically diverse
ownership, and the fact that the industry has been historically underserved by
traditional lenders. The Company is actively providing independent operators
and small to medium size consolidators with a competitively structured source
of debt financing.

LOAN ORIGINATIONS

 Type of Loan Products

  The Company offers permanent loans, DEVCO loans, and equipment loans and
leases to those sectors in which it operates.

  Permanent loans. Substantially all of the Company's permanent loans are
self-amortizing long-term fixed or adjustable rate loans provided for purposes
other than development and construction of business units. Permanent loans
generally have a maximum term and amortization of up to 20 years. Fixed rate
loans are tied to the U.S. Treasury rates plus a spread while adjustable rate
loans are tied to the London interbank offered rate

                                       8
<PAGE>

("LIBOR") plus a spread and generally reprice on a monthly basis. As a cash
flow lender, the Company maintains flexibility to tailor a loan program to fit
the specific needs of its Borrowers. The terms of the loans vary in part based
on the collateral pledged.

  The Company focuses on the cash flow of the subject business, the continuing
ability of the Borrower to operate the business unit in a cash positive manner
and the Borrower's ability to repay the loan since neither the real property
mortgage nor the franchise or license agreement is generally assignable to
secure the loan. In determining enterprise value, in addition to a Borrower's
credit profile, the Company focuses on the following factors:

  . Business Profitability. The Company seeks to lend to Borrowers whose
    subject business operations provide adequate cash flow to support loan
    payments.

  . Strength of Business Concept. The Company emphasizes loans to Borrowers
    whose subject business has significant national or regional market
    penetration.

  . Operating Experience. The Company emphasizes loans to Borrowers having
    ownership of multiple business units with strong industry backgrounds.

  . Site Considerations. The Company focuses on a business' location,
    physical condition and environmental characteristics.

      Location. The Company lends to Borrowers with business units located in
      high traffic areas that it believes exhibit strong retail property
      fundamentals.

      Physical Condition. The Company loans to Borrowers investing in well-
      maintained existing properties or in newly constructed properties. Each
      group uses third party appraisal professionals who conduct physical
      site inspections of each subject property.

      Environmental. The Energy Finance Group has an internal environmental
      department, currently consisting of three experienced environmental
      professionals. The Company's environmental process does not require
      either Phase I or Phase II, but a pragmatic detailed questionnaire that
      requires the attachment of both federal and state documentation and
      certification.

  . Collateral. Loans are partially secured by taking a first lien on all
    available furniture, fixtures and equipment. Where the available
    collateral includes a building on a ground lease, the Company requires an
    assignment of the lease in addition to a security interest on the
    building and on the furniture, fixtures and equipment. If the collateral
    includes owned real estate, the Company also obtains a first mortgage on
    the property. Borrowers with additional collateral are generally afforded
    better credit terms. Depending on the collateral provided, loan to value
    ratios, up front fees and interest rates are adjusted to properly reflect
    credit risk.

  Development and Construction Loans. DEVCO loans are offered to fund the
development and construction of new business units. DEVCO loans generally
provide an interest-only period of up to 18 months that gives the Borrower the
opportunity to construct the unit, stabilize business unit performance, and
achieve a higher cash flow in the short-term. Fixed rate DEVCO loans are tied
to U.S. Treasury rates, while adjustable rate DEVCO loans are tied to LIBOR.

  Adjustable rate DEVCO loans generally have an 18 month maturity and fixed
rate DEVCO loans generally have a 15 year maturity. Both adjustable and fixed
rate DEVCO loans generally provide an initial 18 month period necessary for
the unit to be constructed and sales to stabilize. Within the initial 18 month
period, the unit is appraised and a final loan amount is then determined,
using actual unit level performance. After 18 months, the Borrower can apply
for a permanent loan which will be re-underwritten, converting the adjustable
rate DEVCO to the permanent loan.

  The Company believes that DEVCO loans create a pipeline for the Company's
permanent loans. As a result of fee incentives built into the adjustable rate
DEVCO loans, Borrowers generally look to convert into permanent loans on the
maturity date. DEVCO loans are secured by the real property mortgage or
leasehold interest as well as all available furniture, fixtures and equipment.

                                       9
<PAGE>

  Seasoning Loans. Seasoning loans are offered to fund the acquisition of new
business units or the conversion of existing business units into a different
franchise concept. Seasoning loans generally provide an interest-only period
of up to 18 months that gives the Borrower the opportunity to stabilize
business unit performance and achieve a higher cash flow in the short-term.
Generally, other terms and conditions are similar to those of DEVCO loans.

  Equipment Loans and Leases. The Company provides equipment financing to
experienced owners and operators in those sectors in which the Company
operates. Equipment loans are fixed rate products tied to U.S. Treasury rates.
These loans generally have a maximum term of up to 10 years. In addition, the
Company originates equipment leases with terms that generally range from 5 to
7 years. Substantially all of the leases originated by the Company are "direct
financing" leases in that they transfer substantially all of the benefits and
risks of equipment ownership to the lessee. Because the Company's leases are
classified as direct financing leases, the Company records total estimated
unguaranteed residual value and initial direct costs as the gross investment
in the lease. The difference between the gross investment in the lease and the
cost of the leased equipment is defined as "unearned income." Interest income
is recognized over the term of the lease by amortizing the unearned income and
deferred initial direct costs using the interest method.

 Lending Groups

  The Company's focus at inception was to provide secured financing to
franchisees of Taco Bell Corp. After establishing an infrastructure and credit
expertise, the Company began expanding its QSR concepts, loaning to casual
dining concepts and moving into other related lending sectors such as retail
energy, golf, death care and equipment finance. The Company carefully reviews
industry data seeking sectors with a combination of large capital
requirements, proven cash flow generating capabilities, standardized
operations, a scarcity of long term funding sources and characteristics
attractive to secondary market investors. This business formula provides the
template to identify, test and determine the potential value of entering into
new sectors.

  The Company's lending groups currently include Restaurant Finance, Energy
Finance, Golf Finance, Funeral Services 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.

  Restaurant Finance Group. The Restaurant Finance Group was organized in 1991
and originally focused on providing 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 offering loans to casual dining concepts such as
TGIF, Applebee's, and Denny's and other successful casual dining concepts. 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
December 31, 1997, the Restaurant Finance Group originated loans through a
network of four offices in four states. For the year ended December 31, 1997
this group originated $534.3 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 its formation through December 31, 1997, the
Restaurant Finance Group provided approximately $1.4 billion in financing.

  The Restaurant Finance Group, which is headquartered in Denver, Colorado,
includes marketing, processing, underwriting, credit, closing and
administrative professionals with extensive experience in QSR and casual
dining restaurant finance. The marketing professionals generate loans on a
national basis which are processed and underwritten at the group's
headquarters or in one of the Company's four regional offices located in
Greenwich, Atlanta, Dallas, and Los Angeles. Credit committee approval is
obtained in these regional offices unless the transaction exceeds regional
credit authority in which case approval must be obtained from the Company's
Senior Credit Committee.

  Franchisees utilize restaurant loans for a variety of purposes, including
the acquisition, development and construction of new franchise units, to
refinance existing franchise debt, to provide business expansion and
remodeling proceeds and for working capital. Loans offered are fixed and
adjustable loans typically ranging in

                                      10
<PAGE>

size from $500,000 to $1.5 million with terms of up to 20 years. Generally,
the Company's restaurant finance borrowers own three or more units, have three
or more years of ownership in the concept, or have an equivalent ownership
tenure in a different major fast food or casual dining concept.

  The following table sets forth the Company's QSR and casual dining loan
originations for the periods indicated by franchise concept.

<TABLE>
<CAPTION>
                        YEAR ENDED DECEMBER 31, 1997     YEAR ENDED DECEMBER 31, 1996     YEAR ENDED DECEMBER 31, 1995
                      -------------------------------- -------------------------------- --------------------------------
                        NUMBER   PRINCIPAL     % OF      NUMBER   PRINCIPAL     % OF      NUMBER   PRINCIPAL     % OF
                       OF LOANS    AMOUNT     TOTAL     OF LOANS    AMOUNT     TOTAL     OF LOANS    AMOUNT     TOTAL
                      ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED
                      ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
                                                            (DOLLARS IN THOUSANDS)
<S>                   <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
QSRs:
 Taco Bell...........    281      $216,212     40.5%      237      $176,923     40.9%       54      $ 44,614     20.4%
 Burger King.........     82        69,881     13.1       105       100,517     23.2        92        61,329     28.0
 Wendy's.............     56        43,426      8.1        41        34,249      7.9        25        17,561      8.0
 KFC.................     61        30,306      5.7        19        12,311      2.8        59        30,400     13.9
 Americas Fav.
  Chicken............     86        29,300      5.5       --            --       --        --            --       --
 Hardee's............     15        11,098      2.1        57        40,586      9.4        41        35,722     16.4
 Arby's..............     14        10,918      2.0         8         3,808      0.9       --            --       --
 Other QSR...........     31        14,954      2.8        40        22,056      5.2       --            --       --
                         ---      --------    -----       ---      --------    -----       ---      --------    -----
  Total QSR..........    626       426,095     79.8       507       390,450     90.3       271       189,626     86.7
Casual Dining:
 Shoney's............     38        22,961      4.3       --            --       --        --            --       --
 Applebee's..........     16        21,760      4.1         3         4,750      1.1       --            --       --
 Perkin's............     26        21,295      4.0         3         3,850      0.9       --            --       --
 Denny's.............     28        18,791      3.5         5         4,620      1.1       --            --       --
 Golden Corral.......      6        10,082      1.9         5        14,450      3.3       --            --       --
 Pizza Hut...........      3         1,919      0.4        16         8,093      1.9        38        26,566     12.1
 Other Casual
  Dining.............     19        11,362      2.0         2         6,317      1.4         1         2,550      1.2
                         ---      --------    -----       ---      --------    -----       ---      --------    -----
  Total Casual
   Dining............    136       108,170     20.2%       34        42,080      9.7        39        29,116     13.3
  Total..............    762      $534,265    100.0%      541      $432,530    100.0%      310      $218,742    100.0%
                         ===      ========    =====       ===      ========    =====       ===      ========    =====
</TABLE>

  Energy Finance Group. The 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, regional, and local operators of retail petroleum businesses. As of
December 31, 1997, the Energy Finance Group originated loans through a network
of six offices in four states. For the year ended December 31, 1997, this
group originated $180.8 million of energy loans including loans to Borrowers
that represent brands such as Texaco, Exxon, Shell, Mobil, Amoco, Chevron,
Arco, BP, and Phillips 66.

  The Energy Finance Group, which is headquartered in Parsippany, New Jersey,
consists of approximately 37 financial professionals and includes personnel
similar to the Restaurant Finance Group as well as industry professionals
hired from major oil companies and energy related commercial lending roles who
evaluate each customer's specific needs and suggest personalized financial
solutions. Similar to the Restaurant Finance Group, the Energy Finance Group
originates loans on a national basis and such loans are underwritten at the
group's headquarters or in one of four regional offices located in Los
Angeles, Newport Beach, Dallas, and Charlotte.

  Retail energy business operators use loans for existing station
acquisitions, the purchase of real estate associated with currently leased
facilities, funding for replacement or upgrading of underground storage tanks
and development to transform a gasoline station/convenience store into a
multi-profit center facility which may include a car wash, quick lube shop,
co-branded fast food express unit or slot machines in states such as Nevada
where gaming is permitted. Generally, the Company's Borrowers include business
owners with five to fifty

                                      11
<PAGE>

established locations. Loans typically range in size from $1.0 million to $5.0
million. These loans are primarily fixed-rate loans having a term of up to 20
years. The Company requires Borrowers to maintain at least one additional
revenue source aside from gasoline sales, such as a car wash or fast food,
convenience items or quick lube center in order to diversify the revenue
stream.

  Golf Finance Group. 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 practice facilities. For the year ended December
31, 1997, this group originated $33.2 million of golf loans.

  The Golf Finance Group, which is headquartered in Greenwich, Connecticut,
includes professionals with extensive commercial lending experience. The loan
origination process is conducted by experienced golf facility lenders who
solicit qualified owners nationwide. The group is supported by loan
processing, underwriting and closing departments which work with Borrowers
throughout the process. The Golf Finance Group operates out of three offices
in three states.

  Loans are used for a variety of purposes, including debt refinance, golf
course or facility acquisitions, expansions, renovations and improvements,
purchase of new equipment, new golf course or facility development, purchase
of underlying real estate and working capital. Loans typically range in size
from $1.0 million to $5.0 million with a maximum term of 20 years. Since the
Company generally lends against existing cash flow, all non-acquisition golf
courses and facilities must have a minimum operating history of 12 months
under ownership by the Borrower.

  Funeral Finance Group. The Funeral Finance Group was organized in late 1997
to provide loans to experienced owners and operators of death care related
companies, such as funeral homes and cemeteries. This group closed its first
loans in January of 1998.

  The Funeral Finance Group, which is headquartered in Atlanta, Georgia,
includes professionals with extensive commercial lending and industry related
experience. The loan origination process is conducted nationally by Marketing
Vice Presidents who solicit qualified owners and consolidators nationwide. The
group is supported by loan processing, underwriting and closing departments
which work with Borrowers throughout the loan origination process. The Funeral
Finance Group operates out of three offices in three states.

  Loans are used for a variety of purposes, including debt refinance, facility
acquisitions, expansions, renovations and improvements, purchase of underlying
real estate and working capital. Loans typically range in size from $500,000
to $10.0 million with a maximum term of 20 years. Since the Company generally
lends against existing cash flow, all non-acquisition businesses must have a
minimum operating history of 12 months under ownership by the Borrower.

  Equipment Finance Group. The Equipment Finance Group was organized in 1996
to provide equipment financing to experienced owners and operators in sectors
in which the Company operates and other strategic complementary businesses.
For the year ended December 31, 1997 the group originated $52.7 million of
equipment loans and leases.

  The Equipment Finance Group, which is headquartered in Greenwich,
Connecticut, includes professionals with extensive equipment finance related
experience. Equipment loans and leases are originated either through the
group's direct field sales or telesales department, third party originators or
in connection with loans offered in each sector in which the Company operates
by that sector's sales personnel. The Company's equipment loans and leases
typically range in size from $100,000 to $400,000. The Company believes the
activities of this group complement those of groups in its other sectors and
provides a more complete financing solution for its Borrowers.

