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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
1-13116
FRANCHISE FINANCE CORPORATION OF AMERICA
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0736091
- ------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
The Perimeter Center
17207 North Perimeter Drive
Scottsdale, Arizona 85255
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(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 9, 1998:
Common Stock, $0.01 par value 48,999,705
----------------------------- ----------------
Class Number of Shares
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS - SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Amounts in thousands except share data)
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Investments:
Investments in Real Estate, at cost:
Land $ 462,589 $ 382,637
Buildings and Improvements 689,049 545,629
Equipment 19,557 23,039
----------- -----------
1,171,195 951,305
Less-Accumulated Depreciation 182,825 175,263
----------- -----------
Net Real Estate Investments 988,370 776,042
Mortgage Loans Held for Sale (Note 2) 171,005 251,622
Mortgage Loans Receivable, net of allowances
of $3,300 in 1998 and $1,900 in 1997 41,549 35,184
Real Estate Investment Securities 94,690 55,185
Other Investments 32,670 27,118
----------- -----------
Total Investments 1,328,284 1,145,151
Cash and Cash Equivalents 14,701 7,130
Accounts Receivable, net of allowances
of $750 in 1998 and $2,200 in 1997 9,010 7,581
Other Assets 22,525 19,336
----------- -----------
Total Assets $ 1,374,520 $ 1,179,198
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends Payable $ 23,008 $ 19,640
Notes Payable (Note 4) 357,051 309,360
Borrowings Under Line of Credit 246,000 302,000
Mortgage Payable to Affiliate 8,500 8,500
Accrued Expenses and Other 26,818 16,702
----------- -----------
Total Liabilities 661,377 656,202
----------- -----------
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 48,953,247 shares in 1998
and 41,787,543 shares in 1997 490 418
Capital in Excess of Par Value 771,277 583,056
Cumulative Net Income 272,901 202,106
Cumulative Dividends (331,525) (262,584)
----------- -----------
Total Shareholders' Equity 713,143 522,996
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,374,520 $ 1,179,198
=========== ===========
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Rental $31,569 $25,820 $ 87,350 $ 75,041
Mortgage Loan Interest 5,696 2,330 21,287 7,448
Real Estate Investment
Securities Income 4,003 2,439 9,335 5,330
Investment Income and Other 1,715 1,605 4,767 4,607
Interest (Related Party) -- 667 -- 7,857
------- ------- -------- --------
42,983 32,861 122,739 100,283
------- ------- -------- --------
EXPENSES:
Depreciation and Amortization 6,439 5,230 17,808 15,478
Operating, General and
Administrative 3,529 2,883 9,958 8,418
Property Costs 733 485 1,513 1,540
Interest 10,413 7,851 31,221 26,017
Interest (Related Party) 250 246 750 739
------- ------- -------- --------
21,364 16,695 61,250 52,192
------- ------- -------- --------
Income Before Gain on Sale of
Property and Other Costs 21,619 16,166 61,489 48,091
Gain on Sale of Property 2,218 64 9,306 7,004
Equity in Net Income of Affiliate -- 227 -- 1,147
------- ------- -------- --------
Net Income $23,837 $16,457 $ 70,795 $ 56,242
======= ======= ======== ========
Basic Net Income Per Share $ .49 $ .40 $ 1.50 $ 1.38
======= ======= ======== ========
Diluted Net Income Per Share (Note 5) $ .48 $ .40 $ 1.49 $ 1.37
======= ======= ======== ========
Number of Common Shares Used in
Basic Net Income Per Share 48,920 40,872 47,062 40,710
Incremental Shares from Assumed
Conversion of Options 316 375 387 357
------- ------- -------- --------
Number of Common Shares Used in
Diluted Net Income Per Share 49,236 41,247 47,449 41,067
======= ======= ======== ========
</TABLE>
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Issued Capital in
------------------- Excess of Cumulative Cumulative
Shares Amount Par Value Net Income Dividends Total
------ ------ --------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 41,788 $418 $583,056 $202,106 $(262,584) $522,996
Capital contributions -
Issuance of common stock 6,937 69 182,658 -- -- 182,727
Dividend reinvestment plan 171 2 4,451 -- -- 4,453
Exercise of stock options 57 1 1,112 -- -- 1,113
Net income -- -- -- 70,795 -- 70,795
Dividends declared -
$1.41 per share -- -- -- -- (68,941) (68,941)
------ ---- -------- -------- --------- --------
