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 March 31, 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 May 1, 2000:
Common Stock, $0.01 par value 56,338,878
----------------------------- ----------------
Class Number of Shares
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS - MARCH 31, 2000 AND DECEMBER 31, 1999
(Amounts in thousands except share data)
March 31, December 31,
2000 1999
----------- -----------
ASSETS (Unaudited)
Investments:
Investments in Real Estate, at cost:
Land $ 587,934 $ 583,033
Buildings and Improvements 872,270 871,660
Equipment 19,577 20,065
----------- -----------
1,479,781 1,474,758
Less-Accumulated Depreciation 211,079 205,400
----------- -----------
Net Real Estate Investments 1,268,702 1,269,358
Mortgage Loans Held for Sale 124,645 139,703
Mortgage Loans Receivable, net of
allowances of $3,570 in 2000 and 1999 64,630 57,996
Real Estate Investment Securities 190,295 185,252
Other Investments 15,091 14,129
----------- -----------
Total Investments 1,663,363 1,666,438
Cash and Cash Equivalents 26,190 4,757
Accounts Receivable, net of allowances
of $1,155 in 2000 and $1,125 in 1999 13,722 10,669
Other Assets 30,304 28,932
----------- -----------
Total Assets $ 1,733,579 $ 1,710,796
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends Payable $ 29,857 $ 29,739
Notes Payable 602,281 501,859
Borrowings Under Line of Credit 150,000 238,000
Mortgage Payable to Affiliate 8,500 8,500
Accrued Expenses and Other 30,972 29,066
----------- -----------
Total Liabilities 821,610 807,164
----------- -----------
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 56,331,849 shares in
2000 and 56,110,776 shares in 1999 563 561
Capital in Excess of Par Value 931,256 927,147
Accumulated Other Comprehensive Income (Loss) (562) 237
Cumulative Net Income 481,501 446,550
Cumulative Dividends (500,789) (470,863)
----------- -----------
Total Shareholders' Equity 911,969 903,632
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,733,579 $ 1,710,796
=========== ===========
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FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Amounts in thousands except per share data)
(Unaudited)
2000 1999
------- -------
REVENUES:
Rental $40,849 $35,714
Mortgage Loan Interest 6,098 4,933
Real Estate Investment Securities Income 9,509 6,331
Investment Income and Other 2,176 1,542
------- -------
58,632 48,520
------- -------
EXPENSES:
Depreciation and Amortization 8,564 7,245
Operating, General and Administrative 5,068 3,090
Property Costs 110 594
Interest 15,526 12,503
Related Party Interest 256 254
------- -------
29,524 23,686
------- -------
Income Before Realized and Unrealized Gains 29,108 24,834
Unrealized Gain on Real Estate Investment Securities 3,960 --
Gain on Sale of Property 1,883 625
------- -------
Net Income $34,951 $25,459
======= =======
Basic Net Income Per Share $ .62 $ .48
======= =======
Diluted Net Income Per Share $ .62 $ .48
======= =======
Number of Common Shares Used in Basic Net Income Per Share 56,252 53,384
Incremental Shares from Assumed Conversion of Options 214 149
------- -------
Number of Common Shares Used in Diluted Net Income Per Share 56,466 53,533
======= =======
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FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR
THE THREE MONTHS ENDED MARCH 31, 2000
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Issued Capital in Other
------------------- Excess of Comprehensive Cumulative Cumulative
Shares Amount Par Value Income Net Income Dividends Total
------ ------ --------- ------ ---------- --------- -----
<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 -- -- -- -- 34,951 -- 34,951
Unrealized loss on securities -- -- -- (799) -- -- (799)
---------
Comprehensive income 34,152
---------
Capital contributions -
Issuance of common stock 113 1 190 -- -- -- 191
Dividend reinvestment plan 78 1 1,822 -- -- -- 1,823
Exercise of stock options 30 -- 597 -- -- -- 597
Warrants issued -- -- 1,500 -- -- -- 1,500
Dividends declared -
$0.53 per share -- -- -- -- -- (29,926) (29,926)
------ ---- -------- -------- -------- --------- ---------