                                      12
<PAGE>

  The following table sets forth the Company's loan and lease origination
activity by sector for the periods indicated:

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31, 1997                     YEAR ENDED DECEMBER 31, 1996
                            ------------------------------------------------ ------------------------------------------------
                                                                     % OF                                             % OF
                                           WEIGHTED    PRINCIPAL  PRINCIPAL                 WEIGHTED    PRINCIPAL  PRINCIPAL
    LENDING SECTOR           NUMBER OF      AVERAGE      AMOUNT     AMOUNT    NUMBER OF      AVERAGE      AMOUNT     AMOUNT
 AN TYPE OF ORIGINATIOND    ORIGINATIONS INTEREST RATE ORIGINATED ORIGINATED ORIGINATIONS INTEREST RATE ORIGINATED ORIGINATED
-----------------------     ------------ ------------- ---------- ---------- ------------ ------------- ---------- ----------
                                                                                          (DOLLARS IN THOUSANDS)
   <S>                      <C>          <C>           <C>        <C>        <C>          <C>           <C>        <C>
   Restaurant Loans:
    Fixed-rate
    loans...........             635         10.04%     $421,108     52.6%       292          10.24%     $218,765     47.6%
    Variable-rate
    loans...........             127          9.55       113,157     14.1        249           9.31       213,765     46.5
                               -----         -----      --------    -----        ---          -----      --------    -----
    Total (2).......             762          9.93       534,265     66.7        541           9.78       432,530     94.1
                               -----         -----      --------    -----        ---          -----      --------    -----
   Retail Energy
   Loans:
    Fixed-rate
    loans...........             181         10.08       158,726     19.8        --             --            --       --
    Variable-rate
    loans...........              31          9.84        22,108      2.8        --             --            --       --
                               -----         -----      --------    -----        ---          -----      --------    -----
    Total (3).......             212         10.05       180,834     22.6        --             --            --       --
                               -----         -----      --------    -----        ---          -----      --------    -----
   Golf Loans:
    Fixed-rate
    loans...........               7         10.83        21,030      2.6          2          10.95        14,200      3.1
    Variable-rate
    loans...........               2          9.47        12,188      1.5          3           9.74        10,251      2.2
                               -----         -----      --------    -----        ---          -----      --------    -----
    Total (4).......               9         10.33        33,218      4.1          5          10.44        24,451      5.3
                               -----         -----      --------    -----        ---          -----      --------    -----
   Equipment
   Finance:
    Fixed-rate loans
    and leases......             250         12.14        52,722      6.6         16          12.14         2,539      0.6
    Total loan and
    lease
    originations....           1,233         10.12%     $801,039    100.0%       562           9.83%     $459,520    100.0%
                               =====         =====      ========    =====        ===          =====      ========    =====
<CAPTION>
                                    YEAR ENDED DECEMBER 31, 1995(1)
                            ------------------------------------------------
                                                                     % OF
                                           WEIGHTED    PRINCIPAL  PRINCIPAL
    LENDING SECTOR           NUMBER OF      AVERAGE      AMOUNT     AMOUNT
 AN TYPE OF ORIGINATIOND    ORIGINATIONS INTEREST RATE ORIGINATED ORIGINATED
-----------------------     ------------ ------------- ---------- ----------
   <S>                      <C>          <C>           <C>        <C>
   Restaurant Loans:
    Fixed-rate
    loans...........            202          10.12%     $143,515     65.6%
    Variable-rate
    loans...........            108           8.40        75,227     34.4
                            ------------ ------------- ---------- ----------
    Total (2).......            310           9.53       218,742    100.0
                            ------------ ------------- ---------- ----------
   Retail Energy
   Loans:
    Fixed-rate
    loans...........            --             --            --       --
    Variable-rate
    loans...........            --             --            --       --
                            ------------ ------------- ---------- ----------
    Total (3).......            --             --            --       --
                            ------------ ------------- ---------- ----------
   Golf Loans:
    Fixed-rate
    loans...........            --             --            --       --
    Variable-rate
    loans...........            --             --            --       --
                            ------------ ------------- ---------- ----------
    Total (4).......            --             --            --       --
                            ------------ ------------- ---------- ----------
   Equipment
   Finance:
    Fixed-rate loans
    and leases......            --             --            --       --
    Total loan and
    lease
    originations....            310           9.53%     $218,742    100.0%
                            ============ ============= ========== ==========
</TABLE>
----
(1) Loan and lease origination activity for the six months ended December 31,
    1995 and for the six months ended June 30, 1995 have been combined to show
    a 12 month period for the purpose of comparing to the year ended December
    31, 1996.
(2) For the year ended December 31, 1997, 70.3% and 29.7% of the Company
    restaurant loans consisted of permanent and DEVCO loans, respectively;
    such percentages were 75.4% and 24.6% at December 31, 1996 and 97.3% and
    2.7% at December 31, 1995.
(3) For the year ended December 31, 1997, 80.9% and 19.1% of the Company
    retail energy loans consisted of permanent and DEVCO loans, respectively.
(4) For the years ended December 31, 1997, 1996 and 1995, all of the Company's
    golf loans were permanent loans.

                                       13
<PAGE>

  Geographic Distribution--The following table sets forth by state the number
of loans and leases originated by the Company for the periods presented.

<TABLE>
<CAPTION>
                     YEAR ENDED DECEMBER 31, 1997       YEAR ENDED DECEMBER 31, 1996       YEAR ENDED DECEMBER 31, 1995
                  ---------------------------------- ---------------------------------- ----------------------------------
                               PRINCIPAL                          PRINCIPAL                          PRINCIPAL
                   NUMBER OF     AMOUNT   % OF TOTAL  NUMBER OF     AMOUNT   % OF TOTAL  NUMBER OF     AMOUNT   % OF TOTAL
                  ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED
                  ------------ ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
                                                           (DOLLARS IN THOUSANDS)
<S>               <C>          <C>        <C>        <C>          <C>        <C>        <C>          <C>        <C>
California......       177      $113,653     14.2%        42       $ 33,209      7.2%        23       $ 13,172      6.0%
Georgia.........       115        85,281     10.6         11         11,052      2.4         16         13,612      6.2
Texas...........        67        62,054      7.7         42         29,264      6.4         15         13,471      6.2
North Carolina..        78        48,097      6.0         21         23,106      5.0         22         13,444      6.1
Michigan........        58        43,339      5.4          7          4,848      1.1          9          7,414      3.4
Kentucky........        49        35,235      4.4          1          1,177      0.3          4          5,500      2.5
Virginia........        47        34,883      4.4         17         35,913      7.8         25         18,859      8.6
Arizona.........        48        29,320      3.7        --             --       --         --             --       --
Illinois........        71        28,215      3.5         10          5,855      1.3          6          3,686      1.7
Florida.........        41        26,739      3.3          7          3,854      0.8         20         12,779      5.8
Ohio............        41        26,291      3.3         10          6,501      1.4          9          8,192      3.7
Alabama.........        33        23,172      2.9         20         18,479      4.0         26         18,435      8.4
New Jersey......        38        23,513      2.9         30         31,380      6.8         14         10,906      5.0
Pennsylvania....        25        22,594      2.8         58         35,196      7.7         15          7,852      3.6
Louisiana.......        21        21,492      2.7          5          4,243      0.9        --             --       --
South Carolina..        23        16,311      2.0         21         17,022      3.7          8          5,460      2.5
Maryland........        31        15,974      2.0         21         25,019      5.4          3          1,621      0.7
Other
 States(1)......       270       144,876     18.2        239        173,402     37.8         95         64,339     29.6
                     -----      --------    -----        ---       --------    -----        ---       --------    -----
 Totals:             1,233      $801,039    100.0%       562       $459,520    100.0%       310       $218,742    100.0%
                     =====      ========    =====        ===       ========    =====        ===       ========    =====
</TABLE>
--------
(1) Other states represent loan originations that are less than 2.0% of total
    1997 originations.

COMPETITION

  The Company faces intense competition in the business of originating and
selling loans and leases. Traditional competitors in the financial services
business include commercial banks, thrift institutions, diversified finance
companies, asset-based lenders, specialty franchise finance companies and real
estate investment trusts. Many of these competitors in the commercial finance
business are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. In addition, many
financial service organizations have formed national networks for loan and
lease originations substantially similar to the Company's loan and lease
programs. Competition can take many forms including convenience in obtaining a
loan or lease, customer service, marketing and distribution channels, amount
and term of the loan, and interest or credit ratings. In addition, the current
level of gains realized by the Company and its competitors on the sale of
loans and leases could attract additional competitors into this market with
the possible effect of lowering gains on future loan and lease sales due to
increased loan and lease origination competition.

  The Company believes that its industry expertise and proprietary databases,
combined with its responsiveness to Borrowers, flexibility in structuring
transactions and broad product offerings give it a competitive advantage over
more traditional, highly regulated small business lenders.

REGULATION

 Lending Laws

  Certain aspects of the Company's businesses are subject to regulation and
supervision at both the federal and state level. Regulated matters include
loan origination, credit activities, maximum interest rates and finance and
other charges, disclosure to customers, the collection, foreclosure,
repossession and claims handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions and other trade practices.

                                      14
<PAGE>

 Future Laws

  The laws, rules and regulations applicable to the Company are subject to
modifications and change. There can be no assurance that rules and
regulations, or other such laws, rules or regulations will not be adopted in
the future which could make compliance more difficult or expensive, restrict
the Company's ability to originate or sell loans, the amount of interest and
other charges earned on loans originated or sold by the Company, or otherwise
adversely affect the business or prospects of the Company.

 Environmental Liability Generally

  Contamination of real property by hazardous substances may give rise to a
lien on that property to assure payment of the cost of clean-up or, in certain
circumstances subject the lender to liability. Such contamination may also
reduce the value of the business property. Under the laws of some states and
under CERCLA, a lender may become liable for cleanup of a property and
adjacent properties that are contaminated by releases from the property if the
lender engages in certain activities.

 Environmental Laws Affecting Borrowers in Specific Sectors

  Environmental Regulations Affecting Franchises. The operation and management
of franchise businesses (whether pursuant to direct ownership, lease or
management contract) may involve the use and limited storage of certain
hazardous materials. Borrowers may be required to obtain various environmental
permits and licenses in connection with their operations and activities and
comply with various health and safety regulations adopted by federal, state,
local and foreign authorities governing the use and storage of such hazardous
materials.

  Environmental Regulations Affecting Retail Energy Businesses. The operation
and management of retail energy businesses (whether pursuant to direct
ownership, lease or management contract) involves the use and limited storage
of certain hazardous materials. Specifically, the Company's Borrowers in the
retail energy sector incur ongoing costs to comply with federal, state and
local environmental laws and regulations governing USTs used in their
operations. The Company's loans may be secured by convenience store and gas
station locations with USTs and other environmental risks. Borrowers may be
required to obtain various environmental permits and licenses in connection
with their operations and activities and comply with various health and safety
regulations adopted by federal, state, local and foreign authorities governing
the use and storage of such hazardous materials. Under various federal, state,
local and foreign laws, ordinances and regulations, various categories of
persons, including owners, operators or managers of real property may be
liable for the costs of investigation, removal and remediation of hazardous
substances that are or have been released on or in their property even if such
releases were by former owners or occupants. In addition, any liability to
Borrowers for assessment and remediation activities in connection with
releases into the environment of gasoline or other regulated substances from
USTs or otherwise at such Borrowers' gasoline facilities could adversely
impact the Borrowers' ability to repay their loans from the Company or the
value of any pledged collateral. Due to the nature of releases, the actual
costs incurred may vary and the ongoing costs of assessment and remediation
activities may vary from year to year and may adversely impact such Borrowers'
ability to repay their loans.

  Most states have funds which provide reimbursement to qualified storage tank
owners/operators for assessment and remediation costs associated with
petroleum releases (after the operator pays a set deductible and co-payment
amount). Most funds are supported by annual tank registration fees paid by the
station owners and a gasoline fee, included in the price of the gas, which is
paid by consumers. There has been an increasing number of UST replacements in
recent years. Consequently, some state funds have been drained of reserves.
The result is a delay in disbursement until the fund can be replenished with
fee collections, the effect of which may have an adverse effect on the
borrowers' financial condition and ability to repay its loan.

  Environmental Regulations Affecting Golf Courses and Facilities. The
operation and management of golf courses and golf practice and instruction
facilities (whether pursuant to direct ownership, lease or management
contract) involve the use and limited storage of certain hazardous materials
such as herbicides, pesticides,

                                      15
<PAGE>

fertilizers, motor oil, gasoline and paint. Borrowers may be required to
obtain various environmental permits and licenses in connection with their
operations and activities and comply with various health and safety
regulations adopted by federal, state, local and foreign authorities governing
the use and storage of such hazardous materials.

 Impaired Property Insurance Policy

  The Company will be entitled to the benefit of a Secured Creditor Impaired
Property Insurance Policy (the "Policy") issued by Commerce and Industry
Insurance Company, a member company of American International Group, Inc. (the
"Insurer") with respect to energy loan mortgaged properties. The following
summary describes certain provisions of the Policy. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to the provisions of the Policy. The Policy will insure the Company,
subject to terms of the Policy, against the following claims, expenses, and
losses made or incurred during the Policy period which result from existing
and known environmental contamination that has been disclosed to the Insurer
or environmental contamination that is discovered during the effective period
of the Policy of energy loan mortgaged properties: either (i) certain clean-up
costs relating to certain pollution conditions required to be paid by the
Company with respect to any such mortgaged property, or (ii) loss resulting
from a default by a related borrower in an amount equal to the lesser of the
outstanding principal balance of the related energy loan and certain clean-up
costs with respect to such mortgaged properties where the pollution condition
is first discovered by the insured during the Policy period. The maximum
recovery under the Policy is $2 million per loss and $25 million overall, with
a $10,000 deductible on each loss. The period of the Policy is 20 years.

EMPLOYEES

  As of February 28, 1998, the Company had approximately 202 employees.
Management believes that its relations with these employees are satisfactory.
The Company is not party to any collective bargaining agreement.

ITEM 2. PROPERTIES

  The Company's executive and administrative offices are located in the
Century City area of Los Angeles, California. The Company also leases offices
in Birmingham, Alabama; Newport Beach and Los Angeles, California; Englewood,
Colorado; Greenwich, Connecticut; Atlanta, Georgia; Columbus, Nebraska;
Parsippany and Princeton, New Jersey; Charlotte, North Carolina; Dallas and
Houston, Texas; and Bothell, Washington. These offices are primarily used for
the marketing and originating of the company's loan and lease products, and
management believes they are adequate and suitable for the company's ongoing
operations.

