UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission file number
1-13116
FRANCHISE FINANCE CORPORATION OF AMERICA
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0736091
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(State of Incorporation) (I.R.S. Employer
Identification Number)
The Perimeter Center
17207 North Perimeter Drive
Scottsdale, Arizona 85255
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrants' telephone number including area code (602) 585-4500
------------------------------
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
----- -----
Number of shares outstanding of each of the issuer's classes of common stock as
of November 10, 1997:
Common Stock, $0.01 par value 41,703,423
----------------------------- ------------------------
Class Number of Shares
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item l. Financial Statements.
--------------------
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS - SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
------
Investments:
Investments in Real Estate, at cost:
Land $ 369,142 $ 346,626
Buildings and Improvements 534,873 490,506
Equipment 24,219 31,083
--------- ---------
928,234 868,215
Less-Accumulated Depreciation 173,981 172,941
--------- ---------
Net Real Estate Investments 754,253 695,274
Mortgage Loans Receivable, net of allowances
of $1,900 in 1997 and $1,400 in 1996 32,972 57,808
Mortgage Loans Held for Sale (Note 2) 71,305 -
Related Party Notes Receivable 31,948 147,616
Other Investments (Note 2) 65,693 37,836
--------- ---------
Total Investments 956,171 938,534
Cash and Cash Equivalents 1,424 11,350
Notes and Accounts Receivable, net of allowances
of $2,200 in 1997 and $1,700 in 1996 23,479 22,020
Other Assets 18,228 16,872
--------- ---------
Total Assets $ 999,302 $ 988,776
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Dividends Payable $ 18,766 $ 18,254
Notes Payable (Note 4) 299,146 298,956
Borrowings Under Line of Credit (Note 5) 128,000 150,500
Mortgage Payable to Affiliate 8,500 8,500
Accrued Expenses and Other 20,874 17,196
--------- ---------
Total Liabilities 475,286 493,406
--------- ---------
Shareholders' Equity:
Preferred Stock, par value $.01 per share, 10 million shares
authorized, none issued or outstanding - -
Common Stock, par value $.01 per share, authorized 200 million
shares, issued and outstanding 41,702,508 shares in 1997 and
40,564,076 shares in 1996 417 406
Capital in Excess of Par Value 581,091 553,335
Cumulative Net Income 185,451 129,209
Cumulative Dividends (242,943) (187,580)
--------- ---------
Total Shareholders' Equity 524,016 495,370
--------- ---------
Total Liabilities and Shareholders' Equity $ 999,302 $ 988,776
========= ==========
</TABLE>
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
9/30/97 9/30/96 9/30/97 9/30/96
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental $25,820 $24,540 $ 75,041 $71,148
Mortgage Loan Interest 2,330 1,923 7,448 14,956
Investment Income and Other 4,044 2,598 9,937 3,832
Interest (Related Party) 667 - 7,857 -
------- ------- --------- -------
32,861 29,061 100,283 89,936
------- ------- --------- -------
EXPENSES:
Depreciation and Amortization 5,230 5,188 15,478 15,419
Operating, General and
Administrative 2,883 2,600 8,418 9,477
Property Costs 485 427 1,540 1,646
Interest 7,851 5,715 26,017 19,199
Related Party Interest 246 244 739 730
------- ------- --------- -------
16,695 14,174 52,192 46,471
------- ------- --------- -------
Income Before Gain on Sale of Property
and Other Costs 16,166 14,887 48,091 43,465
Gain on Sale of Property 64 944 7,004 8,037
Equity in Net Income of Affiliate 227 - 1,147 -
------- ------- --------- -------
Net Income $16,457 $15,831 $ 56,242 $51,502
======= ======= ========= =======
Net Income Per Share (Note 1) $.40 $.39 $1.37 $1.27
==== ==== ===== =====
Weighted Average Common and
Common Equivalent Shares
Outstanding (Note 1) 41,247,315 40,683,324 41,067,150 40,527,447
========== ========== ========== ==========
</TABLE>
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Capital in
Common Excess of Cumulative Cumulative
Stock Par Value Net Income Dividends Total
----- --------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $406 $553,335 $129,209 $(187,580) $495,370
Capital contributions 11 27,756 - - 27,767
Net income - - 56,242 - 56,242
Dividends declared -