BALANCE, March 31, 2000 56,332 $563 $931,256 $ (562) $481,501 $(500,789) $ 911,969
====== ==== ======== ======== ======== ========= =========
</TABLE>
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FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,951 $ 25,459
Adjustments to net income:
Depreciation and amortization 8,564 7,245
Gain on sale of assets (1,883) (625)
Unrealized gain on real estate investment securities (3,960) --
Other 78 3,723
--------- ---------
Net cash provided by operating activities 37,750 35,802
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property (16,621) (72,467)
Investment in mortgage loans (74,866) (319,615)
Investment in notes receivable (3,120) --
Proceeds from securitization transactions 42,146 109,288
Proceeds from sale of property 9,197 5,744
Receipt of mortgage loan and note payoffs 38,385 1,386
Collection of mortgage loan and note principal 2,876 2,006
Collection of investment security principal 1,040 1,097
--------- ---------
Net cash used in investing activities (963) (272,561)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (27,988) (25,399)
Net proceeds from issuance of common stock 634 145,937
Proceeds from bank borrowings 70,000 318,000
Proceeds from issuance of notes 100,000 --
Payment of bank borrowings (158,000) (202,000)
--------- ---------
Net cash (used)provided by financing activities (15,354) 236,538
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,433 (221)
CASH AND CASH EQUIVALENTS, beginning of period 4,757 3,881
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 26,190 $ 3,660
========= =========
Noncash Investing Activities:
Investment in securities resulting from
securitization transactions $ 13,320 $ 23,798
Conversion of mortgage loans to property and
equipment subject to operating lease $ -- $ 2,828
Noncash Financing Activities:
Common stock issued for employee stock plans and other $ 3,477 $ 1,987
</TABLE>
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FRANCHISE FINANCE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(1) NEW ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission issued a new major
topic "Revenue Recognition" under Staff Accounting Bulletin (SAB) 101. 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. 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. Verification of the
actual amount of percentage revenues due is received from the operator at
various times during the year, based on the operator's reporting requirements.
On March 24, 2000, the Securities and Exchange Commission issued SAB 101A,
amending SAB 101. The amendment permits deferral of the implementation of SAB
101 from the first quarter to the second quarter of 2000. FFCA intends to adopt
the new accounting for contingent rentals in the second quarter of 2000. 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 a policy of
deferring recognition of contingent revenues until receiving verification that
the property reached its sales targets, the effect on the March 31, 2000
financial statements would have been a shifting of the recognition of contingent
revenues that otherwise would have been recognized in the first quarter of the
year, to the latter part of the year.
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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 March 31, 2000, FFCA's servicing portfolio represented
over 5,400 properties (including chain store mortgage loans serviced for
others). FFCA had interests in 5,383 properties representing over $1.8 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 480 different operators
in approximately 150 retail chains comprise the portfolio. FFCA's investment
portfolio included 2,454 chain store properties represented by investments in
real estate mortgage loans and properties subject to leases and 2,929 properties
represented by securitized mortgage loans in which FFCA holds a residual
interest.
FFCA has explored a number of strategic options to diversify its capital
sources. After consideration of various alternatives, 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) and selling the loans 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.