ITEM 3. LEGAL PROCEEDINGS

  The Company is not currently involved in any litigation arising from the
normal course of business.

  The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among
others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on
November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an
accounting, monetary and punitive damages for alleged breach of contract,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing and fraud arising from an alleged business relationship. Counsel to
the predecessor entity and Mr. Knyal believe that the claim is without merit
and intend to defend it vigorously. ICII and FLRT, Inc. have agreed to
indemnify the Company against any and all liability that the Company and its
stockholders (other than ICII and FLRT, Inc.) may incur as a result of this
lawsuit.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  None.

                                      16
<PAGE>

SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT

  In reliance on General Instruction G to Form 10-K, information on executive
officers of the Registrant is included in this Part I. The following table
sets forth certain information as of February 28, 1998 with respect to each
person who is an executive officer of the Company:

<TABLE>
<CAPTION>
           NAME           AGE                      POSITION
           ----           ---                      --------
 <C>                      <C> <S>
 Wayne L. "Buz" Knyal ...  51 President, Chief Executive Officer and Director
 Thomas J. Shaughnessy ..  39 Executive Vice President and Chief Credit Officer
 John W. Rinaldi ........  50 Executive Vice President, Loan Portfolio
                               Management and President, Equipment Finance
                               Group
 Thomas Kaplan ..........  32 Executive Vice President, Capital Markets
                           43 Executive Vice President and Chief Financial
 Raedelle Walker ........     Officer
</TABLE>

  All officers of the Company are elected or appointed by the Board of
Directors and shall hold office until their successors are elected or
appointed, except that the Board of Directors may remove any officer at
anytime at its discretion.

  WAYNE L. "BUZ" KNYAL is President, Chief Executive Officer, Director, and
founder of the Company. Prior to founding the Company's predecessor in 1991,
Mr. Knyal founded and owned CBI Insurance Services, Inc. and concurrently
served as President of CBI Mortgage Company, a residential mortgage banker.
From 1968 to 1980, Mr. Knyal was an Executive Vice President of Krupp/Taylor
Advertising and served clients in the fast food industry. Mr. Knyal is a
Director of New Riders, Inc., a restaurant company.

  THOMAS J. SHAUGHNESSY, Executive Vice President, Chief Credit Officer, has
been with the Company since May of 1994. From 1992 to May 1994, Mr.
Shaughnessy was the Credit Portfolio Manager for the Franchise Finance Group
at AT&T Capital Corporation in Denver, Colorado.

  JOHN W. RINALDI, Executive Vice President and President, Equipment Finance
has been with the Company since its inception. Mr. Rinaldi has held the same
title at Franchise Mortgage LLC since July 1997 and was Senior Vice President,
Operations of Franchise Mortgage LLC since July 1995 through June 1997. From
1993 to July 1995, Mr. Rinaldi was the Executive Vice President of Federated
Financial Reserve Corporation. Mr. Rinaldi was the Senior Vice President and
Chief Operating Officer of the Commercial Equipment Finance Group of Bell
Atlantic TriCon from 1984 to 1993.

  THOMAS KAPLAN, Executive Vice President, Capital Markets, has been with the
Company since October of 1997. Mr. Kaplan was a Senior Vice President in the
Asset-Backed Finance group at Greenwich Capital Markets ("Greenwich Capital")
from September 1995 to October 1997. From 1990 to 1995, Mr. Kaplan was a
Director at Credit Suisse First Boston, where he was a trader for the firm's
subordinate mortgage- and asset-backed securities and asset-backed whole loan
positions.

  RAEDELLE WALKER, Executive Vice President and Chief Financial Officer, has
been with the Company since February of 1997. From 1995 until joining the
Company, Ms. Walker served as the Chief Financial Officer of Southern Pacific
Bank. From 1985 to 1995, Ms. Walker served as a Senior Manager with KPMG Peat
Marwick LLP, providing accounting and consulting services to clients in the
firm's financial services practice. Ms. Walker is a Certified Public
Accountant.

                                      17
<PAGE>

OTHER KEY EMPLOYEES

<TABLE>
  <S>                       <C>
  Clinton V. Barrow.......  Marketing Vice President, Restaurant Finance Group
  Edward A. Boyle.........  President, Golf Finance Group
  Kevin T. Burke..........  Senior Vice President, Capital Markets
  Melissa G. Dant, Esq. ..  Vice President, Operations, Corporate Counsel, Energy Finance Group
  Kent "Carty" M. Davis...  Marketing Vice President, Restaurant Finance Group
  Michael A. DeMita, III..  President, Diversified Finance Group
  Brian V. Farren.........  Senior Vice President, Restaurant Finance Group
  Bonita Glover...........  Marketing Vice President, Restaurant Finance Group
  Donald W. Hakes.........  President, Energy Finance Group
  Larry Howard............  Marketing Vice President, Restaurant Finance Group
  Christopher Kelleher....  Senior Vice President, Operations Manager, Energy Finance Group
  Pierrette A. Newman,
   Esq. ..................  Senior Vice President, Operations, Corporate Counsel, Restaurant Finance Group
  Thomas J. Schuldt.......  President, Restaurant Finance Group
  David Schwartzman.......  Senior Vice President, Credit Manager, Restaurant Finance Group
  Courtney S. Stephens....  Marketing Vice President, Restaurant Finance Group
  Mary Ann Zic............  Vice President, Director of Research, Corporate
</TABLE>

                                       18
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
       MATTERS

  The Company's common stock is traded on the NASDAQ National Market System
under the symbol FMAX. The following table presents the quarterly high and low
bid quotations in the over-the-counter market as reported on the NASDAQ
National Market System for the period from November 18, 1997, when public
trading of the common stock commenced. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                         MARKET PRICE
                                                         ------------- DIVIDENDS
                                                          HIGH   LOW   DECLARED
                                                         ------ ------ ---------
   <S>                                                   <C>    <C>    <C>
   1997
     First Quarter......................................    N/A    N/A     N/A
     Second Quarter.....................................    N/A    N/A     N/A
     Third Quarter......................................    N/A    N/A     N/A
     Fourth Quarter (beginning November 18)............. $20.00 $15.88   $0.00
   1996
     First Quarter......................................    N/A    N/A     N/A
     Second Quarter.....................................    N/A    N/A     N/A
     Third Quarter......................................    N/A    N/A     N/A
     Fourth Quarter.....................................    N/A    N/A     N/A
</TABLE>

  According to the report of beneficial owners provided by the Depository
Trust Company, the approximate number of shareholders of record of the
Company's common stock on February 28, 1998 was 95.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                               PREDECESSOR
                                                        --------------------------
                            YEAR ENDED      SIX MONTHS  SIX MONTHS   YEAR ENDED
                           DECEMBER 31,       ENDED       ENDED     DECEMBER 31,
                          ---------------- DECEMBER 31,  JUNE 30,  ---------------
                           1997     1996       1995        1995     1994    1993
                          -------  ------- ------------ ---------- ------  -------
                             (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S>                       <C>      <C>     <C>          <C>        <C>     <C>
STATEMENT OF OPERATIONS
 DATA:
Revenues:
  Gain on sales(1)......  $52,117  $18,671    $  --      $   --    $4,052  $ 1,430
  Net interest income...    5,156    1,641       239         154       37       35
  Loan servicing
   income...............    3,314    1,191       349         326      306      345
  Other income (loss)...     (111)      63       --          --        68      --
                          -------  -------    ------     -------   ------  -------
    Total revenues......   60,476   21,566       588         480    4,463    1,810
                          -------  -------    ------     -------   ------  -------
Expenses:
  Personnel and
   commission...........   13,636    8,270       356         931    1,723    1,035
  General and
   administrative.......    4,759    1,094       294         684    1,804    2,952
  Other.................    6,360    2,878       597         776    1,664    1,718
                          -------  -------    ------     -------   ------  -------
    Total expenses......   24,755   12,242     1,247       2,391    5,191    5,705
                          -------  -------    ------     -------   ------  -------
    Income (loss) before
     taxes..............   35,721    9,324      (659)     (1,911)    (728)  (3,895)
Income tax(2)...........   15,001      --        --          --       --       --
                          -------  -------    ------     -------   ------  -------
    Net income (loss)...  $20,720  $ 9,324    $ (659)    $(1,911)  $ (728) $(3,895)
                          =======  =======    ======     =======   ======  =======
Basic and diluted income
 per share(3)...........  $  0.91
                          =======
</TABLE>

                                      19
<PAGE>

<TABLE>
<CAPTION>
                                                  DECEMBER 31,
                                   -------------------------------------------
                                                                PREDECESSOR
                                                              ----------------
                                     1997     1996     1995    1994     1993
                                   -------- -------- -------- -------  -------
                                                 (IN THOUSANDS)
<S>                                <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA:
Cash and cash equivalents........  $  7,335 $    --  $    --  $   102  $   205
Securities available for sale....    25,345   39,349      --    9,541    5,025
Loans and leases held for sale...   343,200   98,915  181,254     --       --
Retained interest in loan
 securitizations(4)..............    19,177    6,908      --      --       --
Accrued interest receivable......     2,758      560    1,108     138       39
Goodwill.........................     4,315    4,332    4,226     --       --
Other assets.....................    20,102   10,112    2,460     467      862
                                   -------- -------- -------- -------  -------
  Total assets...................   422,232  160,176  189,048  10,248    6,131
Payable to Imperial Credit Indus-
 tries, Inc......................       --    17,728      --      --       --
Overdraft........................       --       171      445     --       --
Borrowings.......................   256,220  125,240  181,632  13,548    7,160
Deferred income taxes(2).........    15,001      --       --      --       --
Other liabilities................    12,589    2,580    3,198   1,543    3,086
                                   -------- -------- -------- -------  -------
  Total liabilities..............   283,810  145,719  185,275  15,091   10,246
Members' equity..................       --  $ 14,457 $  3,773 $(4,843) $(4,115)
                                            ======== ======== =======  =======
Common stock.....................        29
Additional paid-in capital.......   138,393
                                   --------
  Total stockholders equity......  $138,422
                                   ========
</TABLE>

<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                            -------------------------------------------------
                               1997       1996      1995      1994     1993
                            ----------  --------  --------  --------  -------
                                    (IN THOUSANDS, EXCEPT RATIOS)
<S>                         <C>         <C>       <C>       <C>       <C>
OPERATING STATISTICS:
Loan originations:
  Total loan originations.. $  748,317  $456,981  $218,742  $109,166  $29,367
  Average initial principal
   balance per loan........ $      761  $    837  $    706  $    635  $   452
  Number of loans..........        983       546       310       172       65
  Weighted average interest
   rate:
    Fixed rate loans.......      10.08%    10.29%    10.12%    10.21%    9.48%
    Variable rate loans....       9.58%     9.34%     8.40%     8.13%     -- %
Equipment finance
 originations:
  Total equipment finance
   originations............ $   52,722  $  1,486  $    --   $    --   $   --
  Average principal balance
   per financing........... $      258  $    149  $    --   $    --   $   --
  Number of financings.....        250        10       --        --       --
  Weighted average interest
   rate....................      12.14%    12.14%      -- %      -- %     -- %
Total loan and lease
 originations:............. $  801,039  $458,467  $218,742  $109,166  $29,367
Loan sales:
  Whole loan sales(1)...... $   50,800  $    --   $    --   $    --   $   --
  Loans sold through
   securitizations(1)......    483,100   325,088   147,972   105,686   28,973
                            ----------  --------  --------  --------  -------
      Total................ $  533,900  $325,088  $147,972  $105,686  $28,973
Loans and leases held in
 servicing portfolio
 (at period end)(5)........ $1,629,067  $737,176  $358,579  $180,367  $81,030
Net charge-offs as a
 percentage of total
 servicing portfolio.......        -- %      -- %      -- %      -- %     -- %
</TABLE>

                                       20
<PAGE>

--------
(1) Gain on sale for the years ended December 31, 1997 and 1996 includes $51.1
    million and $11.9 million of cash gains, of which $6.1 million and $7.8
    million, respectively, represented loan fees. The gain on sale of loans
    for the December 1995 securitization was not recognized until the first
    quarter of 1996.
(2) From July 1, 1995 through November 18, 1997, the Company qualified to be
    treated as a limited liability company, which is similar to a partnership,
    for federal and state income tax purposes. As a result of terminating the
    Company's LLC status upon completion of the Initial Public Offering, the
    Company was required to record a one-time non-cash charge of $11.0 million
    against historical earnings for deferred income taxes. This charge
    occurred in the quarter ended December 31, 1997 and the year ended
    December 31, 1997. See Notes 3 and 13 of Notes to Financial Statements.
(3) A weighted average of 22,669,949 outstanding shares were used in computing
    basic and diluted income per share.
(4) See Note 7 of Notes to Financial Statements.
(5) Total delinquencies, which include all loans and leases 90 or more days
    past due as a percentage of all loans and leases held in the Company's
    servicing portfolio, was 0.8% as of December 31, 1997.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS

  The following discussion should be read in conjunction with the Company's
financial statements and notes thereto appearing elsewhere herein. The
accompanying statements of operations and cash flows for the six months ended
June 30, 1995, and the year ended December 31, 1994, are those of the
Company's predecessor when it was a division of Greenwich. Revenues and
interest expense appearing on such statements of operations result from assets
and debt of such division accounted for separately by Greenwich. Personnel and
commission expense appearing on such statements of operations apply to the
employees of such division, and such expense was also accounted for separately
by Greenwich. All other expenses of such division were either directly
assigned or allocated to the predecessor division by Greenwich based on either
actual utilization or the number of such division's employees.

RESULTS OF OPERATIONS

 Impact of Change in Tax Status

  Prior to the completion of the Offering, the Company qualified to be taxed
as a limited liability company, which is similar to a partnership.
Accordingly, income was taxed directly as a pass through to its members. As a
result of the change in tax status effective with the completion of the
Offering, the Company now provides for all income taxes at statutory rates.
These factors are estimated to result in an effective tax rate for periods
subsequent to the Offering of approximately 42%. However, for the three-month
period in which the Offering closed, the Company recorded a one-time, non-cash
charge of $11.0 million for the quarter ended December 31, 1997 and for the
year ended December 31, 1997 for deferred income taxes based upon the change
in the Company's status to a C Corporation. For further information see Notes
3 and 13 of Notes to Financial Statements.