$1.35 per share - - - (55,363) (55,363)
---- -------- -------- --------- --------
BALANCE, September 30, 1997 $417 $581,091 $185,451 $(242,943) $524,016
==== ======== ======== ========= ========
</TABLE>
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,242 $ 51,502
Adjustments to net income:
Depreciation and amortization 15,478 15,419
Equity in net income of affiliate (1,147) -
Gain on sale of property (7,004) (8,037)
Provision for uncollectible mortgages and notes 75 1,424
Other 3,921 4,890
---------- ----------
Net cash provided by operating activities 67,565 65,198
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property (89,445) (99,538)
Investment in mortgage loans (188,037) (76,764)
Investment in notes receivable (5,260) (17,280)
Collection of related party notes receivable 115,668 -
Purchase of investment securities (15,946) -
Proceeds from securitization transaction (Note 2) 103,975 151,720
Proceeds from sale of property 19,468 18,615
Receipt of mortgage loan and note payoffs 27,816 5,209
Collection of mortgage loan principal 3,061 4,487
Collection of investment security principal 1,093 -
---------- ----------
Net cash used in investing activities (27,607) (13,551)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (54,851) (54,495)
Proceeds from issuance of common stock 27,767 4,487
Proceeds from bank borrowings 366,000 129,000
Proceeds from issuance of notes 50,000 59,655
Payment of bank borrowings and loan fees (388,800) (177,172)
Payment of other unsecured notes (50,000) -
---------- ----------
Net cash used in financing activities (49,884) (38,525)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (9,926) 13,122
CASH AND CASH EQUIVALENTS, beginning of period 11,350 2,067
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,424 $ 15,189
========== ==========
Supplemental Disclosure of Noncash Activities:
Investment in securities resulting from securitization $ 11,303 $ 30,763
========== ==========
Mortgage loans obtained as part of property sale proceeds,
net of deferred gain $ 767 $ 2,918
========== ==========
</TABLE>
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1997
------------------
(1) ACCOUNTING CHANGES:
------------------
Effective January 1, 1997, Franchise Finance Corporation of America
(FFCA) adopted Statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities". SFAS No. 125 provides, among other things, guidance on when a
securitization of a pool of financial assets (such as mortgage loans) is
accounted for as a sale of assets (see Note 2).
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128 "Earnings per Share", which is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. FFCA will adopt SFAS No. 128 for the year ending December 31,
1997. The weighted average shares as reported below include the dilutive effect
of common stock options outstanding; therefore, the earnings per share
calculation as reported results in the same per share amounts as the pro forma
Diluted Earnings Per Share presented below. Under SFAS No. 128, FFCA's earnings
per share would have resulted in the following pro forma amounts (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Net Net
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
For the Nine Months Ended September 30,
Amounts as Reported $56,242 41,067 $1.37 $51,502 40,527 $1.27
Pro Forma Amounts:
Basic Earnings Per Share - Net income
available to common stockholders $56,242 40,710 $1.38 $51,502 40,386 $1.28
Effect of Dilutive Securities-
Common stock options - 357 - 141
------- ------ ------- ------
Diluted Earnings Per Share $56,242 41,067 $1.37 $51,502 40,527 $1.27
======= ====== ===== ======= ====== =====
For the Quarter Ended September 30,
Amounts as Reported $16,457 41,247 $.40 $15,831 40,683 $.39
Pro Forma Amounts:
Basic Earnings Per Share - Net income
available to common stockholders $16,457 40,872 $.40 $15,831 40,460 $.39
Effect of Dilutive Securities-
Common stock options - 375 - 223
------- ------ ------- ------
Diluted Earnings Per Share $16,457 41,247 $.40 $15,831 40,683 $.39
======= ====== ==== ======= ====== ====
</TABLE>
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
FFCA will adopt SFAS No. 130 in 1998. The adoption of this new accounting
standard would not have had a material effect on FFCA's financial statements for
the quarters or nine months ended September 30, 1997 or 1996.
