================================================================================
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, 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 November 3, 2000:
Common Stock, $0.01 par value 56,559,604
----------------------------- ----------------
Class Number of Shares
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS - SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Investments in Real Estate, at cost:
Land $ 585,073 $ 583,033
Buildings and Improvements 854,061 871,660
Equipment 22,444 20,065
----------- -----------
1,461,578 1,474,758
Less-Accumulated Depreciation 222,237 205,400
----------- -----------
Net Real Estate Investments 1,239,341 1,269,358
Mortgage Loans Held for Sale 170,363 139,703
Mortgage Loans Receivable, net of allowances of $3,125 in 2000
and $3,570 in 1999 54,075 57,996
Real Estate Investment Securities 212,284 185,252
Other Investments 16,117 14,129
----------- -----------
Total Investments 1,692,180 1,666,438
Cash and Cash Equivalents 19,325 4,757
Accrued Interest and Accounts Receivable, net of allowances
of $2,570 in 2000 and $1,125 in 1999 16,164 10,669
Mortgage Servicing Rights and Other Assets 36,471 28,932
----------- -----------
Total Assets $ 1,764,140 $ 1,710,796
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends Payable $ 29,976 $ 29,739
Notes Payable 766,935 501,859
Borrowings Under Line of Credit -- 238,000
Mortgage Payable to Affiliate -- 8,500
Accrued Expenses and Other 39,185 29,066
----------- -----------
Total Liabilities 836,096 807,164
----------- -----------
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 56,558,193 shares in 2000 and
56,110,776 shares in 1999 566 561
Capital in Excess of Par Value 936,651 927,147
Accumulated Other Comprehensive Income (Loss) (1,300) 237
Cumulative Net Income 552,805 446,550
Cumulative Dividends (560,678) (470,863)
----------- -----------
Total Shareholders' Equity 928,044 903,632
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,764,140 $ 1,710,796
=========== ===========
</TABLE>
2
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------- -------------------
9/30/00 9/30/99 9/30/00 9/30/99
-------- -------- -------- --------
REVENUES:
Rental $ 39,368 $ 38,093 $120,128 $111,102
Mortgage Loan Interest 6,338 9,132 17,557 22,074
Real Estate Investment
Securities Income 10,244 10,301 29,510 22,993
Investment Income and Other 2,671 1,946 7,124 5,034
-------- -------- -------- --------
58,621 59,472 174,319 161,203
-------- -------- -------- --------
EXPENSES:
Depreciation and Amortization 8,927 7,718 26,266 22,601
Operating, General
and Administrative 5,313 6,273 16,987 12,875
Property Costs 1,524 1,089 2,559 2,036
Interest 15,750 15,295 46,293 42,016
Related Party Interest -- 253 327 761
-------- -------- -------- --------
31,514 30,628 92,432 80,289
-------- -------- -------- --------
Income Before Realized
and Unrealized Gains 27,107 28,844 81,887 80,914
Unrealized Gain/(Loss) on Real
Estate Investment Securities (1,850) 9,200 1,297 9,200
Gain on Sale of Assets 15,202 8,284 26,790 18,131
-------- -------- -------- --------
Income Before Income Tax Expense 40,459 46,328 109,974 108,245
Income Tax Expense 3,057 -- 3,719 --
-------- -------- -------- --------
Net Income $ 37,402 $ 46,328 $106,255 $108,245
======== ======== ======== ========
Per Share Data:
Basic Net Income Per Share $ .66 $ .83 $ 1.88 $ 1.96
======== ======== ======== ========
Diluted Net Income Per Share $ .66 $ .83 $ 1.88 $ 1.96
======== ======== ======== ========
Number of Common Shares Used in
Basic Net Income Per Share 56,491 55,990 56,375 55,102
Incremental Shares from Assumed
Conversion of Options 213 145 208 166
-------- -------- -------- --------
Number of Common Shares Used in
Diluted Net Income Per Share 56,704 56,135 56,583 55,268
======== ======== ======== ========
3
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Issued Capital in Other Total Total
------------------- Excess of Comprehensive Cumulative Cumulative Stockholders' Comprehensive
Shares Amount Par Value Income Net Income Dividends Equity Income
------ ------ --------- ------ ---------- --------- ------ ------
<S> <C> <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 -- -- -- -- 106,255 -- 106,255 $106,255
Unrealized loss on
securities -- -- -- (1,537) -- -- (1,537) (1,537)
--------
Comprehensive income $104,718
========
Capital contributions -
Dividend reinvestment plan 282 3 6,374 -- -- -- 6,377
Incentive and benefit plans 118 1 676 -- -- -- 677
Exercise of stock options 47 1 954 -- -- -- 955
Warrants issued -- -- 1,500 -- -- -- 1,500
Dividends declared -
$1.59 per share -- -- -- -- -- (89,815) (89,815)
------ ----- -------- ------- -------- --------- --------
BALANCE, September 30, 2000 56,558 $ 566 $936,651 $(1,300) $552,805 $(560,678) $928,044
====== ===== ======== ======= ======== ========= ========
</TABLE>
4
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Amounts in thousands)
(Unaudited)
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 106,255 $ 108,245