As a REIT, FFCA's tax status restricts it from taking full advantage of the
opportunities provided by the loan sale agreement with Washington Mutual by
preventing REITs from originating and subsequently selling mortgage loans (other
than through certain structured securitization transactions); therefore, on
January 4, 2000, FFCA established a nonqualified REIT subsidiary, FFCA Funding
Corporation ("Funding Corp."), to originate mortgage loans for sale to
Washington Mutual. FFCA would 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 first quarter of 2000, FFCA and its subsidiary, Funding Corp.,
originated $92 million in new real estate investments ($40 million in chain
restaurant properties, $37 million in convenience stores and $15 million in
automotive services and parts stores). Consistent with financing activity in
1999, over 80% of the new financings during the first quarter were mortgage
loans ($75 million) and the balance were properties subject to operating leases
($17 million). Of the mortgage loans originated during the quarter, $35.5
million in loans were sold to Washington Mutual under the loan sale agreement
that became effective in January 2000. It is anticipated that a growing
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
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<PAGE>
revolving credit facilities and cash generated from operations. As of March 31,
2000, FFCA had $200 million available on its $350 million bank revolving loan
facility and $362 million available on its $600 million loan sale facility
described below. The current bank revolving loan facility expires in December
2000 and FFCA expects to have negotiated another revolving loan facility by 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 March
31, 2000, FFCA sold 66 loans with an aggregate principal balance of $50 million
through the loan sale facility. Cash proceeds from the sale amounted to 85% of
the mortgage loan balance with the remaining sale proceeds represented by trust
certificates. These retained subordinated investment securities, totaling
approximately $8 million, were accounted for as the sale of mortgage loans and
the purchase of trust certificates. The net cash proceeds approximated $42
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 March 31, 2000, delinquent
mortgage loans represent less than 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
times 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 January 14, 2000, FFCA issued $50 million in unsecured notes due in
2002, bearing interest at 8.43% and $50 million in unsecured notes due in 2004
bearing interest at 8.68%. Proceeds of the notes 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.
Operations during the quarter ended March 31, 2000 provided net cash of $38
million as compared to $36 million for the first quarter of 1999. Cash generated
from operations provides distributions to the shareholders in the form of
quarterly dividends. 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 March 31, 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 March 31, 2000 totaled
approximately $1.8 million. FFCA declared a first quarter 2000 dividend of $0.53
per share, or $2.12 per share on an annualized basis, payable on May 19, 2000 to
shareholders of record on May 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. In January 2000, FFCA granted options to purchase approximately 584,000
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shares of common stock at an exercise price of $23.50 per share, and issued
111,500 shares of restricted stock, to employees under its stock-based
compensation plan. Both the stock options and the restricted stock are subject
to years-of-service vesting requirements over the next five years.
On May 1, 2000, a mortgage payable to FFCA's affiliate matured and FFCA
paid the principal due 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 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. The sale is subject to the approval, by vote, of the majority of
the limited partner interests of the affiliate. There can be no assurances as to
the final terms of the proposed transaction, that the conditions will be
satisfied or that the proposed transaction will be consummated.
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 March 31, 2000, FFCA had
outstanding interest rate swap contracts aggregating $46 million in notional
amount. Based on the level of interest rates prevailing, FFCA would have
received approximately $45,000 if it had terminated the swap contracts at March
31, 2000.
FFCA estimates that a hypothetical one percentage point increase or
decrease in long-term interest rates at March 31, 2000 would impact the
financial instruments described above and result in a change to net income of
approximately $2 million. 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 March 31, 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 first quarter of 2000 resulted in net income of
$35 million ($.62 per share diluted) as compared to net income of $25.5 million
($.48 per share diluted) in 1999. The increase in net income between 1999 and
2000 resulted from increased revenues due to the continued growth in FFCA's real
estate investment portfolio and to increases in realized and unrealized gains.
Total revenues rose 21% to $58.6 million during the quarter from $48.5
million in the comparable quarter of 1999 primarily due to the growth of FFCA's
investment portfolio. FFCA's primary source of revenue growth has been rental
revenues generated by new investments in chain store properties. Since the first
quarter of 1999, FFCA made new investments in property subject to operating
leases of approximately $202 million, including $17 million in the first quarter
of 2000. The average base lease rate on new investments in 2000 was slightly
higher than the average rate for the comparable quarter in 1999. Partially
offsetting the rental revenue increases generated by new investments were
decreases in rent related to properties sold. Rental revenues represented nearly
70% of total revenues for the quarter as compared to 74% in the first quarter of
1999. The decrease in the percentage of FFCA's total revenues generated by
leases is due to FFCA's strategic decision made during 1999 to focus on
originating mortgage loan products rather than sale-leasebacks because of better
shareholder returns.