                                      21
<PAGE>

 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

<TABLE>
<CAPTION>
                                                                     PRO FORMA
                                                        YEAR ENDED   YEAR ENDED
                                                       DECEMBER 31, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
                                                            (IN THOUSANDS)
<S>                                                    <C>          <C>
Revenues:
  Gain on sale of loans...............................   $52,117      $18,671
  Interest income.....................................    26,758       16,130
  Interest expense....................................   (21,602)     (14,489)
                                                         -------      -------
    Net interest income...............................     5,156        1,641
  Loan servicing income...............................     3,314        1,191
  Other income (loss).................................      (111)          63
                                                         -------      -------
    Total revenues....................................    60,476       21,566
                                                         -------      -------
Expenses:
  Personnel and commission............................    13,636        8,270
  Professional services...............................     2,416        1,093
  Travel..............................................     1,585          614
  Business promotion..................................     1,251          450
  Occupancy...........................................       683          310
  Goodwill amortization...............................       425          411
  General and administrative..........................     4,759        1,094
                                                         -------      -------
    Total expenses....................................    24,755       12,242
                                                         -------      -------
  Income before taxes.................................    35,721        9,324
  Income tax(1).......................................    15,001        3,873
                                                         -------      -------
    Net income(1).....................................   $20,720      $ 5,451
                                                         =======      =======
</TABLE>
--------
(1) Income tax and net income for 1996 are presented as if the Company had
    been taxed as a corporation, for comparative purposes.

  Total revenues increased 180.4% to $60.5 million for the year ended December
31, 1997 from $21.6 million for the comparable period in 1996. During the same
periods, the Company's total expenses increased 102.2% to $24.8 million from
$12.2 million. As a result, net income increased 280.1% to $20.7 million for
the year ended December 31, 1997 as compared to pro forma net income of $5.5
million in 1996.

  The increase in revenues was primarily attributable to a $33.4 million
increase in gain on sale of loans and leases. For the year ended December 31,
1997, the Company sold approximately $483.1 million of loans and leases in
three securitizations for a gain on sale of $46.9 million (of which $45.9
million was cash) as compared to $430.3 million of loans sold in three
securitizations for a gain on sale of $18.7 million (of which $11.9 million
was cash) for the year ended December 31, 1996. The Company also recognized a
gain on sale of $3.2 million in the year ended December 31, 1997 from five
whole loan and lease sales of approximately $50.8 million in loans and leases.
Additionally, $2.0 million in loan fees was recognized in 1997 which was
previously deferred due to the sales and securitizations of loans and leases.
The increased gain on sale of loans was due to several factors, including the
composition of loans in the securitizations and whole loan sales, the
structure of the securitizations, market conditions at the time of the
securitization transactions, and the fact that the Company was successful in
selling all classes of securitization interests.

  Net interest income also contributed to the increase in revenues, increasing
214.2% to $5.2 million for the year ended December 31, 1997 as compared to
$1.6 million for the same period in 1996, primarily due to the significant
increase in loans and leases held for sale which resulted from increased loan
and lease originations.

  Additionally, loan servicing income increased 178.3% to $3.3 million for the
year ended December 31, 1997 as compared to $1.2 million for the same period
in 1996. This was due to an increase in loans and leases serviced

                                      22
<PAGE>

which resulted from the securitization of $483.1 million in loans and leases
during 1997 with servicing rights retained by the Company.

  Total expenses increased 102.2% to $24.8 million for the year ended December
31, 1997 as compared to $12.2 million for the same period of the prior year
primarily due to infrastructure additions needed to fund increased loan and
lease originations. Personnel expenses increased 64.9% to $13.6 million,
professional services increased 121.0% to $2.4 million and general and
administrative expenses increased 249.7% to $3.8 million for the year ended
December 31, 1997 as compared to the year ended December 31, 1996.

 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

<TABLE>
<CAPTION>
                                                                     PRO FORMA
                                                        YEAR ENDED   YEAR ENDED
                                                       DECEMBER 31, DECEMBER 31,
                                                           1996       1995(1)
                                                       ------------ ------------
                                                            (IN THOUSANDS)
   <S>                                                 <C>          <C>
   Revenues:
     Gain on sale of loans............................   $ 18,671     $    --
     Interest income..................................     16,130       3,050
     Interest expense.................................    (14,489)     (2,657)
                                                         --------     -------
       Net interest income............................      1,641         393
                                                         --------     -------
     Loan servicing income............................      1,191         675
     Other income.....................................         63         --
                                                         --------     -------
       Total revenues.................................     21,566       1,068
                                                         --------     -------
   Expenses:
     Personnel and commission.........................      8,270       1,287
     Professional services............................      1,093         583
     Travel...........................................        614         337
     Business promotion...............................        450         158
     Occupancy........................................        310         149
     Goodwill amortization............................        411         146
     General and administrative.......................      1,094         978
                                                         --------     -------
       Total expenses.................................     12,242       3,638
                                                         --------     -------
       Net income (loss)..............................   $  9,324     $(2,570)
                                                         ========     =======
</TABLE>
--------
(1) The statement of operations for the six months ended December 31, 1995 and
    the predecessor statement of operations for the six months ended June 30,
    1995 have been combined to show a 12 month period for the purpose of
    comparing to the year ended December 31, 1996.

  Total revenues increased 1,919.3% to $21.6 million for the year ended
December 31, 1996 from $1.1 million for the pro forma year ended December 31,
1995. For the same years, the Company's total expenses increased 236.5% to
$12.2 million from $3.6 million. As a result, the Company's net income
increased to $9.3 million for the year ended December 31, 1996 as compared to
a loss of $2.6 million for the pro forma 1995 period.

  The $20.5 million increase in revenues for the year ended December 31, 1996
was primarily attributable to the sale of approximately $430.3 million of
loans in securitizations, resulting in an $18.7 million gain on sale (of which
$11.9 million was cash). The Company securitized $105.2 million of loans for
the six months ended December 31, 1995; however, for accounting purposes, the
transaction was precluded from sale treatment until the first quarter of 1996
at which time the retained interests were sold to an affiliate of ICII.

  Net interest income also contributed to the increase in revenues, increasing
317.6% to $1.6 million for the year ended December 31, 1996 as compared to
$0.4 million for the pro forma year ended December 31, 1995,

                                      23
<PAGE>

due to the significant increase in loans and leases held for sale which
primarily resulted from a 108.9% increase in loan originations to $457.0
million in 1996 as compared to $218.7 million in 1995.

  Additionally, loan servicing income increased 76.4% to $1.2 million for the
year ended December 31, 1996 from $0.7 million for the pro forma year ended
December 31, 1995. This was due to the increase in loans serviced which
resulted from the securitization of $167.4 million in loans in June 1996 and
$105.2 million in loans in 1995, with servicing rights retained by the
Company.

  The 236.5% increase in total expenses to $12.2 million for the year ended
December 31, 1996 compared to $3.6 million for the pro forma year ended
December 31, 1995 primarily resulted from the growth in operations of the
Company due to the dramatic increase in loan originations. Personnel expenses
increased $7.0 million or 542.6%, professional services increased $0.5 million
or 87.5% and travel and business promotion expenses increased $0.6 million or
114.9% for the year ended December 31, 1996 as compared to the year ended
December 31, 1995.

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 December 31, 1997, the
Company had the following warehouse lines of credit and repurchase facilities,
of which CS First Boston, Banco Santander, and Sanwa Bank were guaranteed by
ICII:

<TABLE>
<CAPTION>
                                                                            INTEREST  COMMITMENT  PRINCIPAL
            LENDER             EXPIRATION DATE             INDEX              RATE      AMOUNT    OUTSTANDING
            ------             ---------------             -----            --------- ----------- -----------
                                                                                      (DOLLARS IN THOUSANDS)
 <C>                          <C>                <S>                        <C>       <C>         <C>
 Credit Suisse First Boston.. December 31, 1998  1-month Libor plus 160     7.32% to   $300,000    $127,249
                                                  to 235 basis points       8.07%
 Morgan Stanley.............. September 30, 1998 1-month Libor plus 95 to   6.67% to    200,000      94,031
                                                  155 basis points          7.27%
 Banco Santander............. June 1, 1998       1-month Libor plus 160     7.32%        50,000      21,649
                                                  basis points
 Sanwa Bank.................. June 30, 1998      Eurodollars plus 160       6.88%        25,000       4,506
                                                  basis points
 Other Borrowings (1)...............................................................        --        8,785
                                                                                       --------    --------
                              Total.................................................   $575,000    $256,220
                                                                                       ========    ========
</TABLE>
--------
(1)  Other borrowings include a $2.4 million loan with Goldman Sachs to
     finance a golf loan and a $6.4 million sale of loans to Imperial Credit
     Commercial Mortgage Investment Corporation that has been accounted for as
     a financing.

  The Company has formed a joint venture with MLQ Investors, LP ("MLQ")
pursuant to which all loan and lease activities of the Company's Golf Finance
Group will be exclusively conducted by the new entity which is 50% owned and
managed by each of the Company and MLQ. In connection therewith, Goldman Sachs
Mortgage Company will 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 Company also has a master purchase and sale agreement with Southern
Pacific Bank, a wholly owned subsidiary of ICII ("SPB") to originate loans for
SPB under mutual agreement, and subject to SPB underwriting each such loan
prior to sale of such loans. Under this agreement, the Company also has the
ability to repurchase loans, under mutual agreement with SPB. There is no
specified commitment by either party, and each individual sale is negotiated
separately as to pricing. This agreement has no expiration date. For the year
ended December 31, 1997, loans originated for SPB (and not repurchased),
totaled approximately $7.4 million. The Company does not expect to originate a
significant volume of loans for SPB under this arrangement in the future.

                                      24
<PAGE>

  The Company also has an equipment finance sale facility in place with
Greenwich which is used to fund equipment loans and leases. Under the terms of
the facility, the Company sells loans and future lease payment streams to
Franchise Lease Funding Corporation II ("FLF2"), and FLF2 simultaneously
borrows funds from Greenwich. The facility with Greenwich is for $100 million
expiring in September 1998.

  The Company's sources of operating cash flow include: (i) loan origination
income and fees; (ii) net interest income on loans held for sale; (iii) cash
servicing income; (iv) premiums obtained in sales of whole loans and (v) 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").

  Prior to the Offering, the Company's excess liquidity needs were 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 was fixed at 12% annually.
At December 31, 1997, the Company had no outstanding borrowing with ICII. The
Company made a final distribution of $3.0 million to the members of Franchise
Mortgage LLC immediately prior to the completion of the Offering.

  For the year ended December 31, 1997, net cash provided by operating
activities was $39.1 million. This excludes cash used in net loan originations
of $257.2 million, which was attributable to the Company's increased loan
origination volume. For the year ended December 31, 1996, net cash provided by
operating activities was $5.1 million, exclusive of cash provided by net loan
origination activity of $82.3 million.

  For the year ended December 31, 1997, net cash provided by investing
activities was $9.1 million, which was primarily attributable to the sale of
securities relating to the restructuring of the Company's 1991-A
securitization; the purchase of a $22.8 million bond (which was subsequently
sold in 1998 for approximately the carrying value); the purchase of servicing
rights from Southern Pacific Bank; and a retained interest of $11.7 million in
the whole loan and lease sale to FLF2. For the year ended December 31, 1996,
net cash used in investing activities was $49.9 million, which was primarily
attributable to the purchase of securities related to the restructuring of the
Company's 1991A securitization.

  For the year ended December 31, 1997, net cash provided by financing
activities was $216.5 million, which was primarily attributable to increased
amounts of warehouse line borrowings resulting from increased loan
originations during the period, offset by a $9.3 million LLC distribution to
its members. For the year ended December 31, 1996, net cash used in financing
activities was $37.3 million, which was primarily attributable to the
repayment of bonds relating to the restructuring of the Company's 1991A
securitization, offset by $73.3 million in cash provided through borrowings
from ICII and warehouse lines of credit and repurchase facilities.

  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.

YEAR 2000 COMPUTER ISSUE

  Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00." This could cause many computer applications
to fail completely or create erroneous results unless corrective measures are
taken.

  The Company utilizes some software and related computer hardware
technologies essential to its operations that will be affected by the Year
2000 issue. The Company is currently making changes and enhancements to

                                      25
<PAGE>

eliminate this problem internally and studying what additional actions will be
necessary to make all of its computer systems Year 2000 compliant. The expense
associated with these actions has yet to be fully determined, but could be
material.

INTEREST RATE RISK MANAGEMENT

  The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse financing facilities or for securities issued in its
securitizations. The spread can be adversely affected because of interest rate
increases during the period from the date the loans are originated or
purchased until the closing of the sale or securitization of such loans.

  The Company is required by its warehouse lending facilities to hedge all of
its fixed-rate principal loan balance securing such facilities. The Company's
hedging strategy normally includes selling U.S. Treasury futures in such
amounts and maturities as to effectively hedge the interest rate volatility of
its portfolio. The Company does not maintain naked or leveraged hedge
positions.

  In addition, the Company from time to time may use various other hedging
strategies to provide a level of protection against interest rate risks on its
fixed-rate loans. These strategies may include forward sales of loans or loan-
backed securities, interest rate caps and floors and buying and selling of
futures and options on futures. The Company's management determines the nature
and quantity of hedging transactions based on various factors, including
market conditions and the expected volume of loan originations and purchases.
While the Company believes its hedging strategies are cost-effective and
provide some protection against interest rate risks, no hedging strategy can
completely protect the Company from such risks. Further, the Company does not
believe that hedging against the interest rate risks associated with
adjustable-rate loans is cost-effective, and does not utilize the hedging
strategies described above with respect to its adjustable-rate loans.

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.

TAX CONSIDERATIONS

  As a result of terminating its LLC status upon completion of the Offering,
the Company was required to record deferred income taxes, which relate
primarily to timing differences between financial and income tax reporting of
gain on sale of loans that were attributable to the periods in which it
qualified to be taxed as a limited liability company, which is similar to a
partnership. The recording of such deferred income taxes resulted in a one-
time, non-cash charge against earnings in the quarter ended December 31, 1997
as an additional income tax provision equal to the amount of the deferred
income tax liability. As of December 31, 1997, the recorded amount of the
Company's deferred income taxes was $15.0 million. See Notes 3 and 13 of Notes
to Financial Statements.

ACCOUNTING CONSIDERATIONS

  The Company adopted a new accounting standard on January 1, 1997, and
adopted additional accounting and disclosure standards on either December 31,
1997 or January 1, 1998. For a description of these standards and the effect,
if any, adoption has had or will have on the Company's financial statements,
see Note 3 of Notes to Financial Statements.

