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 June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
1-13116
Commission file number
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
----------------------------------------
(Address of principal executive offices)
Registrants' telephone number including area code (480) 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 August 4, 2000:
Common Stock, $0.01 par value 56,428,718
----------------------------- ----------------
Class Number of Shares
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2000 AND DECEMBER 31, 1999
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Investments:
Investments in Real Estate, at cost:
Land $ 591,433 $ 583,033
Buildings and Improvements 874,957 871,660
Equipment 23,318 20,065
----------- -----------
1,489,708 1,474,758
Less-Accumulated Depreciation 216,886 205,400
----------- -----------
Net Real Estate Investments 1,272,822 1,269,358
Mortgage Loans Held for Sale 112,097 139,703
Mortgage Loans Receivable, net of allowances of $3,415 in
2000 and $3,570 in 1999 53,630 57,996
Real Estate Investment Securities 191,634 185,252
Other Investments 15,773 14,129
----------- -----------
Total Investments 1,645,956 1,666,438
Cash and Cash Equivalents 9,893 4,757
Accounts Receivable, net of allowances of $2,023 in
2000 and $1,125 in 1999 15,838 10,669
Mortgage Servicing Rights and Other Assets 30,659 28,932
----------- -----------
Total Assets $ 1,702,346 $ 1,710,796
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends Payable $ 29,905 $ 29,739
Notes Payable 617,704 501,859
Borrowings Under Line of Credit 115,000 238,000
Mortgage Payable to Affiliate -- 8,500
Accrued Expenses and Other 22,170 29,066
----------- -----------
Total Liabilities 784,779 807,164
----------- -----------
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 56,427,416
shares in 2000 and 56,110,776 shares in 1999 564 561
Capital in Excess of Par Value 933,450 927,147
Accumulated Other Comprehensive Income (Loss) (1,150) 237
Cumulative Net Income 515,403 446,550
Cumulative Dividends (530,700) (470,863)
----------- -----------
Total Shareholders' Equity 917,567 903,632
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,702,346 $ 1,710,796
=========== ===========
</TABLE>
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FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/00 6/30/99 6/30/00 6/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Rental $ 39,911 $ 37,295 $ 80,760 $ 73,009
Mortgage Loan Interest 5,121 8,009 11,219 12,942
Real Estate Investment Securities Income 9,757 6,361 19,266 12,692
Investment Income and Other 2,277 1,546 4,453 3,088
-------- -------- -------- --------
57,066 53,211 115,698 101,731
-------- -------- -------- --------
EXPENSES:
Depreciation and Amortization 8,775 7,638 17,339 14,883
Operating, General and Administrative 6,606 3,512 11,674 6,602
Property Costs 925 353 1,035 947
Interest 15,017 14,218 30,543 26,721
Related Party Interest 71 254 327 508
-------- -------- -------- --------
31,394 25,975 60,918 49,661
-------- -------- -------- --------
Income Before Realized and Unrealized Gains 25,672 27,236 54,780 52,070
Unrealized Gain/(Loss) on Real Estate
Investment Securities (813) -- 3,147 --
Gain on Sale of Property 9,705 9,222 11,588 9,847
-------- -------- -------- --------
Income Before Income Tax Expense 34,564 36,458 69,515 61,917
Income Tax Expense 662 -- 662 --
-------- -------- -------- --------
Net Income $ 33,902 $ 36,458 $ 68,853 $ 61,917
======== ======== ======== ========
Per Share Data:
Basic Net Income Per Share $ .60 $ .65 $ 1.22 $ 1.13
======== ======== ======== ========
Diluted Net Income Per Share $ .60 $ .65 $ 1.22 $ 1.13
======== ======== ======== ========
Number of Common Shares Used in
Basic Net Income Per Share 56,381 55,903 56,317 54,650
Incremental Shares from Assumed
Conversion of Options 199 204 205 178
-------- -------- -------- --------
Number of Common Shares Used in
Diluted Net Income Per Share 56,580 56,107 56,522 54,828
======== ======== ======== ========
</TABLE>
3
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FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Accumulated