BALANCE, September 30, 1998 48,953 $490 $771,277 $272,901 $(331,525) $713,143
====== ==== ======== ======== ========= ========
</TABLE>
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Amounts in thousands)
(Unaudited)
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 70,795 $ 56,242
Adjustments to net income:
Depreciation and amortization 17,808 15,478
Gain on sale of property (9,306) (7,004)
Equity in net income of affiliate -- (1,147)
Provision for uncollectible mortgage loans 703 75
Other 6,324 1,540
--------- ---------
Net cash provided by operating activities 86,324 65,184
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property (248,504) (89,445)
Investment in mortgage loans (391,782) (188,037)
Investment in notes receivable (25,533) (5,260)
Proceeds from securitization transactions (Note 2) 415,858 103,975
Proceeds from sale of property 22,184 19,468
Receipt of mortgage loan and note payoffs 24,108 27,816
Collection of mortgage loan and note principal 8,454 5,442
Collection of investment security principal 2,242 1,093
Collection of related party notes receivable -- 115,668
Purchase of investment securities -- (15,946)
--------- ---------
Net cash used in investing activities (192,973) (25,226)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (65,573) (54,851)
Proceeds from issuance of common stock 188,293 27,767
Proceeds from bank borrowings 490,000 366,000
Proceeds from issuance of notes 47,500 50,000
Payment of bank borrowings (546,000) (388,800)
Payment of other unsecured notes -- (50,000)
--------- ---------
Net cash provided by (used in)
financing activities 114,220 (49,884)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,571 (9,926)
CASH AND CASH EQUIVALENTS, beginning of period 7,130 11,350
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 14,701 $ 1,424
========= =========
Supplemental Disclosure of Noncash Activities:
Investment in securities resulting from
securitization transactions $ 41,408 $ 11,303
========= =========
Mortgage loans obtained as part of property
sale proceeds, net of deferred gain $ 1,447 $ 767
========= =========
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(1) NEW PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. This
standard is effective for FFCA's fiscal year 2000 at which time FFCA plans to
adopt it. The impact that the adoption of this new accounting standard would
have had on FFCA's financial statements for the three and nine months ended
September 30, 1998 and 1997 has not been determined.
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This standard requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. FFCA has elected early adoption of this standard in October 1998.
Those of FFCA's retained interests that have been accounted for as trading
securities will be reclassified to the available-for-sale or held-to-maturity
category, as applicable based on FFCA's intent and ability to hold these
investments. The adoption of this new accounting standard would not have had a
material effect on FFCA's financial statements for the three and nine months
ended September 30, 1998 and 1997.
(2) MORTGAGE LOANS HELD FOR SALE:
Certain mortgage loans originated for sale by FFCA totaling $335
million were securitized in May 1998 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 9% of the aggregate mortgage loan
principal balance through the purchase of subordinated investment securities of
the securitization trust. These investment securities, totaling $21.7 million,
were accounted for as the sale of mortgage loans and the purchase of
mortgage-backed securities and are included in Real Estate Investment Securities
in the accompanying consolidated balance sheets.
In August 1998, FFCA entered into a $600 million loan sale facility
with a third party. This facility permits FFCA to sell loans on a regular basis
to a trust for an agreed upon advance rate. Upon the sale of such loans, FFCA
acts as servicer for the loans. As of September 30, 1998, FFCA sold 234 loans
with an outstanding aggregate principal balance of $119 million to the trust.
Approximately 84% of the mortgage loan balance was sold while FFCA holds the
remaining (subordinated) 16%. The retained subordinated investment securities,
totaling $19.8 million, were accounted for as the sale of mortgage loans and the
purchase of trust certificates and are included in Real Estate Investment
Securities in the accompanying consolidated balance sheets.