                                      26
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
   <S>                                                                       <C>
   Independent Auditors' Report.............................................  28
   Balance Sheets...........................................................  29
   Statements of Operations.................................................  30
   Statements of Changes in Stockholders' or Members' Equity................  31
   Statements of Cash Flows.................................................  32
   Notes to Financial Statements............................................  33
</TABLE>

  Schedules are omitted because they are either inapplicable or the required
information is included in the financial statements or notes thereto.

                                      27
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors
Franchise Mortgage Acceptance Company:

  We have audited the accompanying balance sheets of Franchise Mortgage
Acceptance Company as of December 31, 1997 and 1996, and the related
statements of operations, changes in stockholders' or members' equity and cash
flows for the years ended December 31, 1997 and 1996, the six months ended
December 31, 1995, and the Predecessor six months ended June 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
upon our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Franchise Mortgage
Acceptance Company as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
the six months ended December 31, 1995, and the Predecessor six months ended
June 30, 1995, in conformity with generally accepted accounting principles.

                                          KPMG PEAT MARWICK LLP

Los Angeles, California
January 21, 1998


                                      28
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                                 BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1997     1996
                                                              -------- --------
<S>                                                           <C>      <C>
                           ASSETS
Cash and cash equivalents.................................... $  7,335 $    --
Interest bearing deposits--restricted........................    2,744    2,594
Securities available for sale................................   25,345   39,349
Loans and leases held for sale...............................  343,200   98,915
Retained interest in loan securitizations....................   19,177    6,908
Premises and equipment, net..................................    2,518    1,162
Goodwill.....................................................    4,315    4,332
Accrued interest receivable..................................    2,758      560
Other assets.................................................   14,840    6,356
                                                              -------- --------
    Total assets............................................. $422,232 $160,176
                                                              ======== ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdraft............................................... $    --  $    171
Payable to Imperial Credit Industries, Inc...................      --    17,728
Borrowings...................................................  256,220  125,240
Current income taxes payable.................................      841      --
Deferred income taxes........................................   14,160      --
Other liabilities............................................   12,589    2,580
                                                              -------- --------
    Total liabilities........................................  283,810  145,719
                                                              -------- --------
Commitments and contingencies (note 18)
Stockholders' equity:
  Members' capital...........................................      --     5,792
  Preferred stock, $.001 par value; 10,000,000 shares autho-
   rized at December 31, 1997, none authorized at December
   31, 1996; none issued and outstanding.....................      --       --
  Common stock, $.001 par value; 100,000,000 shares autho-
   rized at December 31, 1997, none authorized at December
   31, 1996; 28,715,625 shares issued and outstanding at De-
   cember 31, 1997...........................................       29      --
  Additional paid in capital.................................  118,330      --
  Retained earnings..........................................   20,063    8,665
                                                              -------- --------
  Total stockholders' equity.................................  138,422   14,457
                                                              -------- --------
  Total liabilities and stockholders' equity................. $422,232 $160,176
                                                              ======== ========
</TABLE>

                See accompanying notes to financial statements.

                                       29
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                            STATEMENTS OF OPERATIONS
                   (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
                                                                     PREDECESSOR
                                                                     -----------
                                         YEAR ENDED      SIX MONTHS  SIX MONTHS
                                        DECEMBER 31,       ENDED        ENDED
                                       ---------------- DECEMBER 31,  JUNE 30,
                                        1997     1996       1995        1995
                                       -------  ------- ------------ -----------
<S>                                    <C>      <C>     <C>          <C>
Revenue:
  Gain on sale of loans..............  $52,117  $18,671    $ --        $   --
                                       -------  -------    -----       -------
  Interest income....................   26,758   16,130    1,929         1,121
  Interest expense...................   21,602   14,489    1,690           967
                                       -------  -------    -----       -------
  Net interest income................    5,156    1,641      239           154
                                       -------  -------    -----       -------
  Loan servicing income..............    3,314    1,191      349           326
  Other income (loss)................     (111)      63      --            --
                                       -------  -------    -----       -------
    Total............................   60,476   21,566      588           480
                                       -------  -------    -----       -------
Expense:
  Personnel..........................   13,636    8,270      356           931
  Professional services..............    2,416    1,093      106           477
  Travel.............................    1,585      614      155           182
  Business promotion.................    1,251      450       96            62
  Valuation allowances...............      933      --       --            --
  Occupancy..........................      683      310       94            55
  Goodwill amortization..............      425      411      146           --
  General and administrative.........    3,826    1,094      294           684
                                       -------  -------    -----       -------
    Total expense....................   24,755   12,242    1,247         2,391
                                       -------  -------    -----       -------
  Income (loss) before taxes.........   35,721    9,324     (659)       (1,911)
  Income taxes.......................   15,001      --       --            --
                                       -------  -------    -----       -------
    Net income (loss)................  $20,720  $ 9,324    $(659)      $(1,911)
                                       =======  =======    =====       =======
Basic and diluted income per share ..  $  0.91
                                       =======
Unaudited pro forma earnings data:
  Net income as reported.............           $ 9,324
  Pro forma income taxes.............             3,873
                                                -------
  Pro forma net income...............           $ 5,451
                                                =======
  Pro forma basic and diluted income
   per share.........................           $  0.25
                                                =======
</TABLE>

                See accompanying notes to financial statements.

                                       30
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

           STATEMENTS OF CHANGES IN STOCKHOLDERS' OR MEMBERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                           NUMBER OF                   ADDITIONAL    ACCUMULATED         TOTAL
                            SHARES    MEMBERS'  COMMON  PAID-IN   (DEFICIT) RETAINED STOCKHOLDERS'
PREDECESSOR               OUTSTANDING CAPITAL   STOCK   CAPITAL        EARNINGS         EQUITY
-----------               ----------- --------  ------ ---------- ------------------ -------------
<S>                       <C>         <C>       <C>    <C>        <C>                <C>
Balance, December 31,
 1994...................       --     $   --     $--    $    --         (2,797)          (2,797)
Net Loss................       --         --      --         --         (1,911)          (1,911)
                            ------    -------    ----   --------       -------         --------
Balance, June 30, 1995..       --     $   --     $--    $    --        $(4,708)        $ (4,708)
                            ======    =======    ====   ========       =======         ========
THE COMPANY
-----------
Members' contribution--
 ICII...................       --     $ 7,592    $--    $    --        $   --          $  7,592
Members' contribution--
 Knyal..................       --         645     --         --            --               645
Return of capital--
 ICII...................       --      (3,805)    --         --            --            (3,805)
Net loss................       --         --      --         --           (659)            (659)
                            ------    -------    ----   --------       -------         --------
Balance, December 31,
 1995...................       --     $ 4,432    $--    $    --        $  (659)        $  3,773
Net income..............       --         --      --         --          9,324            9,324
Members' Contribution--
 ICII...................       --       1,360     --         --            --             1,360
                            ------    -------    ----   --------       -------         --------
Balance, December 31,
 1996...................       --     $ 5,792    $--    $    --        $ 8,665         $ 14,457
Tax Distribution--ICII..       --         --      --         --         (4,215)          (4,215)
Tax Distribution--
 Knyal..................       --         --      --         --         (2,107)          (2,107)
LLC Distribution--ICII..       --         --      --         --         (2,000)          (2,000)
LLC Distribution--
 Knyal..................       --         --      --         --         (1,000)          (1,000)
Issuance of common
 stock, net of offering
 costs..................    28,716     (5,792)     29    118,330           --           112,567
Net income..............       --         --      --         --         20,720           20,720
                            ------    -------    ----   --------       -------         --------
Balance, December 31,
 1997...................    28,716    $   --     $ 29   $118,330       $20,063         $138,422
                            ======    =======    ====   ========       =======         ========
</TABLE>


                See accompanying notes to financial statements.

                                       31
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    PREDECESSOR
                                                                    -----------
                                     YEAR ENDED         SIX MONTHS  SIX MONTHS
                                    DECEMBER 31,          ENDED        ENDED
                                 --------------------  DECEMBER 31,  JUNE 30,
                                   1997       1996         1995        1995
                                 ---------  ---------  ------------ -----------
<S>                              <C>        <C>        <C>          <C>
Cash flows from operating
 activities:
  Net income (loss)............. $  20,720  $   9,324   $    (659)   $ (1,911)
  Adjustments to reconcile net
   income (loss) to net cash
   provided (used) by operating
   activities:
    Depreciation and amortiza-
     tion.......................     1,417      2,883         153          16
    Decrease (increase) in
     accrued interest
     receivable.................    (2,198)       548      (1,108)       (524)
    Increase in securities
     owned......................       --         --          --      (45,778)
    Provision for deferred in-
     come taxes.................    14,160        --          --          --
    Increase in current income
     taxes payable..............       841
    Increase (decrease) in other
     liabilities and accrued
     interest payable...........    10,009       (618)      3,198         828
    (Increase) decrease in other
     assets.....................    (6,271)    (7,027)     (2,245)      1,044
    Increase in valuation
     allowance for retained
     interest in loan
     securitizaitons............       400        --          --          --
    Loan and lease operations
      Loans and leases originat-
       ed.......................  (801,039)  (458,467)   (130,314)        --
      Gain on sale of loans and
       leases...................   (52,117)   (18,671)        --          --
      Loans sold to (purchased
       from) affiliates.........    22,043    222,462    (196,631)        --
      Provision for loan and
       lease losses.............       811        --          --          --
      Proceeds from loan sales
       and securitizations......   573,084    337,015     145,691         --
                                 ---------  ---------   ---------    --------
  Net cash provided (used) by
   operating activities.........  (218,140)    87,449    (181,915)    (46,325)
                                 ---------  ---------   ---------    --------
  Cash flows from investing ac-
   tivities:
    Purchases of premises and
     equipment..................    (1,781)    (1,190)       (162)         52
    Increase in interest bearing
     deposits...................      (150)    (2,594)        --          --
    Purchase of securities
     available for sale.........   (22,870)   (41,704)        --          --
    Sale of securities available
     for sale...................    36,571        --          --          --
    Purchase of other invest-
     ments......................      (408)    (4,383)        --          --
    (Purchase) sale of servicing
     rights.....................    (2,213)       --        3,805         --
                                 ---------  ---------   ---------    --------
  Net cash provided (used) by
   investing activities.........     9,149    (49,871)      3,643          52
                                 ---------  ---------   ---------    --------
  Cash flows from financing ac-
   tivities:
    Issuance (repayment) of
     bonds......................       --    (111,995)    111,995         --
    Net change in borrowings
     from ICII..................   (17,728)    17,728         --          --
    Increase in borrowings......   130,980     55,603      69,637      46,391
    Proceeds from issuance of
     common stock...............   112,567        --          --          --
    Member (distributions) con-
     tributions.................    (9,322)     1,360      (3,805)        --
                                 ---------  ---------   ---------    --------
  Net cash provided (used) by
   financing activities.........   216,497    (37,304)    177,827      46,391
                                 ---------  ---------   ---------    --------
Net change in cash..............     7,506        274        (445)        118
Cash (book overdraft) at
 beginning of period............      (171)      (445)        --          102
                                 ---------  ---------   ---------    --------
Cash (book overdraft) at end of
 period......................... $   7,335  $    (171)  $    (445)   $    220
                                 =========  =========   =========    ========
</TABLE>

                See accompanying notes to financial statements.

                                       32
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY
                         NOTES TO FINANCIAL STATEMENTS

                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

(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").

  The Company's 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
("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 ("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 the FMAC Servicing Contracts. 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 owned by
Greenwich. Concurrent with the closing of the transactions described above,
ICII entered into an operating agreement with Mr. Knyal for the formation of
Franchise Mortgage LLC. Under the terms of the Franchise Mortgage LLC
operating agreement, in exchange for a 66 2/3% ownership interest in Franchise
Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.4
million in cash and all of the assets purchased from Greenwich. In exchange
for a 33 1/3% ownership interest in Franchise Mortgage LLC, Knyal caused his
wholly owned company, FLRT, Inc., to contribute to Franchise Mortgage LLC all
of its rights under a servicing contract pertaining to franchise loans that
were previously securitized by FLRT, Inc.

  On August 30, 1995, ICII completed the acquisition of certain net assets of
the FMAC Division for a net purchase price of $7.6 million which included $3.8
million in contingent consideration based on loan originations after the date
of acquisition up to a maximum principal amount of such loans equal to $250.0
million. The acquisition was recorded using the purchase method of accounting.
The excess of the purchase price over the fair value of the net assets
acquired was recorded as goodwill of $4.4 million.

  On November 18, 1997, the Company completed its initial public offering (the
"Offering") pursuant to which 10,000,000 shares of common stock were sold to
the public at a price of $18.00 per share. On November 28, 1997, 890,625
additional shares of common stock were sold to the public at the sale price of
$18.00 per share. Net proceeds to the Company after offering costs of $1.7
million were $112.6 million.

  Immediately prior to the Offering, Franchise Mortgage LLC merged into
Franchise Mortgage Acceptance Company, a Delaware corporation which was
incorporated in August 1997 for the purpose of succeeding to the business of
Franchise Mortgage LLC. As part of the initial public offering, ICII and FLRT,
Inc. collectively sold to the public 4,062,500 shares of Company common stock
at $18.00 per share. Subsequent to the sales of common stock described above,
ICII owned 38.4% and FLRT, Inc. owned 21.6% of the Company's outstanding
shares of common stock.

(2) BASIS OF PRESENTATION

  The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the

                                      33
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

reported amounts of assets and liabilities as of the dates of the balance
sheet and revenues and expenses for the periods presented. Significant balance
sheet accounts which could be materially affected by such estimates include
loans and leases held for sale, securities available for sale and retained
interest in loan securitizations. Actual results could differ significantly
from those estimates.

  The accompanying statements of operations and cash flows for the six months
ended June 30, 1995 are those of the Company's predecessor, the FMAC Division.
Revenues and interest expense appearing on such statement of operations result
from assets and debt of the FMAC Division which were accounted for separately
by Greenwich. Personnel and commission expense appearing on such statement of
operations apply to the employees of the FMAC Division, and such expense was
also accounted for separately by Greenwich. All other expenses of the FMAC
Division were either directly assigned or allocated to the FMAC Division by
Greenwich based on either actual utilization or the number of FMAC Division
employees. Management believes that the method used to allocate the expenses
of Greenwich to the FMAC Division was reasonable and that the Company's
expenses on a stand alone basis as if the Company had operated during the
predecessor period as an entity unaffiliated with Greenwich are not materially
different from those expenses presented.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Cash and Cash Equivalents

  For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less at date of
acquisition to be cash equivalents.