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. Such contingent revenues totaled $2.5 million in the
first quarter of 2000 as compared to $2 million in the first quarter of 1999. In
December 1999, the Securities and Exchange Commission issued a new major topic
"Revenue Recognition" under Staff Accounting Bulletin (SAB) 101. 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. 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. Verification of the
actual amount of percentage revenues due is received from the operator at
various times during the year, based on the operator's reporting requirements.
On March 24, 2000, the Securities and Exchange Commission issued SAB 101A,
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amending SAB 101. The amendment permits deferral of the implementation of SAB
101 from the first quarter to the second quarter of 2000. FFCA intends to adopt
the new accounting for contingent rentals in the second quarter of 2000. 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 a policy of
deferring recognition of contingent revenues until receiving verification that
the property reached its sales targets, the effect on the March 31, 2000
financial statements would have been a shifting of the recognition of contingent
revenues that otherwise would have been recognized in the first quarter of the
year, to the latter part of the year.
Subsequent to March 31, 2000, certain properties FFCA owns that are leased
to a family restaurant chain were not performing as expected. The chain leases
96 properties (1.8% of FFCA's total financed portfolio of approximately 5,400
properties) from FFCA under a master lease, and for the first quarter of 2000
contributed approximately 4% to FFCA's total revenues. This chain store
operator, with monthly lease and loan payments aggregating nearly $800,000,
failed to make its April and May payments when due. To the extent that the chain
continues to underperform, short-term growth in FFCA's earnings will be
negatively impacted. FFCA has the infrastructure in place to deal with
underperforming assets, and is working with this chain store operator to resolve
the problem.
Mortgage interest income generated by FFCA's loan portfolio totaled $6.1
million for the quarter ended March 31, 2000. The majority of the mortgage
interest income is generated by mortgage loans that are held for sale. The
average rate achieved on the loans originated during the first quarter of 2000
was slightly higher than the average rate achieved during the first quarter of
1999. 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. Although FFCA no longer receives mortgage
interest income from the mortgages it has sold through securitization
transactions, 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 two securitization transactions that closed in 1999.
Expenses increased to $29.5 million during the quarter from $23.7 million
in the comparable quarter of 1999. This increase was primarily due to higher
interest expense and increased operating, general and administrative expenses.
For the quarter, interest expense rose $3 million due primarily to an increase
in the average debt outstanding and to an increase in the weighted average
interest rate. FFCA's outstanding debt averaged $772 million in the first
quarter of 2000 as compared to $634 million in 1999 due to the growth in its
portfolio. Operating, general and administrative expenses in the first quarter
of 2000 were $2 million higher than the same quarter in 1999 primarily due to
higher bad debt recoveries in 1999.
During the quarter, FFCA sold 15 properties (as compared to 12 properties
sold in the first quarter of 1999) and recorded net gains totaling $513,000 on
these sales, as compared to net gains of $625,000 recorded in the first quarter
of 1999. Loan prepayments received in 2000 on securitized mortgage loans
represented another four properties removed from FFCA's servicing portfolio.
Also during the quarter, Funding Corp. sold loans representing 44 properties to
Washington Mutual and recorded net gains totaling $1.4 million on these sales.
Cash proceeds from the sales of property and from mortgage loan and note payoffs
during the quarter, totaling $47.6 million, were used to fund new investments.
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".
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PART II - OTHER INFORMATION
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.
3.01 Third Amended and Restated Bylaws of Franchise Finance Corporation of
America *
10.01 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Morton H.
Fleischer *
10.02 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Christopher
H. Volk *
10.03 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and John R.
Barravecchia *
10.04 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Dennis L.
Ruben *
10.05 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Stephen G.