<PAGE>
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way that public companies report certain information about operating segments of
their business in their financial statements (including interim financial
reports). FFCA will adopt SFAS No. 131 in 1998. The adoption of this new
accounting standard would not have had a material effect on FFCA's financial
statements for the quarters or nine months ended September 30, 1997 or 1996.
(2) MORTGAGE LOANS HELD FOR SALE:
----------------------------
At September 30, 1997, FFCA's portfolio included mortgage loans
originated in 1997 which are held for sale. These mortgage loans are stated at
the lower of cost or fair market value, determined in the aggregate. These loans
represent first mortgage loans on the land and/or buildings and/or equipment of
80 restaurants comprising $66 million in fixed-rate loans and $5.3 million in
variable-rate loans. The fixed-rate loans carry a weighted average interest rate
of 9.65% and mature in 5 to 20 years from the date of origination. The
variable-rate loans carry interest rates which adjust monthly based on 30-day
LIBOR plus a margin (average interest rate was 8.27% at September 30, 1997).
Total principal and interest payments aggregate approximately $725,000 per
month.
Certain mortgage loans originated for sale by FFCA and its affiliate,
FFCA Mortgage Corporation, totaling $261 million were securitized on June 9,
1997 and Secured Franchise Loan Trust Certificates (the "Certificates") were
sold to investors. Upon sale, the mortgage loans receivable were removed from
the balance sheet and a gain on the sale was recognized for the difference
between the carrying amount of the mortgage loans and the adjusted sales price.
The servicing rights on these mortgage loans have been retained by FFCA and are
not significant. FFCA also retained certain interests in approximately 11% of
the aggregate mortgage loan principal balance through the purchase of
subordinated investment securities of the securitization trust. These investment
securities, totaling $26.9 million at September 30, 1997, were reported as the
sale of mortgage loans and the purchase of mortgage-backed securities accounted
for as trading securities and are included in Other Investments in the
accompanying consolidated balance sheets. Also included in Other Investments are
securities approximating $28.9 million related to the sale in June 1996 of
mortgage loans from FFCA's original portfolio (which were not originated for
sale and, accordingly, are accounted for as available for sale). At September
30, 1997, the estimated fair market values of FFCA's investment securities
approximate cost.
(3) DERIVATIVE FINANCIAL INSTRUMENTS:
--------------------------------
FFCA intends to use derivative financial instruments to manage interest
rate exposures which exist as a part of its ongoing business operations. The
portfolio of fixed-rate mortgage loans held for sale through securitization is
funded on an interim basis by FFCA's variable rate bank credit facility. In such
circumstances, FFCA hedges against fluctuations in interest rates that could
adversely affect the value of the mortgage loans to be sold. At September 30,
1997, FFCA had interest rate swap contracts outstanding with a total notional
amount of $59.3 million. FFCA intends to terminate these contracts upon
securitization of the fixed-rate mortgage loans, at which time both the gain or
loss on the securitization of the fixed-rate mortgage loans and the gain or loss
on the termination of the interest rate swap contracts will be measured and
recognized in the statement of operations. FFCA had no outstanding liabilities
under these contracts at September 30, 1997 and based on the level of interest
rates prevailing, FFCA would have paid approximately $1.1 million if it had
terminated these swap contracts at September 30, 1997.
(4) NOTES PAYABLE:
-------------
In January 1997, FFCA issued $50 million in variable-rate unsecured
notes due 1998 bearing interest at a weighted average rate of 3-month LIBOR plus
.33% (interest reset quarterly). The notes were redeemed by FFCA on July 14,
1997 at a redemption price of 100% of the principal amount of the notes.