 Investment Securities

  The Company classifies investments as held-to-maturity, or available for
sale. Held-to-maturity investments are reported at amortized cost. Available
for sale securities are reported at fair value with unrealized gains and
losses included as a separate component of stockholders' equity. Discount and
premium on such securities are amortized to income using the interest method
over the life of the securities.

  Realized gains and losses on securities available for sale are included in
earnings at the time of sale using the specific identification method for
determining the cost of securities sold.

 Loans and Leases Held for Sale

  Loans and leases held for sale are carried at the lower of aggregate cost or
market.

 Retained Interest in Loan Securitizations

  The Company may create retained interest in loan securitizations as a result
of the sale of loans into securitization trusts. Securitizations are generally
structured with several classes, which reflect the spectrum of bond credit
ratings. Retained interests in loan securitizations are recorded at estimated
fair value, with unrealized gains and losses included in operations. The
Company generally structures this interest as a first loss certificate at a
substantial discount from par. The notional amount may be 3% to 7% of the
securitization, but the face amount is generally 20 to 50 basis points.

  Each loan securitization has specific credit enhancement cash flow
requirements that must be met before the Company receives or accrues any
earnings on its retained interests. As the securitized assets generate excess
cash flows, they are initially used to pay down the balance of the various
classes.

  Retained interest in loan securitizations is classified as available for
sale and income is amortized using the interest method. To the extent that
actual future performance results are less than the Company's original

                                      34
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

performance estimates, the Company's retained interest in loan securitizations
will be written down through a charge to operations in that period.

 Purchased Servicing Rights

  Purchased servicing rights represent the amortized cost of acquiring the
right to service loans. The total cost of the loans is allocated to the
servicing rights and the loans (without the servicing rights) based on their
relative fair values. The cost relating to the purchased servicing is
capitalized and amortized in proportion to, and over the period of, estimated
net servicing income.

  The Company assesses the impairment of the purchased servicing portfolio
based on the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired stratum.
For the purpose of measuring impairment, the Company has stratified the
capitalized servicing rights using the following risk characteristics: loan
program type and interest rate traunche in 100 basis point increments.

  In order to determine fair value of the servicing rights, the Company uses
market prices under comparable servicing sales contracts, when available, or
alternatively, it uses a valuation model that calculates the present value of
future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for loans with similar coupons and prepayment
rates for comparable loans. In addition, the Company uses market comparables
for estimates of the cost of servicing per loan, an inflation rate, ancillary
income per loan and default rates. Amounts capitalized are recorded at cost,
net of accumulated amortization, and valuation allowances.

 Loan and Lease Sales and Related Gain or Loss

  Loans and leases are sold through either securitizations or whole loan sales
with servicing generally retained by the Company. Securitizations typically
require credit enhancements in the form of cash reserves or
overcollateralization, some of which may be reflected as retained interest in
loan securitizations on the Company's balance sheet. Sales are recognized when
the transaction settles and the risks and rewards of ownership are legally
transferred to the purchaser.

  Gain is recognized to the extent that the selling price exceeds the carrying
value of the loans or leases sold based on the estimated relative fair values
of the assets transferred, assets obtained and liabilities incurred. The
assets obtained in a sale include, generally, retained interest in
securitizations, servicing assets, and call options. Liabilities incurred in a
sale include, generally, recourse obligations, and servicing liabilities. In
the securitizations completed to date, the Company retained call options
giving it the right to repurchase loans sold when the outstanding amount of
such loans is 1% to 10% or less of the original amount sold, depending on the
terms of the related securitization. As these call options are equivalent to a
cleanup call, the Company has ascribed no value to them. The Company has not
established servicing assets or liabilities, although the Company retained the
servicing rights on the loans and leases sold, because management has
determined that revenues from contractually specified servicing fees
(approximately 30 basis points) and other ancillary sources are just adequate
to compensate the Company for its servicing responsibilities. Recourse
obligations are included in the retained interests through discounting. The
securitizations completed to date had no put option features.

  In determining the estimated fair values of the retained interest in loan
and lease securitizations, the Company estimates the cash flows therefrom and
discounts such cash flows at interest rates determined by management (ranging
from 11% to 20%) to be rates market participants would use in similar
circumstances. The Company began using a 20% discount rate of the retained
equity portion for its securitizations in 1997. Quoted market prices are not
available as no active market exists for retained interest in loan and lease
securitizations.

                                      35
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In estimating the cash flows, the Company considers default and prepayment
rates. To date, the default rate used by the Company has been zero because the
Company has incurred no credit losses. Management does, however, continually
review the credit loss assumption and makes changes thereto based on portfolio
trends and risks associated with new products. Generally, the Company has used
zero prepayment rates because a prepayment penalty contained in lending
documents has deterred borrower prepayments significantly.

 Loan and Lease Origination Fees

  Origination fees received on loans and leases held for sale, net of direct
costs related to the origination of the loans and leases, are deferred as an
adjustment to the carrying value of loans and leases held for sale. At the
time of sale of the related loans and leases, such deferred fees are taken
into income and included with the gain or loss on sale of loans and leases.

 Servicing Fees

  Servicing fees are earned on the cash flow streams from various pools of
sold or securitized loans and leases serviced for others. Servicing fees are
recognized as income when received. At December 31, 1997, 1996, and 1995, the
Company serviced loans and leases of $1,286.7 million, $593.7 million and
$207.7 million, respectively, for affiliates and others.

 Premises and Equipment, Net

  Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets
(three to seven years). Leasehold improvements are amortized over the terms of
their related leases or the estimated useful lives of improvements, whichever
is shorter.

 Income Taxes

  Prior to the Offering, the Company was organized as a Limited Liability
Company under the Internal Revenue Code and the corresponding state tax laws.
Accordingly, income was taxed directly to the members for Federal income and
state franchise tax purposes. In addition, the California Franchise Tax Board
imposed the minimum tax as well as an annual fee not to exceed $4,500 for
years ending prior to 1997. The Company converted its tax filing status from
an LLC to a C Corporation on November 18, 1997.

  Income taxes are provided by the Company based on taxable income and are
adjusted for the change in deferred tax assets and liabilities which are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

 Goodwill

  Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the asset.

 Income Per Share

  Basic and diluted income per common share are computed based on the weighted
average number of shares outstanding during the year plus common stock
equivalents deemed to be dilutive. The number of shares used in

                                      36
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

computations are given retroactive effect for stock dividends and splits, if
any, for all periods presented. The weighted average number of shares of
common stock used in computing income per share was 22,669,949. There are
presently no dilutive common stock equivalents.

 Stock Based Compensation

  During 1997, the Company granted stock options to its employees and
directors. The Company will provide pro forma net income disclosures for stock
option grants made in 1997 and future years as if the fair-value-based method
had been applied. Compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price.

 Hedging Program

  The Company regularly securitizes and sells fixed- and variable-rate loans.
To offset the effects of interest rate fluctuations on the value of its fixed-
rate loans held for sale, the Company in certain cases will hedge its interest
rate risk related to loans held for sale by selling United States Treasury
futures contracts. Unrealized and realized gains and losses on such positions
are deferred as an adjustment to the carrying value of loans and leases held
for sale and included in income as gain or loss on sale of loans when the
related loans are sold.

  Management has determined that hedge accounting is appropriate for the
Company's hedging program because the hedged loans expose the Company to price
risk, the futures contracts reduce that risk and are designated as hedges, and
at the inception of the hedge and throughout the hedge period, there is a high
correlation between the price of the futures contracts and the fair value of
the loans being hedged. In the event correlation does not remain high, the
futures contracts will cease to be accounted for as hedges and a gain or loss
will be recognized to the extent the futures results have not been offset by
the price changes of the hedged loans.

 Year 2000

  Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00." This could cause many computer applications
to fail completely or create erroneous results unless corrective measures are
taken. The Company utilizes some software and related computer hardware
technologies essential to its operations that will be affected by the Year
2000 issue. The Company is currently making changes and enhancements to
eliminate this problem internally and studying what additional actions will be
necessary to make all of its computer systems Year 2000 compliant. Any
expenses related to the Year 2000 issue are being expensed as incurred.

 Recent Accounting Pronouncements

  The Company adopted on January 1, 1997, Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which establishes accounting for
transfers and servicing of financial assets and extinguishment of liabilities.
This statement specifies when financial assets and liabilities are to be
removed from an entity's financial statements, the accounting for servicing
assets and liabilities and the accounting for assets that can be contractually
prepaid in such a way that the holder would not recover substantially all of
its recorded investment. Under SFAS 125, an entity recognizes only assets it
controls and liabilities it has incurred, discontinues recognition of assets
only when control has been surrendered, and discontinues recognition of
liabilities only when they have been extinguished. SFAS 125 requires that the
selling entity continue to carry retained interests, including servicing
assets, relating to assets it no longer recognizes. Such retained interests
are based on the relative fair values of the retained interests of the subject
assets at the

                                      37
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

date of transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral. SFAS 125
requires an entity to recognize its obligation to service financial assets
that are retained in a transfer of assets in the form of a servicing asset or
liability. The servicing asset or liability is amortized in proportion to, and
over the period of, net servicing income or loss. Servicing assets and
liabilities are assessed for impairment based on their fair value. The
implementation of SFAS 125 did not have a material impact on the Company's
financial condition or results of operations. Under the provisions of SFAS
125, securitization interests retained by the Company as a result of
securitization transactions will be held as either available for sale or
trading.

  The Company adopted SFAS No. 128, "Earnings Per Share" ("SFAS 128") on
December 31, 1997. SFAS 128 simplifies the standards for computing and
presenting earnings per share ("EPS") as previously prescribed by Accounting
Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 replaces
primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted from issuance of common stock that
then shared in earnings. The implementation of SFAS 128 did not have a
material impact on the Company's financial condition or results of operations.

  The Company adopted SFAS No. 129, "Disclosure of Information about Capital
Structure" ("SFAS 129") on December 31, 1997. SFAS 129 consolidates existing
reporting standards for disclosing information about an entity's capital
structure. SFAS 129 also supersedes specific requirements found in previously
issued accounting statements. The implementation of SFAS 129 did not have a
material impact on the Company's financial condition or results of operations.

  In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management believes that the adoption of
SFAS 130 will have no material effect on the Company's financial condition or
results of operations.

  The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," ("SFAS 131") in June 1997. SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. Management believes that the
adoption of SFAS 131 will have no material effect on the Company's financial
condition or results of operations.

(4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

  Cash paid for interest for the years ended December 31, 1997 and 1996 was
$21.0 million and $15.6 million, respectively. Cash paid for interest during
the six months ended December 31, 1995 and June 30, 1995 totaled $1.4 million
and $0.5 million, respectively. During 1996, ICII contributed $1.4 million to
the Company by decreasing the balances of the outstanding payable to ICII by
the amount of the contribution.

                                      38
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


  Non-cash transactions for the six months ended December 31, 1995 included
the contribution of all of the assets acquired by ICII from Greenwich
including $80,000 of premises and equipment, $11,000 of prepaid expenses and
approximately $3.1 million of servicing rights. In addition, servicing rights
totaling $645,000 were contributed by Mr. Knyal for his interest in the
Company.

(5) SECURITIES AVAILABLE FOR SALE

  Securities available for sale consist of asset-backed securities issued by
the Company. For the years ended December 31, 1997 and 1996, activity in
securities available for sale was as follows:

<TABLE>
<CAPTION>
                                           FOR THE YEAR ENDED DECEMBER 31, 1997
                            --------------------------------------------------------------------
                            BEGINNING             CASH     DISCOUNT   HEDGING            ENDING
                             BALANCE   PURCHASED RECEIVED  ACCRETION (GAIN) LOSS  SOLD   BALANCE
                            ---------- --------- --------  --------- ----------- ------- -------
                                                      (IN THOUSANDS)
   <S>                      <C>        <C>       <C>       <C>       <C>         <C>     <C>
   1994-A(1)...............  $ 1,814    $   --   $  (474)    $259       $--      $   --  $ 1,599
   1995-A(1)...............      964        --      (224)     136        --          --      876
   1991-A(2)...............   36,571        --       --       --         --       36,571     --
   1997-B(3)...............      --      22,752      --       --         118         --   22,870
                             -------    -------  -------     ----       ----     ------- -------
   Totals..................  $39,349    $22,752  $  (698)    $395       $118     $36,571 $25,345
                             =======    =======  =======     ====       ====     ======= =======
<CAPTION>
                                           FOR THE YEAR ENDED DECEMBER 31, 1996
                            --------------------------------------------------------------------
                            BEGINNING             CASH     DISCOUNT   HEDGING            ENDING
                             BALANCE   PURCHASED RECEIVED  ACCRETION (GAIN) LOSS  SOLD   BALANCE
                            ---------- --------- --------  --------- ----------- ------- -------
                                                      (IN THOUSANDS)
   <S>                      <C>        <C>       <C>       <C>       <C>         <C>     <C>
   1994-A(1)...............  $   --     $ 1,928  $  (257)    $143       $--      $   --  $ 1,814
   1995-A(1)...............      --       1,019     (130)      75        --          --      964
   1991-A(2)...............      --      38,756   (2,004)    (181)       --          --   36,571
                             -------    -------  -------     ----       ----     ------- -------
   Totals..................  $   --     $41,703  $(2,391)    $ 37       $--      $   --  $39,349
                             =======    =======  =======     ====       ====     ======= =======
</TABLE>
--------
(1) 1994-A and 1995-A are interest-only strips that were purchased from
    Greenwich in June 1996.
(2) 1991-A was purchased from Greenwich in August 1996, and included a $1.5
    million premium. This security was sold in January 1997.
(3) 1997-B is an interest-only strip that was purchased from CS First Boston
    in December 1997.