<PAGE>
(3) DERIVATIVE FINANCIAL INSTRUMENTS:
FFCA uses derivative financial instruments to manage interest rate
exposures that 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. FFCA hedges
against fluctuations in interest rates that could adversely affect the value of
the mortgage loans to be sold. At September 30, 1998, FFCA had interest rate
swap contracts outstanding with a total notional amount of $86 million. FFCA
intends to terminate these contracts upon securitization of the fixed-rate
mortgage loans in early 1999, at which time both the gain or loss on the sale of
the 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, 1998 and,
based on the level of interest rates prevailing, FFCA would have paid
approximately $3 million if it had terminated these swap contracts at September
30, 1998.
In addition, FFCA entered into an interest rate agreement with a
notional amount of $100 million to hedge exposure to fluctuations in interest
rates on anticipated debt. FFCA terminated this interest rate agreement upon the
issuance of its senior unsecured notes in October 1998 (see Note 4), at which
time FFCA deferred (and will amortize into interest expense) the payment of
approximately $7 million it made in settlement of this interest rate agreement.
(4) NOTES PAYABLE:
In January 1998, FFCA issued $17 million in unsecured notes due in
2007, bearing interest at a rate of 6.86%. In April 1998, FFCA issued $30.5
million in unsecured notes due in 2008, bearing interest at a rate of 7.07%.
Interest on the notes is payable semi-annually in arrears on each May 30 and
November 30 with principal due at maturity. Subsequent to September 30, 1998,
FFCA issued $150 million in senior unsecured notes due in 2003, bearing interest
at a rate of 8.25%. Interest on these notes is payable semi-annually in arrears
on each April 30 and October 30 with principal due at maturity.
(5) EARNINGS PER SHARE:
Earnings per share amounts for 1997 have been restated to conform to
1998's presentation as required by Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share". Stock options to purchase 233,000 and
208,249 weighted shares of common stock (representing options granted in January
1998) at $27.625 per share were outstanding during the three and nine months
ended September 30, 1998, respectively, but were not included in the computation
of diluted earnings per share, because the options' exercise price was greater
than the average market price of the common shares during this period.
<PAGE>
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, as well as to the convenience
store and automotive services and parts industries through various financial
products, including sale-leaseback transactions, mortgage loans, equipment loans
and construction financing. At September 30, 1998, FFCA had interests in 3,317
properties consisting of investments in 2,645 chain restaurant properties, 552
convenience stores, 110 automotive services and parts stores and 10 other retail
properties. FFCA's portfolio included 2,000 chain store properties represented
by investments in real estate and mortgage loans and 1,317 properties
represented by securitized mortgage loans in which FFCA holds a residual
interest.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 1998, FFCA originated $212 million in new
sale-leaseback and mortgage loan investments, representing $103 million in chain
restaurant properties, $58 million in convenience stores and $51 million in
automotive services and parts stores. This brings the year-to-date total
investments to $656 million, up 110% from $313 million in the first nine months
of 1997. At September 30, 1998, FFCA's portfolio represents over 3,300 locations
in 48 states and Canada, approximately 220 of which were financed in the third
quarter of 1998. In addition to this geographic diversification, the portfolio
is also represented by more than 400 different operators in approximately 50
retail chains.
FFCA's investment activities are funded initially by draws on FFCA's
revolving credit facility and cash generated from operations. FFCA's $350
million unsecured acquisition loan facility is used as a warehousing line until
a sufficiently large pool of portfolio investments is accumulated to warrant the
sale of loans through a securitization transaction or the issuance of additional
debt or equity securities of FFCA. In August 1998, FFCA entered into a loan sale
facility with a third party, under which the third party is currently committed
to advance FFCA up to $600 million. This facility permits FFCA to sell loans on
a regular basis to a trust for an agreed upon advance rate. FFCA acts as
servicer for such loans following the sale to the trust.
In September 1998, Duff & Phelps Credit Rating Co. upgraded the senior
unsecured debt of FFCA from BBB- to BBB. The rating upgrade was based on FFCA's
continued strong financial performance, general reduction in operator and
concept concentrations and improved financial flexibility. This financial
flexibility gives FFCA the ability to access a large amount of capital at a time
when some of its competitors are unable to do so.