<PAGE>
(5) BORROWINGS UNDER LINE OF CREDIT:
-------------------------------
At September 30, 1997, FFCA's primary source of interim funding for new
investments is an unsecured acquisition loan facility. On April 15, 1997, the
acquisition loan facility was amended to, among other things, increase the
facility from $200 million to $350 million.
<PAGE>
Part I -- Financial Information
- -------------------------------
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
General
- -------
Franchise Finance Corporation of America ("FFCA") is a self-administered real
estate investment trust ("REIT") which provides real estate financing to the
chain restaurant industry through various financial products, including
sale-leaseback transactions, mortgage loans, restaurant equipment loans and
construction financing. At September 30, 1997, FFCA had interests in 2,215
restaurant properties through various investments. FFCA's portfolio included
1,539 restaurant properties represented by investments in real estate and
mortgage loans receivable, 627 properties represented by securitized mortgage
loans in which FFCA holds a residual interest and 49 properties represented by
mortgage loans originated and held by FFCA's affiliate, FFCA Mortgage
Corporation (Mortgage Corp.). These restaurants are operated by approximately
400 experienced restaurant operators in over 35 established chains throughout
the United States.
In order to facilitate the loan origination and securitization process, FFCA had
formed Mortgage Corp. during 1996. As a result of changes made to the structure
of the securitization transaction used in 1997 (and planned to be used in future
transactions) FFCA determined that it would no longer need Mortgage Corp. to
originate loans. The loan origination activities are transferring to FFCA and
the existing operations of Mortgage Corp. are expected to be phased out over the
next several months.
Results of Operations
- ---------------------
FFCA had income of $16.2 million before gain on the sale of property and other
costs for the quarter ended September 30, 1997 (the quarter) as compared to
$14.9 million for the comparable quarter of 1996, representing an increase of
9%. Revenues rose 13% to $32.9 million during the quarter from $29.1 million in
the comparable quarter of 1996 primarily due to the growth of FFCA's investment
portfolio. Revenues for the nine months ended September 30, 1997 show a similar
rate of growth over the nine-month period ended September 30, 1996. Net income
of $16.5 million ($.40 per share) for the quarter increased 4% compared to net
income of $15.8 million ($.39 per share) for the quarter ended September 30,
1996. Net income of $56.2 million ($1.37 per share) for the nine months ended
September 30, 1997 included gains on the sale of property aggregating $7
million, as compared to net income of $51.5 million ($1.27 per share) for the
nine months ended September 30, 1996 which included gains of $8 million.
Portions of the gains in both years were generated by mortgage loan
securitization transactions, as discussed below.
FFCA's primary source of revenues continues to be rental revenues generated by
its portfolio of restaurant properties leased to restaurant operators on a
triple-net basis. Rental revenues increased 5.2% for the quarter primarily due
to the impact of new investments in property subject to operating leases made in
the last quarter of 1996 and in 1997. FFCA invested in over $50 million in
property subject to operating leases during the third quarter of 1997, the full
effect of which will be reflected in future quarters' revenues. Base lease rates
on new investments made during 1997 decreased to a weighted average rate of 9.6%
from 10.6% during 1996, reflecting the overall decrease in interest rates
between these two quarters and increased competition from other financing
sources. Included in rental revenues is the impact of underperforming properties
related to a lessee who operates 27 restaurant properties who failed to make
certain of his lease payments (representing less than 1% of rental revenue for
both the quarter and nine months ended September 30, 1997).