Stock Issued Capital in Other Total Total
-------------- Excess of Comprehensive Cumulative Cumulative Stockholder's Comprehensive
Shares Amount Par Value Income Net Income Dividends Equity Income
------ ------ --------- ------ ---------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 56,111 $561 $927,147 $ 237 $446,550 $(470,863) $ 903,632
Net income -- -- -- -- 68,853 -- 68,853 $ 68,853
Unrealized loss on securities -- -- -- (1,387) -- -- (1,387) (1,387)
--------
Comprehensive income $ 67,466
========
Capital contributions -
Dividend reinvestment plan 159 2 3,570 -- -- -- 3,572
Incentive and benefit plans 117 1 432 -- -- -- 433
Exercise of stock options 40 -- 801 -- -- -- 801
Warrants issued -- -- 1,500 -- -- -- 1,500
Dividends declared -
$1.06 per share -- -- -- -- -- (59,837) (59,837)
------ ---- -------- ------- -------- --------- ---------
BALANCE, June 30, 2000 56,427 $564 $933,450 $(1,150) $515,403 $(530,700) $ 917,567
====== ==== ======== ======= ======== ========= =========
</TABLE>
4
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,853 $ 61,917
Adjustments to net income:
Depreciation and amortization 17,339 14,883
Gain on sale of property (11,588) (9,847)
Unrealized gain on real estate investment securities (3,147) --
Other (6,094) (3,828)
--------- ---------
Net cash provided by operating activities 65,363 63,125
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property (29,405) (111,734)
Investment in mortgage loans (265,530) (566,079)
Investment in notes receivable (4,120) (1,775)
Proceeds from securitization transactions 104,890 401,518
Proceeds from loan sales 133,867 --
Proceeds from sale of property 24,499 15,602
Receipt of mortgage loan and note payoffs 29,641 6,114
Collection of mortgage loan and note principal 4,897 4,659
Collection of investment security principal 12,754 2,399
--------- ---------
Net cash provided (used) in investing activities 11,493 (249,296)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (56,101) (50,869)
Proceeds from issuance of common stock 881 146,105
Proceeds from bank borrowings 113,000 658,000
Proceeds from issuance of notes 115,000 --
Payment of mortgage payable to affiliate (8,500) --
Payment of bank borrowings (236,000) (553,000)
--------- ---------
Net cash (used) provided by financing activities (71,720) 200,236
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,136 14,065
CASH AND CASH EQUIVALENTS, beginning of period 4,757 3,881
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 9,893 $ 17,946
========= =========
Noncash Investing Activities:
Securities and other assets resulting from
loan sales/securitizations $ 21,981 $ 27,925
Conversion of mortgage loans to property and
equipment subject to operating lease $ 9,843 $ 2,900
Noncash Financing Activities:
Common stock issued for employee stock plans and other $ 5,425 $ 3,948
</TABLE>
5
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(1) NEW ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, clarifying
generally accepted accounting principles related to accounting for contingent
rental revenues. This new accounting guidance requires companies to recognize
contingent rentals as revenue when the change in the factor on which the
contingent lease payment is based actually occurs. Recently, the SEC issued SAB
101B, deferring the implementation of SAB 101 until the fourth quarter of 2000;
accordingly, FFCA has delayed its adoption of SAB 101 until that time.
Currently, FFCA recognizes estimated contingent revenues ratably throughout the
year when it is probable that a property will exceed the sales threshold where
percentage rental revenues are due, with verification of the actual amount of
percentage revenues due received from the operator at various times during the
year, based on the operator's reporting requirements. Since many of the
operators of FFCA's chain store properties report sales on a calendar year
basis, it is anticipated that, had FFCA adopted SAB 101, the effect on the June
30, 2000 financial statements would have been a shifting of the recognition of
contingent revenues that otherwise would have been recognized in the first half
of the year to the latter part of the year.