As of September 30, 1998, FFCA sold through the loan sale facility, 234
loans with an aggregate principal balance of $119 million, resulting in no
material gain. Approximately 84% of the mortgage loan balance was sold while
FFCA holds the remaining (subordinated) 16%. The retained subordinated
investment securities, totaling $19.8 million, were accounted for as the sale of
mortgage loans and the purchase of trust certificates. The net cash proceeds
approximated $99.5 million and were used to reduce FFCA's revolving line of
credit and to fund future investments. To date there have been no losses in any
of FFCA's securitized mortgage loan pools.
FFCA intends to continue to originate and securitize mortgage loans and
to retain the loan servicing rights. Several factors affect FFCA's ability to
complete securitizations of its mortgage loans, including conditions in the
securities markets, specifically the asset-backed securities markets. Current
market conditions are less favorable than they have been in the recent past and
these changes in market conditions could impact FFCA's ability to originate and
sell mortgage loans on an advantageous or timely basis. At September 30, 1998,
FFCA had forward commitments totaling over $500 million with various
<PAGE>
operators to acquire or finance (subject to FFCA's customary underwriting
procedures) approximately 500 chain store properties over the next year. FFCA
has renegotiated most of these commitments at more favorable rates;
renegotiations are continuing with respect to the remaining commitments. FFCA
attributes its success in re-pricing the investments to its relationships with
its clients and to its ability to provide various financing alternatives when
competitors were unable to do so. FFCA's strong balance sheet and market
knowledge enable it to take advantage of the investment opportunities that exist
in various economic and interest rate environments.
From the time the fixed-rate mortgage loans are originated until the
time they are sold through a securitization transaction, FFCA hedges against
fluctuations in interest rates through the use of derivative financial
instruments. At September 30, 1998, FFCA had outstanding interest rate swap
contracts aggregating $86 million in notional amount. FFCA intends to terminate
these contracts upon securitization of the related fixed-rate mortgage loans in
1999 and, at that time, both the gain or loss on the sale of the 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. Based on the level of
interest rates prevailing, FFCA would have paid approximately $3 million if it
had terminated the swap contracts at September 30, 1998. In addition, FFCA
entered into an interest rate agreement with a notional amount of $100 million
to hedge exposure to fluctuations in interest rates on anticipated debt. FFCA
terminated this interest rate agreement upon the issuance, in October 1998, of
its $150 million senior unsecured notes due in 2003, bearing interest at a rate
of 8.25%. FFCA deferred (and will amortize into interest expense) the payment of
approximately $7 million it made in October 1998 in settlement of this interest
rate agreement.
Operations during the nine-month period ended September 30, 1998
provided net cash of $86 million as compared to $65 million in 1997. The
increase in cash provided by operations is primarily due to increased revenues
from the growth in the size of the portfolio. Cash generated from operations
provides distributions to the shareholders in the form of quarterly dividends.
FFCA has a dividend reinvestment plan that allows shareholders to
acquire additional shares of FFCA stock by automatically reinvesting their
quarterly dividends. As of September 30, 1998, shareholders owning approximately
6.4% of the outstanding shares of FFCA common stock participate in the dividend
reinvestment plan and dividends reinvested during the quarter ended September
30, 1998 totaled approximately $1.5 million. FFCA declared a third quarter 1998
dividend of $0.47 per share, or $1.88 per share on an annualized basis, payable
on November 20, 1998 to shareholders of record on November 10, 1998. 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.
RESULTS OF OPERATIONS
FFCA's operations for the third quarter of 1998 resulted in net income
of $24 million ($.48 per share diluted) as compared to net income of $16 million
($.40 per share diluted) in the comparable quarter of 1997. For the nine months
ended September 30, 1998, FFCA reported net income of $71 million ($1.49 per
share diluted) as compared to net income of $56 million ($1.37 per share
diluted). The increase in net income between 1997 and 1998 resulted from an
increase in the size of FFCA's real estate investment portfolio.