Rental revenues include rent received from lessees (including contingent
rentals) and revenue received from rent guaranty insurance. In addition to base
rentals, generally the leases in FFCA's portfolio provide for contingent rentals
based on a percentage of the gross sales of the related restaurants. Such
contingent rentals totaled $1.9 million during the quarter as compared to $1.3
million for the same quarter in 1996. The increase primarily relates to one
lessee, Foodmaker, Inc., whose increased Jack in the Box restaurant sales
resulted in
<PAGE>
higher percentage rentals of approximately $300,000 over 1996 amounts. Rent
guaranty insurance coverage on certain properties has been provided by United
Guaranty Insurance Company (UG). During the quarter, rental revenue from rent
guaranty insurance dropped from approximately $422,000 in 1996 to approximately
$206,000 in 1997. During the first quarter of 1997, FFCA and UG reached an
agreement to settle all outstanding and future claims. Deferred income
approximating $110,000 related to settled future claims will be recognized in
income over the original terms of the remaining policies which expire at various
dates through 1998.
Mortgage interest income for the quarter increased to $2.3 million in 1997 from
$2.0 million in 1996 due to the growth in mortgage loan investments. Rates
achieved on the loans originated during 1997 averaged 9.2% as compared to 9.7%
achieved during 1996. The average interest rates on the bank credit facility
used to fund these new investments also reflected a decrease to 6.6% in 1997
from 7.1% in 1996. For the nine months ended September 30, 1997, mortgage
interest income decreased to $7.4 million from $15.0 million in the prior year
due to the impact of mortgage loan securitization transactions. Although FFCA no
longer receives mortgage interest income from the mortgages it sold, it retained
certain interests through the purchase of subordinated investment securities as
discussed below. These securities generate revenues that are included in
Investment Income and Other and represent the majority of the increase in that
financial statement caption between years.
In June 1996, FFCA sold approximately $179 million of the mortgage loans held in
its portfolio at that time. From July 1996 to June 1997, FFCA originated
approximately $146 million in mortgage loans and financed the origination of an
additional $164 million in mortgage loans held by an affiliate. All but
approximately $49 million of these loans were sold on June 9, 1997 through
FFCA's second securitization transaction. Approximately 89% of the $261 million
securitized loan pool was sold to outside parties. FFCA holds investments
(totaling $26.9 million at September 30, 1997) representing the remaining 11% of
the mortgage loan pool balance. These subordinated investment securities are the
last of the securities to be repaid from the pool, so that if any of the
underlying mortgage loans default, these securities take the first loss. Any
future credit losses in the securitized loan pool would be concentrated in the
subordinated investment securities retained by FFCA; however, FFCA originates
and services mortgage loans and has the infrastructure in place to deal with
potential defaults on the securitized portfolio (as it does with the mortgage
loans it holds for investment). To date, there have been no defaults on the
mortgage loans held in either securitized loan pool. These investment
securities, together with the investment securities retained from the 1996
securitization transaction, aggregate $55.8 million. FFCA also retained the
servicing rights on the mortgage loans and the right to receive any
participations based on the gross sales of the related restaurant properties. It
is anticipated that increases and decreases in mortgage interest income between
quarters in the future will continue to be impacted by the amount of loans held
for sale and the timing of future securitization transactions.
Expenses increased to $16.7 million during the quarter ended September 30, 1997
from $14.2 million in the comparable quarter of 1996, primarily due to an
increase in interest expense. Interest expense rose $2.1 million during the
quarter due to the use of borrowings for investment in restaurant properties
during the year. FFCA's unsecured debt balance averaged $400 million during the
third quarter of 1997 as compared to $280 million during the third quarter of
1996. Operating, general and administrative expenses in the third quarter of
1997 increased by approximately $283,000 or 11% as compared to 1996. The primary
reason for this increase is the addition of personnel and other resources
devoted to the development of an expanded line of financial products.