6
<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
multi-unit operators of chain restaurants, convenience stores and automotive
services and parts outlets. FFCA offers financing through various products
including mortgage loans, equipment loans, construction financing and long-term
real estate leases. At June 30, 2000, FFCA's servicing portfolio represented
approximately 5,600 properties (including chain store mortgage loans serviced
for others). FFCA had interests in 5,308 properties representing nearly $1.9
billion in gross investments in chain store properties located throughout the
United States and in Canada (although investments in Canada are not
significant). In addition to this geographic diversification, more than 490
different operators in approximately 160 retail chains comprise the portfolio.
FFCA's investment portfolio included 2,446 chain store properties represented by
investments in real estate mortgage loans and properties subject to leases and
2,862 properties represented by securitized mortgage loans in which FFCA holds a
residual interest.
FFCA entered into a three-year loan sale agreement beginning in January
2000 with Washington Mutual Bank, FA, where Washington Mutual agreed to purchase
loans that FFCA originates and services. This alliance with the nation's ninth
largest financial services company to be its exclusive provider of chain store
loans represents a significant source of new capital. FFCA expects that this
will reduce its reliance on debt and shareholder equity as sources of capital to
fund its continued growth. Under the loan sale agreement, Washington Mutual will
purchase mortgage loans from FFCA at the time the loans are originated; however,
to the extent that Washington Mutual wishes to limit its concentration of
individual borrowers to a certain dollar amount, there can be no assurance that
Washington Mutual will purchase every loan that FFCA originates. Therefore,
while FFCA may no longer have to rely on accumulating large amounts of mortgage
loans (using its bank lines of credit to carry the loans) for sale through
securitization transactions, it may continue to securitize loans in some cases.
In connection with the loan sale agreement, a warrant was issued to Washington
Mutual to purchase 2 million shares of FFCA common stock at a price of $25.47
per share. The warrant expires in December 2009, or earlier, in accordance with
the terms of the warrant agreement.
On January 4, 2000, FFCA established a nonqualified REIT subsidiary, FFCA
Funding Corporation ("Funding Corp."), to enhance FFCA's access to the capital
markets. Funding Corp., a taxable corporation, will originate mortgage loans for
sale to Washington Mutual. FFCA will then service the mortgage loans. FFCA
transferred, among other things, its future mortgage loan origination business
(including a transfer of certain employees and an assignment of the Washington
Mutual loan sale agreement) to Funding Corp. in exchange for 10 shares of
newly-issued, nonvoting preferred stock. The preferred stock, which represents
all of the issued and outstanding stock of its class, entitles FFCA to 99% of
any dividends declared by Funding Corp. Certain executive officers of FFCA own
all of the outstanding voting common stock of Funding Corp. In connection with
the start up of this new company, FFCA advanced $5 million to Funding Corp.
under a one-year note agreement, with interest due monthly and principal due at
maturity.
Liquidity and Capital Resources
During the second quarter of 2000, FFCA and its subsidiary, Funding Corp.,
originated $169 million in new real estate financings ($41 million in chain
restaurant properties, $113 million in convenience stores and $15 million in
automotive services and parts stores). Over 90% of the new financings during the
second quarter of the year 2000 were mortgage loans and notes ($157 million) and
the balance were properties subject to operating leases ($12 million). During
the quarter, $150 million in loans were sold to Washington Mutual under the loan
sale agreement that became effective in January 2000, resulting in gains
totaling $5 million (net of the estimated liability for obligations under a
limited loan loss provision). It is anticipated that a large percentage of the
loans originated during the remainder of the year will be sold under this loan
sale agreement instead of being held in FFCA's portfolio pending sale through a
securitization transaction. This strategy will have the effect of reducing the
rate of growth in FFCA's mortgage interest income (since the loans are sold on
the same day as they are originated, they generate no interest income for FFCA)
and increasing net income through the recognition of cash gains on the sale of
the loans. Due to the unpredictable timing of the sale of loans, the recognition
of gains is expected to increase the volatility of FFCA's earnings on a
quarter-to-quarter basis.
Under the Washington Mutual loan sale agreement, Funding Corp. originates
loans and simultaneously sells them to Washington Mutual; therefore, Washington
Mutual effectively funds the loans at origination. Accordingly, Funding Corp.
does not require significant liquidity or access to capital to originate loans.