Adjustments to net income:
Depreciation and amortization 26,266 22,601
Gain on sale of property (26,790) (18,131)
Unrealized gain on real estate
investment securities (1,297) (9,200)
Other 12,485 6,872
--------- ---------
Net cash provided by operating activities 116,919 110,387
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property (37,108) (222,328)
Investment in mortgage loans (641,077) (976,582)
Investment in notes receivable (4,690) (5,525)
Proceeds from securitization transactions 213,416 835,980
Proceeds from loan sales 321,498 --
Proceeds from sale of property 57,722 39,124
Receipt of mortgage loan and note payoffs 31,021 7,788
Collection of mortgage loan and note principal 6,993 7,246
Collection of investment security principal 13,516 4,218
--------- ---------
Net cash used in investing activities (38,709) (310,079)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (83,202) (76,620)
Proceeds from issuance of common stock 1,060 146,084
Proceeds from bank borrowings 220,000 832,000
Proceeds from issuance of notes 265,000 --
Payment of mortgage payable to affiliate (8,500) --
Payment of bank borrowings (458,000) (681,000)
--------- ---------
Net cash (used) provided by financing activities (63,642) 220,464
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,568 20,772
CASH AND CASH EQUIVALENTS, beginning of period 4,757 3,881
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 19,325 $ 24,653
========= =========
Noncash Investing Activities:
Securities and other assets resulting from
loan sales/securitizations $ 52,236 $ 135,410
Conversion of mortgage loans to property and
equipment subject to operating lease $ 9,843 $ 3,034
Noncash Financing Activities:
Common stock issued for employee stock
plans and other $ 8,449 $ 5,671
5
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(1) NEW ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission (SEC) 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. Subsequently, 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 the effect on FFCA's financial
statements will be a shifting of the recognition of contingent revenues between
quarters.
(2) INCOME TAXES:
On January 4, 2000, FFCA established a nonqualified REIT subsidiary, FFCA
Funding Corporation, a taxable corporation. As of September 30, 2000, FFCA
Funding Corporation reported a deferred tax asset of approximately $80,000 and
income tax expense of approximately $3.7 million.
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 September 30, 2000, FFCA's investment/servicing portfolio
represented over 5,900 properties (including chain store mortgage loans serviced
for others). FFCA had interests in 5,433 properties representing nearly $1.9
billion in gross investments in chain store properties located throughout the
United States and in Canada (although the amount of FFCA's investment in Canada
is not significant). In addition to this geographic diversification, more than
480 different operators in approximately 160 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 2,979 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 one of the nation's
largest financial services company to be its exclusive provider of chain store
loans represents a significant source of new capital. FFCA expects that this
agreement 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 will likely continue to
securitize loans. 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, originates mortgage loans for
sale to Washington Mutual. FFCA then services 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. Although FFCA continues to manage its existing portfolio of real
estate leases and mortgage loans, and may continue to provide some financing
under long-term real estate leases, future financings will likely be focused on
the origination of loans for sale through loan securitization transactions or on
Funding Corp.'s origination and sale of mortgage loans under the Washington
Mutual agreement.
Liquidity and Capital Resources
During the third quarter of 2000, FFCA and its subsidiary, Funding Corp.,
originated $378 million in new real estate financings ($304 million in chain
restaurant properties, $67 million in convenience stores and $7 million in
automotive services and parts stores). Also, FFCA refinanced approximately $21
million of existing leases in its portfolio into mortgage loans. Over 98% of the
new financings during the third quarter of the year 2000 represented mortgage
loans and notes ($372 million) and the balance represented properties subject to
operating leases ($6 million). During the quarter, $158 million in loans were
sold to Washington Mutual under the loan sale agreement resulting in gains
totaling $5.7 million (net of the estimated liability for obligations under a
limited loan loss provision). The strategy of originating loans for sale through
Funding Corp., instead of originating loans for FFCA's own investment portfolio,
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.