FFCA recorded net gains of $64,000 on the sale of property during the quarter as
compared to net gains of $944,000 recorded in the third quarter of 1996. These
net gains represent the effect of gains and losses from sales of property that
occurred primarily through the lessee's exercise of purchase options and through
the disposition of underperforming properties.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1997, FFCA had cash and cash equivalents of $1.4 million and
$222 million available on its bank line of credit. Rental and mortgage interest
revenue generated by FFCA's investments in restaurant
<PAGE>
properties has, and will continue to, comprise the majority of the cash
generated from operations. Operations during the nine-month period provided net
cash of $67.6 million as compared to $65.2 million in 1996 with the increase
primarily due to increased revenues. Cash generated from operations provides
distributions to the shareholders in the form of quarterly dividends. This cash
also may be used on an interim basis to fund new investments in properties or to
pay down debt.
Portfolio investments (including investments through FFCA's affiliate, Mortgage
Corp.) totaled $112 million during the quarter, bringing total portfolio
investments to $313 million year to date. This increase from $105 million for
the comparable quarter in 1996 and $193 million for the comparable year-to-date
period in 1996, reflects FFCA's continued focus on the growth of its portfolio
through restaurant property investments.
Currently, FFCA's primary source of interim funding for new investments is a
$350 million unsecured acquisition loan facility. This loan facility is used as
a warehousing line until a sufficient pool of restaurant properties or loans is
accumulated to warrant the issuance of additional debt or equity securities or
the sale of loans through securitization. At September 30, 1997, FFCA had $71.3
million in mortgage loans held for sale to be securitized in a future
transaction. In addition, Mortgage Corp. had $34.5 million in mortgage loans
held for sale and $6.8 million in construction loans representing a total of 49
restaurant properties. FFCA has hedged against fluctuations in interest rates
that could adversely affect the value of those fixed rate mortgage loans to be
sold. At September 30, 1997, FFCA had interest rate swap contracts outstanding
totaling $59.3 million in notional amount. FFCA intends to terminate these
contracts upon securitization of the fixed-rate mortgage loans, at which time
FFCA would generally expect to receive (if rates rise) or pay (if rates fall) an
amount equal to the present value of the difference between the LIBOR rate set
at the beginning of the interest rate agreement and the then existing LIBOR
rate. At that time, both the gain or loss on the securitization of the
fixed-rate mortgage loans and the gain or loss on the termination of the
interest rate swap contracts will be measured and recognized in the statement of
operations. FFCA had no outstanding liabilities under these contracts at
September 30, 1997 and based on the level of interest rates prevailing, FFCA
would have paid approximately $1.1 million if it had terminated the swap
contracts at September 30, 1997.
FFCA's investments in restaurant properties during the quarter were initially
funded by cash generated from operations, net draws on FFCA's revolving credit
facility and proceeds from the sale of property. During the quarter, FFCA sold 9
properties (as compared to 15 properties sold in the third quarter of 1996). In
addition, during the third quarter of 1997, FFCA had a $20 million mortgage
payoff representing 60 restaurant properties. Proceeds from the sale of property
and mortgage payoffs during the quarter totaled $23.9 million, which were used
to fund new investments.
On October 9, 1997, FFCA issued $10 million in unsecured notes bearing interest
at 6.95%, maturing in August 2007 to coincide with a lease rate reset. On July
14, 1997, FFCA redeemed at par $50 million in variable-rate unsecured notes due
January 1998 bearing interest at a weighted average rate of 3-month LIBOR plus
.33%. From time to time, FFCA may consider it advantageous to issue additional
equity securities. In September 1997, FFCA issued 956,160 shares of common stock
and placed the shares with the trustee of a unit investment trust. Net proceeds
to FFCA totaled $23.4 million, which were used to fund new investments.
FFCA declared a third quarter 1997 dividend of $0.45 per share, or $1.80 per
share on an annualized basis, payable on November 20, 1997 to shareholders of
record on November 10, 1997. Management anticipates that cash generated from
operations will be sufficient to meet operating requirements and provide the
level of shareholder dividends required to maintain FFCA's status as a REIT. As
of September 30, 1997, shareholders owning approximately 7.4% of the outstanding
shares of FFCA common stock participate in the dividend reinvestment plan and
dividends reinvested during the nine months ended September 30, 1997 totaled
$4.5 million as compared to $3.6 million in the comparable period of 1996.