(6) LOANS AND LEASES HELD FOR SALE

  At December 31, 1997 and 1996, loans and leases held for sale consisted of
the following:

<TABLE>
<CAPTION>
                                                                1997     1996
                                                              --------  -------
                                                               (IN THOUSANDS)
   <S>                                                        <C>       <C>
   Loans....................................................  $327,235  $94,490
   Equipment loans and leases...............................    19,500    4,371
   Allowance for loan and lease losses......................      (811)     --
   Net deferred loan fees...................................    (2,530)    (750)
   Unearned lease income....................................    (5,520)    (497)
   Lease residuals..........................................       301       14
   Margin and deferred net losses on futures contracts used
    to hedge loans held for sale............................     5,025    1,287
                                                              --------  -------
    Loans and leases held for sale..........................  $343,200  $98,915
                                                              ========  =======
</TABLE>

  The Company's loans and leases are primarily comprised of loans to
experienced operators of nationally recognized franchise concepts. A
substantial portion of its debtors' ability to honor their contracts is
dependent upon the cash flows generated by the franchise units themselves. The
loans and leases are generally collateralized by the business property and the
real estate on which the franchises are located.

                                      39
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


  Loans and leases held for sale were pledged as collateral for the borrowings
and bonds of the Company. Non-accrual loans, including impaired loans, totaled
$4.0 million at December 31, 1997. There were three restructured loans
totaling $844,000 at December 31, 1997, which were on accrual. As of December
31, 1996, there were no nonaccrual, restructured, or impaired loans.

  As of December 31, 1997, the future minimum lease payments to be received
for each of the five succeeding fiscal years are represented in the table
below. Since the Company intends to sell its leases, there is no guarantee
that these lease payments will continue to be received.

<TABLE>
<CAPTION>
                                                                    FUTURE LEASE
      YEAR                                                            PAYMENTS
      ----                                                          ------------
                                                                    (DOLLARS IN
                                                                     THOUSANDS)
      <S>                                                           <C>
      1998........................................................    $ 3,241
      1999........................................................      3,289
      2000........................................................      3,281
      2001........................................................      3,306
      2002........................................................      2,716
      Thereafter..................................................      4,338
                                                                      -------
       Total......................................................    $20,171
                                                                      =======
</TABLE>

(7) RETAINED INTEREST IN LOAN SECURITIZATIONS

  Activity in retained interest in loan securitizations was as follows for the
years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                 1997     1996
                                                                -------  ------
                                                                (IN THOUSANDS)
      <S>                                                       <C>      <C>
      Balance, January 1....................................... $ 6,908  $  --
      Additions................................................  17,895   7,270
      Accretion................................................     770     503
      Cash received............................................  (1,034)   (339)
      Valuation allowance......................................  (5,362)   (526)
                                                                -------  ------
      Balance, December 31..................................... $19,177  $6,908
                                                                =======  ======
</TABLE>

  The components of retained interest in loan securitizations were as follows
at the dates indicated:

<TABLE>
<CAPTION>
                                                       DECEMBER 31, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
                                                            (IN THOUSANDS)
      <S>                                              <C>          <C>
      Overcollateralization amounts...................   $18,152       $5,208
      Cash reserve deposit--restricted................     6,781        2,092
      Residual interests..............................       132          134
      Valuation allowance.............................    (5,888)        (526)
                                                         -------       ------
                                                         $19,177       $6,908
                                                         =======       ======
</TABLE>

(8) ACQUISITION

  In April 1997, the Company acquired certain net assets of Enterprise
Financial Group for a purchase price of $408,000. The acquisition was recorded
using the purchase method of accounting. Under this method of accounting the
purchase price was allocated to the respective assets acquired. The excess of
the purchase price over the fair value of the net assets acquired has been
recorded as goodwill of approximately $408,000.

                                      40
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


(9) PREMISES AND EQUIPMENT, NET

  Premises and equipment consisted of the following at December 31, 1997 and
1996:

<TABLE>
<CAPTION>
                                                                 1997     1996
                                                                -------  -------
                                                                (IN THOUSANDS)
      <S>                                                       <C>      <C>
      Furniture, fixtures and equipment........................ $ 2,359  $   968
      Leasehold improvements...................................     255       78
      Construction in progress.................................     453      240
        Less accumulated depreciation and amortization.........    (549)    (124)
                                                                -------  -------
      Balance, December 31..................................... $ 2,518  $ 1,162
                                                                =======  =======
</TABLE>

(10) HEDGING

  As of December 31, 1997 and 1996, the Company had open positions of $240.4
million and $94.1 million, respectively, related to United States Treasury
futures contracts used to hedge loans and leases held for sale. At December
31, 1997 and 1996, the Company's unrealized and realized net losses on future
contracts were $5.0 million and $1.3 million, respectively.

                                      41
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(11) BORROWINGS

  Borrowings consisted of the following at December 31, 1997 and 1996 (dollars
in thousands):

<TABLE>
<CAPTION>
                                                                           DECEMBER 31, 1997
                                                                   ----------------------------------
                                                                   INTEREST COMMITMENT   PRINCIPAL
   WAREHOUSE         EXPIRATION DATE              INDEX              RATE     AMOUNT   OUTSTANDING(1)
   ---------        ------------------ --------------------------- -------- ---------- --------------
<S>                 <C>                <C>                         <C>      <C>        <C>
CS First            December 31, 1998  One-month Libor plus 160 to 7.32% to  $300,000     $127,249
Boston..........                       235 basis points               8.07%
Banco               June 1, 1998       One-month Libor plus 160       7.32%    50,000       21,649
Santander.......                       basis points
Morgan Stanley..    September 30, 1998 One-month Libor plus 95 to  6.67% to   200,000       94,031
                                       155 basis points               7.27%
Greenwich
Capital
Financial
Products,
Inc.(2).........    30 days on demand  Libor plus 125 basis points      --        --           --
Southern Pacific    Not specified      Coupon less approximately        --        --           --
Bank............                       50 basis points
Sanwa Bank......    June 30, 1998      Eurodollars plus 160 basis     6.88%    25,000        4,506
                                       points
Imperial Credit     Not Specified      Fixed                            --        --           --
Industries,
Inc. ...........
Other                                                                   --        --         8,785
borrowings(3)(4)..
                                                                             --------     --------
                                                                             $575,000     $256,220
                                                                             ========     ========
<CAPTION>
                              DECEMBER 31, 1996
                    -------------------------------------
                    INTEREST  COMMITMENT     PRINCIPAL
   WAREHOUSE          RATE      AMOUNT     OUTSTANDING(1)
   ---------        -------- ------------- --------------
<S>                 <C>      <C>           <C>
CS First              7.31%  $     300,000    $ 48,673
Boston..........
Banco                 7.63%         50,000      16,181
Santander.......
Morgan Stanley..        --             --          --
Greenwich
Capital
Financial
Products,
Inc.(2).........      7.36%  Not Specified      35,158
Southern Pacific      9.17%         25,228      25,228
Bank............
Sanwa Bank......        --             --          --
Imperial Credit      12.00%  Not Specified      17,728
Industries,
Inc. ...........
Other                   --             --          --
borrowings(3)(4)..
                             ------------- --------------
                             $     375,228    $142,968
                             ============= ==============
</TABLE>
----
(1) The above borrowings are collateralized by franchise loans and leases held
    for sale and interest bearing deposits.
(2) The proceeds of the loan from Greenwich Capital Financial Products, Inc.
    at December 31, 1996, were used to purchase asset-backed securities
    totaling $39.3 million which are included in securities available for sale
    in the accompanying balance sheets.
(3) Other borrowings include a $2.4 million loan with Goldman Sachs to finance
    a golf loan and a $6.4 million sale of loans to Imperial Credit Commercial
    Mortgage Investment Corporation, a subsidiary of ICII, that has been
    accounted for as a financing.
(4) The Company also has an equipment finance sale facility in place with
    Greenwich which is used to fund equipment loans and leases. Under the
    terms of the facility, the Company sells loans and future lease payment
    streams to Franchise Lease Funding Corporation II ("FLF2"), and FLF2
    simultaneously borrows funds from Greenwich. The facility with Greenwich
    is for $100 million expiring in September 1998.

                                       42
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


(12) BONDS

  In December 1995, the Company, through a special purpose entity ("SPE"),
issued pass-through certificates (the "Bonds") secured by $105.2 million of
franchise loans. The Bonds consisted of three separate classes, Class A, Class
B and Class C, with principal balances at December 31, 1995 of approximately
$92.6 million, $4.2 million and $4.2 million, respectively. The Class C bonds
were subordinate to Class B, and both Class B and C are subordinate to Class
A. The Bonds had a weighted average loan rate of 9.63%, a pass-through rate of
8.59%, and a stated maturity of 13 years. The premium associated with the
Bonds of $11.0 million was amortized as an adjustment to interest expense over
the anticipated life of the Bonds. Due to the Company's retained interest in
the SPE and the disproportionate payments on the pass-through certificates,
the Company accounted for this transaction as a financing.

  On March 28, 1996, the Company sold its interest in the SPE to Imperial
Credit Mortgage Holdings, Inc. an affiliate, receiving proceeds from the sale
of $2.8 million. As a result of the sale, the Company removed from its balance
sheet the loans and related bonds of $111.2 million and $112.0 million,
respectively, resulting in a net gain of $3.6 million.

(13) INCOME TAXES

  The provision for income taxes for the year ended December 31, 1997 was as
follows:

<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
      <S>                                                         <C>
      Current:
        Federal..................................................    $   609
        State....................................................        232
                                                                     -------
                                                                         841
                                                                     -------
      Deferred:
        Federal..................................................     10,665
        State....................................................      3,495
                                                                     -------
                                                                      14,160
                                                                     -------
        Total....................................................    $15,001
                                                                     =======
</TABLE>

  Actual income taxes differ from the amount determined by applying the
statutory Federal rate of 35% for the year ended December 31, 1997 as follows:

<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
      <S>                                                       <C>
      Computed "expected" income taxes.........................    $ 3,508
      Income tax related to conversion from LLC to C Corpora-
       tion....................................................     10,997
      State tax, net of federal benefit........................        736
      Other....................................................       (240)
                                                                   -------
                                                                   $15,001
                                                                   =======
</TABLE>

                                      43
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


  The components of the deferred tax liability at December 31, 1997 was as
follows:

<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
      <S>                                                       <C>
      Deferred Tax Assets:
        Loss reserves..........................................    $    317
        State taxes............................................       1,220
                                                                   --------
                                                                      1,537
      Deferred Tax Liabilities:
        Deferred loan fees.....................................      (1,002)
        Depreciation...........................................          (4)
        Gain on sale of loans and leases deferred for income
         tax purposes..........................................     (14,691)
                                                                   --------
                                                                    (15,697)
                                                                   --------
      Total Deferred Tax Liability.............................    $(14,160)
                                                                   ========
</TABLE>

(14) EMPLOYEE BENEFITS PLANS

 Profit Sharing and 401(k) Plans

  The Company's employees participate in a 401(k) plan sponsored by FMAC.
Under the plan, employees may elect to enroll at the beginning of any month
after which the employee has been employed for at least six months. Employees
may contribute up to 14% of their salaries. The Company will match 50% of the
employee's contribution up to 4% of the employee's compensation. The Company
may also make a discretionary contribution on an annual basis to be allocated
to participants who have contributed in excess of 4% of their compensation.
The allocation is based upon a formula set by the plan and requires a five-
year vesting period. All forfeitures are allocated to the remaining
participants in the plan. Distribution of vested benefits to a terminated
participant in the 401(k) is made in accordance with the contribution
allocation form signed by the employee. Distributions are made, by election of
the participant, in either certificates of deposit, FMAC common stock, stock
or bond mutual funds, or a combination thereof.

  The Company contributed approximately $163,000, $88,000, and $13,000 to the
401(k) plan in for the years ended December 31, 1997 and 1996, and the six
months ended December 31, 1995, respectively.

 1997 Stock Option Plan

  The Company's Board of Directors has adopted and its stockholders have
approved the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the
"Stock Option Plan"), which provides for the grant of qualified incentive
stock options ("ISOs") that meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), stock options not so
qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation
rights and limited stock appreciation rights awards ("Awards"). The Stock
Option Plan is administered by a committee of directors appointed by the Board
of Directors (the "Committee"). ISOs may be granted to the officers and key
employees of the Company or any of its subsidiaries. The exercise price for
any option granted under the Stock Option Plan may not be less than 100% (or
110% in the case of ISOs granted to an employee who is deemed to own in excess
of 10% of the outstanding Common Stock) of the fair market value of the shares
of Common Stock at the time the option is granted. The purpose of the Stock
Option Plan is to provide a means of performance-based compensation in order
to attract and retain qualified personnel and to provide an incentive to those
whose job performance affects the Company. The effective date of the Stock
Option Plan was November 18, 1997, the effective date of the Company's initial
public offering.

                                      44
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


  The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 10% of the shares of the Company's Common
Stock outstanding after the Company's initial public offering, but not less
than 2,700,000 shares. The number of shares reserved for issuance under the
Stock Option Plan is subject to anti-dilution provisions for stock splits,
stock dividends and similar events. If an option granted under the Stock
Option Plan expires or terminates, or an Award is forfeited, the shares
subject to any unexercised portion of such option or Award will again become
available for the issuance of further options or Awards under the Stock Option
Plan.

  Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Committee's approval, in connection with the
exercise of stock options granted under the Stock Option Plan. If shares of
Common Stock are pledged as collateral for such indebtedness, such shares may
be returned to the Company in satisfaction of such indebtedness. If so
returned, such shares shall again be available for issuance in connection with
future stock options and Awards under the Stock Option Plan.

  Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan ten years after the effective date
of the Offering.

  On the effective date of the Company's initial public offering, November 18,
1997, the Company granted to certain employees and directors options to
acquire 1,211,300 shares of common stock at $18.00 per share. On December 24,
1997, the Company granted to certain employees options to acquire 255,000
shares of common stock at $16.32 per share. Options vest under this plan at
20% on each anniversary from the date of grant for officers and employees and
100% on the first anniversary of the date of grant for directors.

  A summary of changes in outstanding stock options follows:

<TABLE>
<CAPTION>
                                                                        1997
                                                                      ---------
     <S>                                                              <C>
     Options outstanding, beginning of year..........................       --
     Options granted................................................. 1,466,300
     Options exercised...............................................       --
     Options canceled................................................    (1,800)
                                                                      ---------
     Options outstanding, end of year................................ 1,464,500
                                                                      =========
</TABLE>

  As of December 31, 1997, there were 1,335,500 remaining options available
for future grants under this plan.