7
<PAGE>
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 September 30,
2000, FFCA had $350 million available on its bank revolving loan facility and
had $274 million available on its $600 million loan sale facility described
below. During the quarter, FFCA renewed its $350 million unsecured bank credit
facility with $235 million extended to September 2003 and $115 million extended
to September 2001 (with options to extend).
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, until
the trust accumulates a sufficiently large pool of loans for sale through a
larger securitization transaction. While FFCA intends to originate mortgage
loans through its subsidiary, Funding Corp., for sale to Washington Mutual, it
will likely continue to securitize loans. FFCA acts as servicer for the loans
following the sale to the trust. During the quarter ended September 30, 2000,
FFCA sold 134 loans with an aggregate principal balance of $127.6 million
through the loan sale facility. Cash proceeds from the sale amounted to
approximately 80-85% of the mortgage loan balance with the remaining sale
proceeds represented by trust certificates. These retained subordinated
investment securities, totaling approximately $28 million, were accounted for as
the sale of mortgage loans and the purchase of trust certificates. The net cash
proceeds approximated $104 million and were used to reduce amounts outstanding
under FFCA's bank line of credit. 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 September 30,
2000, delinquent loans represent approximately 0.9% of the total securitized
loan pool balance.
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 and franchised loan sector 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. Absent significant adverse
changes in current market conditions, FFCA plans to complete its sixth
securitization transaction in the fourth quarter of 2000, involving
approximately $400 million in mortgage loans that were originated and sold
through FFCA's loan sale facility.
Although FFCA's current strategy of selling mortgage loans through the
Washington Mutual agreement and through loan securitization transactions
significantly lessens FFCA's dependence on the debt and equity markets, the
unpredictability in these markets may impact FFCA's cost of borrowings and
ability to efficiently raise equity capital. Accordingly, the cost of
refinancing debt or raising 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 senior notes.
On September 18, 2000, FFCA issued $150 million in unsecured notes due in 2010,
bearing interest at 8.75%. The note proceeds were used to pay down FFCA's bank
revolving line of credit. FFCA will use funds from its bank line of credit to
pay down senior notes maturing November 30, 2000. In April 2000, Moody's
Investors Service, Inc. 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 nine months ended September 30, 2000 provided net
cash of $117 million as compared to $110 million for the nine months ended
September 30, 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 the fourth quarter to repurchase some of its
common stock under a stock repurchase program. Under this program, FFCA may
purchase up to 7.5% of its outstanding common stock from time to time in open
market or privately-negotiated transactions.
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, 2000, shareholders owning approximately 9% of the
outstanding shares of FFCA common stock participate in the dividend reinvestment
plan and dividends reinvested during the quarter ended September 30, 2000
totaled approximately $2.8 million. Beginning with the dividend payable in
November of 2000, FFCA intends to purchase its dividend reinvestment plan shares
in the open market rather than issuing new shares. Under FFCA's dividend
reinvestment plan, common stock for the accounts of plan participants may be
8
<PAGE>
purchased from FFCA (newly issued shares with a 2% discount), the open market or
in negotiated transactions with third parties. FFCA declared a third quarter
2000 dividend of $0.53 per share, or $2.12 per share on an annualized basis,
payable on November 20, 2000 to shareholders of record on November 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 September, FFCA purchased a parcel of land (3.6 acres) for approximately
$1.9 million from an affiliate. 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 that are intended to
be sold 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
September 30, 2000, FFCA had outstanding interest rate swap contracts
aggregating approximately $51 million in notional amount. Based on the level of
interest rates prevailing, FFCA would have paid approximately $843,000 if it had
terminated the swap contracts at September 30, 2000.
FFCA estimates that a hypothetical one percentage point increase or
decrease in long-term interest rates at September 30, 2000 would impact the
financial instruments described above and result in a change to net income of
approximately $1 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 September 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 third quarter of 2000 resulted in net income of
$37.4 million ($.66 per share) as compared to net income of $46.3 million ($.83
per share) in 1999. The decrease in net income between periods related primarily
to a decrease in unrealized gain on real estate investment securities, from an
unrealized gain of $9.2 million in 1999 to an unrealized loss of $1.9 million in
2000. Net income for the nine months ended September 30, 2000, was $106.3
million ($1.88 per share) compared to $108.2 million ($1.96 per share) for the
comparable period in 1999. Net income for the quarter and year to date was
impacted by an increase in income tax expense on FFCA's taxable REIT subsidiary.