<PAGE>
In the ordinary course of business, FFCA makes commitments to large restaurant
operators to invest in new and existing restaurant properties. Currently, FFCA
is also pursuing investment opportunities in freestanding retail properties
other than restaurants, such as convenience stores and automotive services
retail locations. FFCA's anticipated investments include commitments totaling
approximately $335 million at September 30, 1997. These commitments were made to
several large operators of Burger King, Chili's, Arby's, Applebee's and others
to acquire or finance properties over the next year (subject to FFCA's customary
underwriting procedures). FFCA anticipates funding these specific commitments,
and other investments, through amounts available through its revolving credit
facility, the issuance of additional unsecured debt, the issuance of
mortgage-backed securities through securitization or the issuance of additional
equity securities of FFCA.
Tenant Concentration
- --------------------
One restaurant operator, Foodmaker, Inc. ("Foodmaker"), accounted for
approximately 9.8% of FFCA's total rental and mortgage loan interest revenues
(generated from its investment portfolio) during the nine months ended September
30, 1997 as compared to 11% for the nine months ended September 30, 1996.
Foodmaker operates and franchises Jack in the Box restaurants. The relative
decrease in the percentage of FFCA's revenue from Foodmaker between 1996 and
1997 is due to the fact that FFCA's portfolio is growing and, as a result,
Foodmaker is becoming a relatively smaller portion of the entire portfolio. This
decrease is expected to continue.
In the opinion of management, the financial information included in this report
reflects all adjustments necessary for fair presentation. All adjustments are of
a normal recurring nature.
Part II -- Other Information
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) For electronic filing purposes only, this report contains Exhibit
27, Financial Data Schedule.
(b) During the quarter covered by this report, FFCA filed the following
reports on Form 8-K:
Form 8-K dated July 21, 1997
Item 5. Other Events - (a) On July 21, 1997, FFCA entered into
a distribution agreement with respect to the issue and sale by
FFCA of up to $150,000,000 in Medium Term Notes due nine
months or more from the date of issue. (b) FFCA's Board of
Directors approved a resolution increasing the number of
directors constituting the Board from ten to eleven directors.
Item 7. Financial Statements and Exhibits - Exhibits (a)
Distribution agreement (b) Legal opinion of Kutak Rock.
Form 8-K dated September 11, 1997
Item 5. Other Events - On September 11, 1997, FFCA entered
into an underwriting agreement with Smith Barney Inc. with
respect to the issue and sale by FFCA of an aggregate of
956,160 shares of FFCA's $.01 par value common stock.
Item 7. Financial Statements and Exhibits - Exhibits (a)
Underwriting agreement (b) Legal opinion of Kutak Rock.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANCHISE FINANCE CORPORATION OF AMERICA
Date: November 12, 1997 By /s/ John Barravecchia
-------------------------------------------
John Barravecchia, Executive Vice President,
Chief Financial Officer and Treasurer
Date: November 12, 1997 By /s/ Catherine F. Long
-------------------------------------------
Catherine F. Long, Senior Vice President
Finance and Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
For electronic filing purposes only, this report contains Exhibit 27, Financial
Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF
SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,424
<SECURITIES> 0
<RECEIVABLES> 25,679
<ALLOWANCES> 2,200
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 928,234
<DEPRECIATION> 173,981
<TOTAL-ASSETS> 999,302
<CURRENT-LIABILITIES> 0
<BONDS> 435,646
0
0
<COMMON> 417
<OTHER-SE> 523,599
<TOTAL-LIABILITY-AND-EQUITY> 999,302
<SALES> 0
<TOTAL-REVENUES> 100,283
<CGS> 0
<TOTAL-COSTS> 1,540
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,756
<INCOME-PRETAX> 56,242
<INCOME-TAX> 0
<INCOME-CONTINUING> 56,242
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,242
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 0
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