FFCA's other investment activities are funded initially by draws on its
revolving credit facilities and cash generated from operations. At June 30,
2000, FFCA had $235 million available on its $350 million bank revolving loan
facility and $348 million available on its $600 million loan sale facility
7
<PAGE>
described below. The current bank revolving loan facility expires in December
2000 and FFCA expects to have completed negotiations on the renewal of its
revolving loan facility by the end of the third quarter of 2000.
FFCA has a $600 million loan sale facility with a third party. This loan
sale facility permits FFCA to sell loans on a regular basis to a trust for an
agreed upon advance rate until the trust accumulates a sufficiently large pool
of loans for sale through a larger securitization transaction. Generally, FFCA
intends to use this loan facility in circumstances where Washington Mutual
declines the loan or where the amount of a loan origination transaction exceeds
the amount that Washington Mutual will purchase due to the limit on its
concentration of loans to an individual borrower group. FFCA acts as servicer
for the loans following the sale to the trust. During the quarter ended June 30,
2000, FFCA sold 119 loans with an aggregate principal balance of $74 million
through the loan sale facility. Cash proceeds from the sale amounted to
approximately 85% of the mortgage loan balance with the remaining sale proceeds
represented by trust certificates. These retained subordinated investment
securities, totaling approximately $14 million, were accounted for as the sale
of mortgage loans and the purchase of trust certificates. The net cash proceeds
approximated $63 million and were used to reduce amounts outstanding under
FFCA's bank revolving loan facility. The subordinated investment securities held
by FFCA are the last of the securities to be repaid from the loan 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 these subordinated investment securities retained by FFCA;
however, FFCA originates and services mortgage loans and has the infrastructure
and resources to deal with potential defaults on the securitized portfolio (as
it does with the mortgage loans it holds for investment). As of June 30, 2000,
delinquent mortgage loans represent approximately 1% of the total securitized
loan pool balance.
While FFCA intends to originate mortgage loans through its subsidiary,
Funding Corp., for sale to Washington Mutual, it may continue to securitize
loans in some cases. Several factors affect FFCA's ability to complete
securitizations of its loans, including conditions in the securities markets
generally, conditions in the asset-backed securities market specifically, the
credit quality of FFCA's loans, compliance of FFCA's loans with the eligibility
requirements established by the securitization documents and the absence of any
material downgrading or withdrawal of ratings given to certificates issued in
FFCA's previous securitizations. Adverse changes in any of these factors could
impair FFCA's ability to originate and sell loans on a favorable or timely
basis. FFCA's inability to sell or securitize loans may adversely affect FFCA's
financial performance and growth prospects. The credit markets have in recent
years experienced volatility. Continued volatility may impair FFCA's ability to
successfully securitize its loans in the future. In addition, unpredictability
in the debt and equity markets may impact FFCA's cost of borrowings and ability
to efficiently raise equity capital. Accordingly, the cost of raising debt or
equity capital may be higher in the future, which could adversely impact FFCA's
results of operations.
During the quarter, FFCA accessed the debt markets by issuing medium term
notes. On June 26, 2000, FFCA issued $15 million in unsecured notes due in 2010,
bearing interest at 8.905%. The note proceeds were used to pay down FFCA's bank
revolving line of credit. In April 2000, Moody's Investors Service upgraded the
senior unsecured debt rating of FFCA to Baa2 from Baa3. According to Moody's,
the rating upgrade was based on FFCA's strong underwriting and leadership in
finance for restaurant properties, the further diversification of FFCA's funding
sources through the loan sale facility with Washington Mutual and FFCA's
controlled expansion beyond the chain restaurant property industry into
convenience/gas stores and automotive parts and services outlets.
Cash generated from operations provides distributions to the shareholders
in the form of quarterly dividends. Operations during the six months ended June
30, 2000 provided net cash of $65 million as compared to $63 million for the six
months ended June 30, 1999. FFCA also plans to use cash generated from
operations during 2000 to reduce amounts outstanding on its bank revolving loan
facility. FFCA intends to pay down its bank debt in order to provide flexibility
for the payment of the senior notes, totaling $150 million, that mature in
November. Depending on the debt markets, FFCA may issue new unsecured debt or
may in the interim use its bank revolving loan facility to pay the senior notes
until new debt or equity securities of FFCA are issued.