Total revenues rose 31% to $43 million during the quarter from $32.9
million in the comparable quarter of 1997 primarily due to the growth of FFCA's
investment portfolio. Revenues for the related nine-month periods showed 22%
growth between years. FFCA's primary source of revenue growth is rental revenues
generated by new investments in chain store properties. As a result of FFCA's
1997 expansion into the financing of convenience stores and the automotive parts
and services industry, new investments during 1998 reflected 61% of the
investment dollars were made in the restaurant industry, 27% in convenience
stores and 12% in the automotive parts and services industry. FFCA management
believes that such investment diversity is likely to continue. Since the third
quarter of 1997, FFCA made new investments in property subject to operating
leases of approximately $290 million, including $77 million in the third quarter
of 1998. Weighted average base lease rates on new investments in 1998 rose to
10.1%, as compared to 9.6% for the comparable nine month period in 1997.
Partially offsetting the rental revenue increases generated by new investments
were decreases in rent related to properties sold.
<PAGE>
Certain of the leases in FFCA's portfolio also provide for contingent
rentals based on a percentage of the gross sales of the related chain store
properties. Such contingent rentals totaled $1.5 million in the third quarter of
1998 as compared to $1.9 million in the comparable quarter of 1997. Contingent
rentals for both of the related nine-month periods were $4.7 million. As of May
1998, a new accounting pronouncement requires that a lessor defer recognition of
contingent rental revenue in interim periods until the specified target that
triggers the contingent rental revenue is achieved. This change in the timing of
revenue recognition resulted in approximately $900,000 less contingent rental
revenue reported in the quarter ended September 30, 1998 as compared to what
would have been reported under the old method.
Mortgage interest income generated by FFCA's loan portfolio totaled
$5.7 million for the quarter ended September 30, 1998 and $21.3 million
year-to-date. The majority of the mortgage interest income is generated by
mortgage loans that are held for sale. In 1997, mortgage investment activity was
split between FFCA and an unconsolidated affiliate, FFCA Mortgage Corporation.
When considered together, the mortgage interest income from FFCA's direct
investments in mortgage loans and related party interest income from indirect
investments in mortgage loans (through FFCA Mortgage Corporation), totaled $3
million and $15.3 million for the quarter and nine months ended September 30,
1997, respectively. Rates achieved on the loans originated during the first nine
months of 1998 averaged 8.8% as compared to 9.2% during the first nine months of
1997. Increases and decreases in mortgage interest income between quarters has
been, and will continue to be, impacted by the amount of loans held for sale and
the timing of the sale of these loans through securitization transactions.
Although FFCA no longer receives mortgage interest income from the mortgages it
sold during 1997 and 1998, it retains certain interests through the purchase of
subordinated investment securities. These securities generate revenues that are
included in "Real Estate Investment Securities Income" in the accompanying
financial statements.
Expenses increased to $21.4 million and $61.3 million during the
quarter and nine months ended September 30, 1998, respectively, from $16.7
million and $52.2 million in the comparable quarter and nine months of 1997,
respectively. This increase was primarily due to higher interest expense and
depreciation and amortization expense related to property purchases and due to
an increase in operating, general and administrative expenses. For the
nine-month periods, interest expense rose $5.2 million due to the use of
borrowings for investment in chain store properties. FFCA's outstanding
borrowings averaged $569 million during the first nine months of 1998 as
compared to $462 million during the first nine months of 1997. Operating,
general and administrative expenses in the first nine months of 1998 increased
by $1.5 million as compared to the same period in 1997. The increase is
primarily attributable to the addition of personnel and other resources devoted
to the expansion of FFCA's line of financial products.
During the quarter, FFCA sold 35 properties (as compared to 9
properties sold in the third quarter of 1997, in addition to a $20 million
mortgage payoff representing 60 restaurant properties) and recorded net gains
totaling $2.2 million on these sales, as compared to net gains of $64,000
recorded in the third quarter of 1997. Of the 35 properties sold, four were due
to lessees exercising their purchase options, ten were sales of underperforming
properties, 13 were payoffs of securitized mortgage loans in which FFCA holds a
residual interest, and the remaining eight were sold for other reasons. Cash
proceeds from the sale of property and from mortgage loan and note payoffs
during the quarter, totaling $27 million, were used to fund new investments.