  Information as to stock option activity and prices of shares is as follows:

<TABLE>
<CAPTION>
                                                                    WEIGHTED
                                         NUMBER OF  PRICE RANGE     AVERAGE
                                          SHARES     PER SHARE    OPTION PRICE
                                         --------- -------------- ------------
     <S>                                 <C>       <C>            <C>
     Shares under option at:
       December 31, 1997................ 1,464,500 $16.32--$18.00    $17.81
     Options exercised during the year
      ended:
       December 31, 1997................       --  $ 0.00--$ 0.00    $ 0.00
     Options exercisable at:
       December 31, 1997................       --  $ 0.00--$ 0.00    $ 0.00
</TABLE>

  The Company adopted the disclosure requirements of SFAS 123 and continues to
measure its employee stock-based compensation arrangements under the
provisions of APB 25. Accordingly, no compensation expense has been recognized
for the stock option plan. Had compensation expense for the Company's stock
option plan

                                      45
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

been determined based on the fair value at the grant date for awards in 1997
consistent with provisions of SFAS 123, the Company's net income and income
per share would have been adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                            DECEMBER 31, 1997
                                                          ----------------------
                                                              (IN THOUSANDS,
                                                          EXCEPT PER SHARE DATA)
     <S>                                                  <C>
     Net income:
       As reported.......................................        $20,720
       Pro forma.........................................         20,280
     Basic and diluted income per share:
       As reported.......................................        $  0.91
       Pro forma.........................................           0.89
</TABLE>

  The weighted average fair value at date of grant of options granted during
1997 was $9.21 per option. The fair value of options at date of grant was
estimated using the Black-Scholes model with the following assumptions:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED
                                                                   DECEMBER 31,
                                                                       1997
                                                                   ------------
     <S>                                                           <C>
     Expected life (years)........................................      5.0
     Interest rate (1)............................................     5.73%
     Volatility...................................................    52.11%
     Dividend yield...............................................     0.00%
</TABLE>
--------
(1) Based on 5-year U.S. Treasury rate.

(15) TRANSACTIONS WITH AFFILIATES

  In the ordinary course of business, the Company has conducted transactions
with affiliated companies. In the opinion of management all such transactions
are conducted at "arm's length" in accordance with the Company's policies.

  The Company provided subservicing on a contractual basis for servicing
rights owned by SPB. At December 31, 1997 and 1996, there were approximately
$0 million and $183 million of loans outstanding underlying this subservicing
arrangement. The Company received approximately 13 basis points for providing
such services. On December 31, 1997, the Company purchased these servicing
rights from ICII for $2.2 million, which is included in other assets.

  The Company purchased $15.5 million in franchise loans at par value from SPB
on June 26, 1997. These franchise loans were purchased at par value by SPB
from the Company in 1996 and 1997. The Company purchased $45.1 million in
franchise loans at par value from SPB on December 24, 1997. These franchise
loans were purchased at par value by SPB from the Company in 1996 and 1997. On
December 30, 1997, the Company sold $1.8 million of participation loans at par
value to SPB.

  The Company also has a master purchase and sale agreement with SPB to
originate loans for SPB under mutual agreement, and subject to SPB
underwriting each such loan prior to sale of such loans. Under this agreement,
the Company also has the ability to repurchase loans, under mutual agreement
with SPB. There is no specified commitment by either party, and each
individual sale is negotiated separately as to pricing. This agreement has no
expiration date. For the year ended December 31, 1997, loans originated for
SPB (and not

                                      46
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

repurchased), totaled approximately $7.4 million. The Company does not expect
to originate a significant volume of loans for SPB under this arrangement in
the future.

  Cash paid to SPB for interest for the years ended December 31, 1997 and 1996
was approximately $0 and $10.3 million, respectively. Cash paid to SPB for
interest for the six months ended December 31, 1995 was approximately $1.2
million.

  At December 31, 1996, the Company had borrowings from ICII outstanding of
$17.7 million. The Company paid interest at 12% on the outstanding balance.
The Company paid to ICII monthly 15 basis points on the Company's non-
affiliate borrowing commitments in consideration for ICII's guaranty of such
borrowings.

(16) EQUITY INVESTMENTS

  The Company periodically makes equity investments which are included in
other assets. These investments represent interests in limited liability
companies ("LLCs") or limited partnerships (collectively, the "investees")
which were formed to own and operate restaurant franchise concepts, and are
owned through investor LLCs, the members of which consist of the Company, the
Company's chief executive officer, and ICII. Member ownership percentages in
the investor LLCs range from 50% to 100% for the Company, from 0% to 0.33% for
the chief executive officer, and from 0.67% to 50% for ICII. The Company
consolidates all investor LLCs in which it has a greater than 50% ownership
interest because the terms of the operating agreements vest control with the
Company. The investor LLC in which the Company has a 50% ownership interest is
accounted for under the equity method because the operating agreement provides
for joint and equal management by the Company and the other 50% owner. These
investments are accounted for by the Company under the equity method as the
terms of the investment agreements do not place the investor LLCs or the
Company in a position of control over the investees. A director of the Company
owns 60% of one investee and the investor LLC owns 40%; such investor LLC is
owned 50% by the Company and 50% by ICII.

  The Company's activity in equity investments was as follows:

<TABLE>
<CAPTION>
                                         FOR THE YEAR ENDED DECEMBER 31, 1997
                          -------------------------------------------------------------------
                                              ADDITIONAL
                          INVESTMENT   FMAC   INVESTMENT BEGINNING    NET     INCOME  ENDING
                             DATE    INTEREST OBLIGATION  BALANCE  INVESTMENT (LOSS)  BALANCE
                          ---------- -------- ---------- --------- ---------- ------  -------
                                                    (IN THOUSANDS)
<S>                       <C>        <C>      <C>        <C>       <C>        <C>     <C>
Summerwood Ltd. ........    6/10/96    40.0%    $2,000    $2,000     $ --     $(715)  $1,285
Restaurant Management Of
 Carolina...............   11/19/96    32.5      2,000       933       --       (44)     889
Family Eats.............   12/20/96    49.0      1,550     1,450       --       194    1,644
Atlanta Franchise
 Development............    3/24/97    39.6        --        --        --       144      144
Hot 'N Now..............    4/16/97    20.0        --        --        --         6        6
Pate Restaurant
 Enterprises............    4/29/97    40.0        --        --        --       (63)     (63)
                                                ------    ------     -----    -----   ------
 Totals.................                        $5,550    $4,383     $ --     $(478)  $3,905
                                                ======    ======     =====    =====   ======
</TABLE>

<TABLE>
<CAPTION>
                                         FOR THE YEAR ENDED DECEMBER 31, 1996
                          ------------------------------------------------------------------
                                              ADDITIONAL
                          INVESTMENT   FMAC   INVESTMENT BEGINNING    NET     INCOME ENDING
                             DATE    INTEREST OBLIGATION  BALANCE  INVESTMENT (LOSS) BALANCE
                          ---------- -------- ---------- --------- ---------- ------ -------
                                                    (IN THOUSANDS)
<S>                       <C>        <C>      <C>        <C>       <C>        <C>    <C>
Summerwood Ltd. ........    6/10/96    40.0%    $2,000     $ --      $2,000   $ --   $2,000
Restaurant Management Of
 Carolina...............   11/19/96    32.5      2,000       --         933     --      933
Family Eats.............   12/20/96    49.0      1,550       --       1,450     --    1,450
                                                ------     -----     ------   -----  ------
 Totals.................                        $5,550     $ --      $4,383   $ --   $4,383
                                                ======     =====     ======   =====  ======
</TABLE>

                                      47
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


  The December 31, 1997, unpaid balances of loans to the investees made by the
Company total approximately $110.2 million, of which $96.3 million has been
securitized and sold and $13.9 million is included in loans held for sale. At
December 31, 1997, none of these loans were past due.

(17) FAIR VALUE OF FINANCIAL INSTRUMENTS

  Financial instruments include interest bearing deposits, securities
available for sale, loans and leases held for sale, futures contracts used to
hedge loans held for sale, retained interest in loan securitizations,
receivables from and payables to affiliates, borrowings and bonds. Fair value
estimates are subjective in nature and involve uncertainties and matters of
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. In addition, the fair
value estimates presented do not include the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.

  The carrying values of interest-bearing deposits and receivables from and
payables to affiliates and members 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 is
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 and
bonds was estimated by discounting cash flows at interest rates for debt
having similar credit ratings and maturities.

  The estimated fair values of the Company's financial instruments as of
December 31, 1997 and 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
                                              1997                 1996
                                      -------------------- --------------------
                                      CARRYING  ESTIMATED  CARRYING  ESTIMATED
                                       AMOUNT   FAIR VALUE  AMOUNT   FAIR VALUE
                                      --------- ---------- --------- ----------
<S>                                   <C>       <C>        <C>       <C>
Assets:
  Interest bearing deposits.......... $  2,744   $  2,744  $  2,594   $  2,594
  Loans and leases held for sale.....  343,200    343,200    98,915    102,872
  Retained interest in loan
   securitizations...................   19,177     19,177     6,908      6,908
  Securities available for sale......   25,345     25,345    39,349     39,349
Liabilities:
  Payable due to Imperial Credit
   Industries, Inc. ................. $    --    $    --   $ 17,728   $ 17,728
  Borrowings.........................  256,220    256,220   125,240    125,240
</TABLE>

                                      48
<PAGE>

                     FRANCHISE MORTGAGE ACCEPTANCE COMPANY

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


(18) COMMITMENTS AND CONTINGENCIES

 Leases

  Minimum rental commitments under noncancelable operating leases at December
31, 1997, were as follows (in thousands):

<TABLE>
<CAPTION>
     YEAR ENDED DECEMBER 31,
     -----------------------
     <S>                                                                 <C>
       1998............................................................. $ 1,655
       1999.............................................................   1,784
       2000.............................................................   1,772
       2001.............................................................   1,723
       2002.............................................................   1,279
       Thereafter.......................................................   3,100
                                                                         -------
         Total.......................................................... $11,313
                                                                         =======
</TABLE>

  Rent expense for the year ended December 31, 1997 and 1996, and the six
months ended December 31, 1995 was $644,000, $292,000, and $94,000,
respectively.

 Litigation

  The Company is not currently involved in any litigation arising from the
normal course of business.

  The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among
others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on
November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an
accounting, monetary and punitive damages for alleged breach of contract,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing and fraud arising from an alleged business relationship. Counsel to
the predecessor entity and Mr. Knyal believe that the claim is without merit
and intend to defend it vigorously. ICII and FLRT, Inc. have agreed to
indemnify the Company against any and all liability that the Company and its
stockholders (other than ICII and FLRT, Inc.) may incur as a result of this
lawsuit.

 Loan Servicing

  Related fiduciary funds held in trust for investors in non-interest bearing
accounts at unaffiliated financial institutions totaled approximately $0 as of
December 31, 1997. These funds are segregated in special bank accounts and are
held as deposits in such financial institutions.

 Loan Commitments

  As of December 31, 1997, the Company had open short-term lending commitments
amounting to approximately $91.5 million in process subject to credit
approval. There is no exposure to credit loss in this type of commitment until
the loans are funded. Interest rate risk is mitigated by the use of hedging
strategies applied to each loan at the time of funding.

(19) UNAUDITED SUBSEQUENT EVENT

  On March 9, 1998, the Company entered into a definitive agreement pursuant
to which the Company will purchase the assets and assume certain liabilities
of Bankers Mutual, a Mortgage Banking Corporation and Bankers Mutual Mortgage,
Inc. (collectively, "Bankers"). Bankers is a Federal National Mortgage
Association Delegated Underwriting and Servicing lender. The purchase price
consists of cash of $61.5 million, a note for $5.0 million, and contingent
cash payments of up to $30 million over three years dependent upon the
achievement of certain operating results. At December 31, 1997, Bankers had
total assets, liabilities and stockholders' equity of approximately $33.6
million, $17.5 million, and $16.1 million, respectively. For the year ended
December 31, 1997, Bankers had net income of approximately $4.5 million.

                                      49
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURE

  None.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information required by this item (other than the information regarding
executive officers set forth at the end of Part I of this Form 10-K) will be
contained in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders, to be filed on or before April 30, 1998, and such
information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

  The information required by this item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, and such information is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, and such information is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, and such information is incorporated herein
by reference.

                                      50
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
   EXHIBIT
   NUMBER   EXHIBIT DESCRIPTION
   -------  -------------------
   <C>     <S>
     3.3*   Form of Articles of Incorporation of the Company
     3.4*   Form of Bylaws of the Company
     4.1*   Form of Specimen Common Stock Certificate
    10.1*   Form of 1997 Stock Option Plan and Form of Option Agreement
    10.2*   Form of Employment Agreement dated August 26, 1997 by and between the Company and Wayne L. Knyal
    27.1    Financial Data Schedule
</TABLE>
--------
 * Incorporated by reference to, and all such Exhibits have the corresponding
   Exhibit number filed as part of, the Company's Registration Statement on
   Form S-1 (Commission File No. 333-34481) and Amendments No. 1, 2, and 3
   filed with the SEC on August 27, 1997, October 10, 1997, October 24, 1997,
   and November 6, 1997, respectively.

                                       51
<PAGE>

                                  SIGNATURES

  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                                          Franchise Mortgage Acceptance
                                           Company

                                                   /s/ Wayne L. Knyal
                                          -------------------------------------
                                                       WAYNE L. KNYAL
                                              President and Chief Executive
                                                         Officer

  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

              SIGNATURE                        TITLE                 DATE

         /s/ Wayne L. Knyal            President, Chief         March 17, 1998
-------------------------------------   Executive Officer and
             WAYNE L. KNYAL             Director (Principal
                                        Executive Officer)

       /s/ Raedelle A. Walker          Executive Vice           March 17, 1998
-------------------------------------   President and Chief
           RAEDELLE A. WALKER           Financial Officer
                                        (Principal Financial
                                        Officer and Principal
                                        Accounting Officer)

        /s/ H. Wayne Snavely           Chairman of the          March 17, 1998
-------------------------------------   Board
            H. WAYNE SNAVELY

         /s/ Ronald V. Davis           Director                 March 17, 1998
-------------------------------------
             RONALD V. DAVIS

     /s/ G. Louis Graziadio, III       Director                 March 17, 1998
-------------------------------------
         G. LOUIS GRAZIADIO, III

         /s/ Perry A. Lerner           Director                 March 17, 1998
-------------------------------------
             PERRY A. LERNER

       /s/ Richard J. Loughlin         Director                 March 17, 1998
-------------------------------------
           RICHARD J. LOUGHLIN

     /s/ John E. Martin Director       Director                 March 17, 1998
-------------------------------------
         JOHN E. MARTIN

       /s/ Michael L. Matkins          Director                 March 17, 1998
-------------------------------------
           MICHAEL L. MATKINS