FFCA has a dividend reinvestment plan that allows shareholders to acquire
additional shares of FFCA stock by automatically reinvesting their quarterly
dividends. As of June 30, 2000, shareholders owning approximately 6% of the
outstanding shares of FFCA common stock participate in the dividend reinvestment
plan and dividends reinvested during the quarter ended June 30, 2000 totaled
approximately $1.8 million. FFCA declared a second quarter 2000 dividend of
$0.53 per share, or $2.12 per share on an annualized basis, payable on August
18, 2000 to shareholders of record on August 10, 2000. 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.
On May 1, 2000, FFCA paid the principal due on a mortgage on its corporate
headquarters building, payable to its affiliate in the amount of $8.5 million,
together with accrued interest, and additional interest in the amount of $1.13
million as provided in the related loan agreement. In addition, FFCA entered
8
<PAGE>
into a contract with this affiliate to purchase a parcel of land (3.6 acres) for
approximately $1.9 million. The land parcel is located adjacent to FFCA's
current corporate headquarters site and may be used for the future expansion of
FFCA's corporate headquarters.
Quantitative and Qualitative Disclosures About Market Risk
FFCA invests in certain financial instruments that are subject to various
forms of market risk such as interest rate fluctuations, credit risk and
prepayment risk. FFCA's primary exposure is the risk of loss that may result
from the potential change in the value of its mortgage loans and investments
held for sale as a result of changes in interest rates.
For those fixed-rate mortgage loans originated by FFCA for sale through a
securitization transaction, FFCA generally hedges against fluctuations in
interest rates through the use of derivative financial instruments (primarily
interest rate swap contracts) from the time the fixed-rate mortgage loans are
originated until the time they are sold. FFCA intends to terminate these
contracts upon securitization of the related fixed-rate mortgage loans 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. At June 30, 2000, FFCA had
outstanding interest rate swap contracts aggregating $38 million in notional
amount. Based on the level of interest rates prevailing, FFCA would have paid
approximately $314,000 if it had terminated the swap contracts at June 30, 2000.
FFCA estimates that a hypothetical one percentage point increase or
decrease in long-term interest rates at June 30, 2000 would impact the financial
instruments described above and result in a change to net income of
approximately $170,000. This sensitivity analysis contains certain simplifying
assumptions (for example, it does not consider the impact of prepayment risk or
credit spread risk). Therefore, although it gives an indication of FFCA's
exposure to interest rate changes at June 30, 2000, it is not intended to
predict future results and FFCA's actual results will likely vary.
Results of Operations
FFCA's operations for the second quarter of 2000 resulted in net income of
$33.9 million ($.60 per share) as compared to net income of $36.5 million ($.65
per share) in 1999. Net income for the six months ended June 30, 2000, rose to
$68.9 million ($1.22 per share) from $61.9 million ($1.13 per share) for the
comparable period in 1999. Net income for the quarter was impacted by lower
growth in rental revenue due to nonperformance of a master lease (discussed
below) and increases in general and administrative expenses.
Total revenues rose to $57 million during the quarter from $53 million in
the comparable quarter of 1999 primarily due to the growth of FFCA's investment
in securitized loan pools. Revenues for the six months ended June 30, 2000,
showed a similar increase from the comparable period of the prior year and also
increased due to the growth in FFCA's portfolio of properties subject to leases.
In prior quarters, FFCA's primary source of revenue growth had been rental
revenues generated by new investments in chain store properties; however, during
1999, FFCA made a strategic decision to focus on originating mortgage loan
products rather than sale-leasebacks because of better shareholder returns.
After consideration of various options, in December 1999, FFCA entered into a
three-year loan sale agreement with Washington Mutual Bank, FA, whereby
Washington Mutual agreed to purchase loans that FFCA originates and services.