Year-to-date, such sales totaled 57 properties, representing $46 million in cash
proceeds.
YEAR 2000 COMPLIANCE
FFCA's STATE OF READINESS. FFCA successfully implemented its new
accounting and servicing information system in January 1998 and its new property
management system was deployed in July 1998. The design and implementation of
these new systems, including related upgrades in computer hardware, was
necessary to develop a more efficient portfolio servicing system that would
permit a high level of growth in the FFCA portfolio while containing operating
costs. The new systems are also "Year 2000" compliant which means that the
systems will appropriately address any dates that refer to the 21st century.
<PAGE>
FFCA is taking a proactive approach in dealing with the issues associated with
the Year 2000 and a five-phase process to address this challenge has been
approved by FFCA's computer steering committee. This plan includes: (1) an
inventory and assessment of the systems and electronic devices that may be at
risk; (2) the identification of potential solutions; (3) the implementation of
upgrades or replacements to affected systems or devices; (4) the verification of
compliance and testing of the revised systems; and (5) the training of users on
the new systems. To date, FFCA has completed a review of its software and
hardware and determined, through a combination of internal testing and vendor
representations that their products have been tested and are compliant, that all
mission-critical systems (those systems that are necessary to conduct FFCA's
business activities) are Year 2000 compliant. Non-mission critical software and
hardware have also been reviewed and FFCA has identified a few third-party
products that are scheduled for upgrades or replacement in the first half of
1999 as part of FFCA's ongoing maintenance of its information system technology.
THE COSTS TO ADDRESS FFCA'S YEAR 2000 ISSUES. Based on current
estimates and plans, FFCA believes the costs of addressing Year 2000 issues will
not be material.
THE RISKS OF FFCA'S YEAR 2000 ISSUES. FFCA believes the most reasonably
likely worst case scenario will be indirect in nature involving third parties
such as clients, vendors and suppliers which may not have successfully dealt
with their Year 2000 issues. FFCA continues to assess the key third parties that
it relies upon; however, FFCA has not yet been assured that all of the computer
systems of its clients, vendors and suppliers will be Year 2000 compliant. For
example, if suppliers of FFCA's energy or telecommunications fail to become Year
2000 compliant, such failure possibly could have an adverse effect on FFCA's
ability to conduct daily operations or to communicate with its clients and
vendors. While FFCA continues to analyze these risks, it is possible that
information relevant to such analysis will not be made available to FFCA, or
that potential solutions will not be within FFCA's control.
FFCA'S CONTINGENCY PLANS. FFCA will continue to monitor and evaluate
its key clients, vendors and suppliers to determine the extent that FFCA is
vulnerable to those third parties' possible failure to become Year 2000
compliant. FFCA expects to develop contingency plans throughout the remainder of
1998 and during 1999, on an as needed basis to address these concerns, where
reasonable to do so.
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) FFCA did not file any reports on Form 8-K during the quarter
ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANCHISE FINANCE CORPORATION OF AMERICA
Date: November 12, 1998 By /s/ John Barravecchia
--------------------------------------------
John Barravecchia, Executive Vice President,
Chief Financial Officer and Treasurer
Date: November 12, 1998 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, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 14,701
<SECURITIES> 0
<RECEIVABLES> 9,760
<ALLOWANCES> 750
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,171,195
<DEPRECIATION> 182,825
<TOTAL-ASSETS> 1,374,520
<CURRENT-LIABILITIES> 0
<BONDS> 611,551
0
0
<COMMON> 490
<OTHER-SE> 712,653
<TOTAL-LIABILITY-AND-EQUITY> 1,374,520
<SALES> 0
<TOTAL-REVENUES> 122,739
<CGS> 0
<TOTAL-COSTS> 1,513
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,971
<INCOME-PRETAX> 70,795
<INCOME-TAX> 0
<INCOME-CONTINUING> 70,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,795
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.49
</TABLE>