In prior quarters, FFCA's primary source of revenue growth had been rental
revenues generated by new investments in chain store properties; however, FFCA
has made a strategic decision to focus on originating mortgage loan products
rather than sale-leasebacks because of the potential for 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 will likely continue to securitize loans. 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 and nine months ended September 30, 2000, rental
revenues were negatively impacted by a monetary default relating to 97 family
dining restaurants. FFCA terminated the master lease on these properties on May
31, 2000 and took a deed in lieu of foreclosure on 16 additional properties
securing certain related loans. The year to date and quarterly impact on net
income amounted to $0.10 and $0.05 per share, respectively. FFCA is currently
leasing the 97 restaurant properties to a new lessee under a short-term lease
while in the process of negotiating long-term leases on these properties.
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
9
<PAGE>
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.
Subsequently, 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 the effect on
FFCA's financial statements will be a shifting of the recognition of contingent
revenues between quarters.
Mortgage interest income generated by FFCA's loan portfolio totaled $6.3
million for the quarter ended September 30, 2000 as compared to $9 million for
the third 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 $31.5 million during the quarter from $30.6 million
in the comparable quarter of 1999 primarily due to increased depreciation and
amortization expenses and higher interest expense. Year to date expenses show
similar increases, plus increased general and administrative expenses. Interest
expense increased due to an increase in the average debt balance outstanding and
an increase in interest rates. General and administrative expenses increased due
to the addition of loan origination and servicing personnel required to
administer FFCA's growing loan origination and servicing activities and to
consulting costs of approximately $675,000 incurred during the year on a special
project to evaluate the feasibility and extent of opportunities in providing
internet-based products and services to chain stores.
During the quarter, FFCA sold 63 properties (as compared to 42 properties
sold in the third quarter of 1999) and recorded net gains totaling approximately
$600,000 on these sales, as compared to net gains of $2.7 million recorded in
the third quarter of 1999. Loan prepayments received during the quarter on
securitized mortgage loans represented another 17 properties removed from FFCA's
servicing portfolio. During the quarter, loans originated by Funding Corp., were
sold to Washington Mutual resulting in gains totaling approximately $5.7
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 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.
4.01* Officers' Certificate setting forth the terms of Franchise
Finance Corporation of America's 8.75% Senior Notes due 2010.
99.01* Third Amended and Restated Credit Agreement dated as of September
15, 2000, among Franchise Finance Corporation of America, certain
lenders and Bank of America, N.A.
99.02* Credit Agreement dated as of September 15, 2000, among Franchise
Finance Corporation of America, certain lenders and Bank of
America, N.A.
99.03* Final Prospectus Supplement dated September 18, 2000.
----------
* Incorporated by reference to the Registrant's Current Report on Form
8-K, dated September 15, 2000, as filed with the Securities and
Exchange Commission.
(b) During the quarter ended September 30, 2000, FFCA filed the following
report on Form 8-K:
Form 8-K dated September 15, 2000, filed September 20, 2000, reporting the
amendment and restatement of the Registrant's unsecured revolving credit
facility, the purchase agreement entered into between the Registrant and
Salomon Smith Barney Inc., as representative of the underwriters, regarding
the sale of the Registrant's 8.75% Senior Notes due 2010, and the
appointment of Wells Fargo Bank Minnesota, N.A. as the Registrant's new
transfer agent, 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, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANCHISE FINANCE CORPORATION OF AMERICA
Date: November 6, 2000 By /s/ John Barravecchia
-------------------------------------
John Barravecchia, Executive Vice
President and Chief Financial Officer
Date: November 6, 2000 By /s/ Catherine F. Long
-------------------------------------
Catherine F. Long, Senior Vice
President Finance and Principal
Accounting Officer
<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.
4.01* Officers' Certificate setting forth the terms of Franchise Finance
Corporation of America's 8.75% Senior Notes due 2010.
99.01* Third Amended and Restated Credit Agreement dated as of September 15,
2000, among Franchise Finance Corporation of America, certain lenders
and Bank of America, N.A.
99.02* Credit Agreement dated as of September 15, 2000, among Franchise
Finance Corporation of America, certain lenders and Bank of America,
N.A.
99.03* Final Prospectus Supplement dated September 18, 2000.
----------
* Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated September 15, 2000, as filed with the Securities and Exchange
Commission.