Under the loan sale agreement, Washington Mutual will purchase mortgage loans
from FFCA at the time the loans are originated; however, there can be no
assurance that Washington Mutual will purchase every loan that FFCA originates,
therefore, FFCA may continue to securitize loans in some cases. Accordingly,
growth in earnings of FFCA in the near future is anticipated to be primarily
from gains on the sale of mortgage loans originated by FFCA and, to a lesser
extent, from increases in real estate investment securities income.
During the quarter ended June 30, 2000, rental revenue was negatively
impacted by the nonperformance of certain properties owned by FFCA that were
leased to Quincy's Restaurants, Inc. ("Quincy's"), a family restaurant chain.
The chain leased 96 properties from FFCA under a master lease, and for the first
quarter of 2000 contributed approximately 4% to FFCA's total revenues. Quincy's,
with monthly lease and loan payments aggregating nearly $800,000, failed to make
its April and May payments. FFCA terminated the master lease on May 31, 2000 and
took a deed in lieu of foreclosure on 16 additional properties securing certain
related loans. On June 8, 2000, FFCA signed an agreement with a new restaurant
operator to lease and operate 97 of the properties and during the term of this
new agreement, FFCA intends to negotiate a long-term lease arrangement with
respect to these properties. Fifteen of the properties that were the subject of
the deed in lieu of foreclosure remain vacant and will be remarketed for lease
or sale.
Certain of the leases and mortgages in FFCA's portfolio also provide for
contingent revenues based on a percentage of the gross sales of the related
chain store properties. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements, clarifying generally accepted accounting principles related to
9
<PAGE>
accounting for contingent rental revenues. This new accounting guidance requires
companies to recognize contingent rentals as revenue when the change in the
factor on which the contingent lease payment is based actually occurs. Recently,
the SEC issued SAB 101B, deferring the implementation of SAB 101 until the
fourth quarter of 2000 and, accordingly, FFCA has delayed its adoption of SAB
101 until that time. Currently, FFCA recognizes estimated contingent revenues
ratably throughout the year when it is probable that a property will exceed the
sales threshold where percentage rental revenues are due, with verification of
the actual amount of percentage revenues due received from the operator at
various times during the year, based on the operator's reporting requirements.
Since many of the operators of FFCA's chain store properties report sales on a
calendar year basis, it is anticipated that, had FFCA adopted SAB 101, the
effect on the June 30, 2000 financial statements would have been a shifting of
the recognition of contingent revenues that otherwise would have been recognized
in the first half of the year to the latter part of the year.
Mortgage interest income generated by FFCA's loan portfolio totaled $5.1
million for the quarter ended June 30, 2000 as compared to $8 million for the
second quarter of 1999. The majority of the mortgage interest income is
generated by mortgage loans that are held for sale. Increases and decreases in
mortgage interest income between quarters have been, and will continue to be,
impacted by the amount of loans held for sale and the timing of the sale of
these loans. It is anticipated that a large percentage of the loans originated
during the remainder of the year will be sold under the loan sale agreement with
Washington Mutual instead of being held in FFCA's portfolio pending sale through
a securitization transaction; therefore, it is expected that mortgage interest
income will continue to be a smaller percentage of FFCA's revenue in the current
year than in the prior year. For those loans that are sold through
securitization transactions, FFCA no longer receives mortgage interest income
from the mortgages it has sold; however, 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. The increase in real estate investment
securities income between 1999 and 2000 is due primarily to the addition of
subordinated investment securities related to the securitization transactions
that closed in 1999 and 2000.
Expenses increased to $31.4 million during the quarter from $26 million in
the comparable quarter of 1999. This increase was primarily due to increased
operating, general and administrative expenses and higher interest expense.
Operating, general and administrative expenses in the second quarter of 2000
were $3 million higher than the same quarter in 1999 due to several factors.
Salary expense increased from the prior year due primarily to the addition of
loan origination and servicing personnel required to administer FFCA's growing
loan origination and servicing activities. In addition, FFCA incurred consulting
costs of approximately $600,000 during the quarter to evaluate the feasibility
and extent of opportunities in providing internet-based products and services to
chain stores. FFCA does not anticipate material ongoing expenses related to this
project. Interest expense for the quarter also increased slightly due to an
increase in interest rates. Expenses for the six months ended June 30, 2000,
showed similar increases from the comparable period of 1999.