Schmitz *
99.01 Second Amended and Restated Sale and Servicing Agreement dated as of
January 1, 2000, among FFCA Franchise Loan Owner Trust 1998-1, FFCA
Loan Warehouse Corporation, FFCA Acquisition Corporation, Franchise
Finance Corporation of America and LaSalle Bank National Association
f/k/a LaSalle National Bank *
99.02 Amendment No. 2, dated as of January 1, 2000, to the Loan Purchase
Agreement between FFCA Loan Warehouse Corporation and FFCA Acquisition
Corporation *
99.03 Fourth Amended and Restated Indenture Supplement, dated as of January
1, 2000, between FFCA Franchise Loan Owner Trust 1998-1 and LaSalle
Bank National Association f/k/a LaSalle National Bank *
99.04 Amendment No. 4, dated as of January 1, 2000, to the Note Purchase
Agreement among FFCA Franchise Loan Owner Trust 1998-1, FFCA
Acquisition Corporation, FFCA Loan Warehouse Corporation, and Morgan
Stanley Securitization Funding Inc. *
- ---------
* Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, as filed with the Securities
and Exchange Commission.
(b) During the quarter ended March 31, 2000, FFCA filed the following
report on Form 8-K:
Form 8-K dated January 1, 2000, filed January 13, 2000, reporting the
Employment Agreements entered into between the Registrant and five of its
executive officers, under Item 5, Other Events, and Item 7, Financial Statements
and Exhibits.
11
<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: May 8, 2000 By /s/ John Barravecchia
-------------------------------------
John Barravecchia, Executive Vice
President, Chief Financial Officer
and Treasurer
Date: May 8, 2000 By /s/ Catherine F. Long
-------------------------------------
Catherine F. Long, Senior Vice
President Finance and Principal
Accounting Officer
12
<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.
3.01 Third Amended and Restated Bylaws of Franchise Finance Corporation of
America *
10.01 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Morton H.
Fleischer *
10.02 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Christopher
H. Volk *
10.03 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and John R.
Barravecchia *
10.04 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Dennis L.
Ruben *
10.05 Amended and Restated Employment Agreement, dated as of January 1,
2000, between Franchise Finance Corporation of America and Stephen G.
Schmitz *
99.01 Second Amended and Restated Sale and Servicing Agreement dated as of
January 1, 2000, among FFCA Franchise Loan Owner Trust 1998-1, FFCA
Loan Warehouse Corporation, FFCA Acquisition Corporation, Franchise
Finance Corporation of America and LaSalle Bank National Association
f/k/a LaSalle National Bank *
99.02 Amendment No. 2, dated as of January 1, 2000, to the Loan Purchase
Agreement between FFCA Loan Warehouse Corporation and FFCA Acquisition
Corporation *
99.03 Fourth Amended and Restated Indenture Supplement, dated as of January
1, 2000, between FFCA Franchise Loan Owner Trust 1998-1 and LaSalle
Bank National Association f/k/a LaSalle National Bank *
99.04 Amendment No. 4, dated as of January 1, 2000, to the Note Purchase
Agreement among FFCA Franchise Loan Owner Trust 1998-1, FFCA
Acquisition Corporation, FFCA Loan Warehouse Corporation, and Morgan
Stanley Securitization Funding Inc.*
- ----------
* Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, as filed with the Securities
and Exchange Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 26,190
<SECURITIES> 0
<RECEIVABLES> 14,877
<ALLOWANCES> 1,155
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,479,781
<DEPRECIATION> 211,079
<TOTAL-ASSETS> 1,733,579
<CURRENT-LIABILITIES> 0
<BONDS> 760,781
0
0
<COMMON> 563
<OTHER-SE> 911,406
<TOTAL-LIABILITY-AND-EQUITY> 1,733,579
<SALES> 0
<TOTAL-REVENUES> 58,632
<CGS> 0
<TOTAL-COSTS> 110
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,782
<INCOME-PRETAX> 34,951
<INCOME-TAX> 0
<INCOME-CONTINUING> 34,951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,951
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.62
</TABLE>