During the quarter, FFCA sold 26 properties (as compared to 20 properties
sold in the second quarter of 1999) and recorded net gains totaling $1.1 million
on these sales, as compared to net gains of $1.4 million recorded in the second
quarter of 1999. Loan prepayments received during the quarter on securitized
mortgage loans represented another three properties removed from FFCA's
servicing portfolio. During the quarter, mortgage loans originated by Funding
Corp., together with loans that FFCA sold into its loan sale facility during
1999 and 2000, were sold to Washington Mutual resulting in gains totaling
approximately $5 million. Cash proceeds from the sales of property and from
mortgage loan and note payoffs during the quarter were used to pay down FFCA's
bank credit facility.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This item is incorporated by reference from Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Quantitative and Qualitative Disclosures About Market Risk".
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the stockholders of FFCA (the "Meeting") was held on May
10, 2000. The following table sets forth each of the proposals that the
stockholders were asked to vote upon and the results of the Meeting:
Proposal Results
-------- -------
1. A proposal to elect ten directors
to the Board of Directors
Morton H. Fleischer For 48,149,724
Withheld 386,685
Willie R. Barnes, Esq. For 48,041,529
Withheld 494,879
Kelvin L. Davis For 48,139,254
Withheld 397,154
Kathleen H. Lucier For 48,135,779
Withheld 400,629
Dennis E. Mitchem For 48,040,450
Withheld 495,959
Louis P. Neeb For 48,160,133
Withheld 376,276
Kenneth B. Roath For 48,153,617
Withheld 382,792
Casey J. Sylla For 48,162,577
Withheld 373,832
Christopher H. Volk For 48,161,964
Withheld 374,445
Shelby Yastrow For 48,148,147
Withheld 388,262
2. A proposal to amend FFCA's 1995 Stock For 30,345,993
Option and Incentive Plan to extend Against 6,179,817
the term of the plan to June 1, 2004. Abstain 922,060
3. A proposal to change the state of For 31,028,323
incorporation of FFCA from Delaware Against 5,696,428
to Maryland. Abstain 800,224
4. A proposal to ratify the selection of For 47,939,238
Arthur Andersen LLP as FFCA's Against 133,921
independent auditors for the Abstain 447,652
fiscal year ended December 31, 2000.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following is a complete list of exhibits filed as part of this
Form 10-Q. For electronic filing purposes only, this report contains
Exhibit 27, the Financial Data Schedule. Exhibit numbers correspond to
the numbers in the Exhibit Table of Item 601 of Regulation S-K.
1.01* Letter Agreement, dated June 20, 2000, between Morgan Stanley & Co.
Incorporated and Franchise Finance Corporation of America.
10.01* Amendment No. 2, dated May 10, 2000, to Franchise Finance Corporation
of America's 1995 Stock Option and Incentive Plan.
----------
* Filed herewith
(b) FFCA did not file any reports on Form 8-K during the quarter ended June 30,
2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANCHISE FINANCE CORPORATION OF AMERICA
Date: August 8, 2000 By /s/ John Barravecchia
-------------------------------------
John Barravecchia, Executive Vice
President, Chief Financial Officer and
Treasurer
Date: August 8, 2000 By /s/ Catherine F. Long
-------------------------------------
Catherine F. Long, Senior Vice
President Finance and Principal
Accounting Officer
13
<PAGE>
EXHIBIT INDEX
The following is a complete list of exhibits filed as part of this Form 10-Q.
For electronic filing purposes only, this report contains exhibit 27, the
Financial Data Schedule. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-K.
1.01* Letter Agreement, dated June 20, 2000, between Morgan Stanley & Co.
Incorporated and Franchise Finance Corporation of America.
10.01* Amendment No. 2, dated May 10, 2000, to Franchise Finance Corporation
of America's 1995 Stock Option and Incentive Plan.
----------
* Filed herewith
14
