Filed Pursuant to Rule 424(b)(2)
Registration No. 333-26437
P R O S P E C T U S S U P P L E M E N T
(To Prospectus Dated April 16, 1998)
[FFCA LOGO]
$150,000,000
FRANCHISE FINANCE CORPORATION OF AMERICA
8.25% SENIOR NOTES DUE 2003
------------
The Notes will mature on October 30, 2003. Interest on the Notes is
payable semiannually on April 30 and October 30, beginning April 30, 1999. The
Notes are unsecured and rank equally with all of FFCA's other unsecured senior
indebtedness. The Notes will be issued only in registered form in denominations
of $1,000. FFCA may, at its option, redeem the Notes as described under
"Description of the Notes."
------------
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-12 IN THIS PROSPECTUS SUPPLEMENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the related prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------------
Per Note Total
------------ --------------
Public Offering Price 99.899% $149,848,500
Underwriting Discounts .600% $ 900,000
Proceeds to FFCA (before expenses) 99.299% $148,948,500
Interest on the Notes will accrue from October 30, 1998.
------------
The underwriters are offering the Notes subject to various conditions. The
underwriters expect to deliver the Notes to purchasers on or about October 30,
1998.
------------
Salomon Smith Barney
Merrill Lynch & Co.
NationsBanc Montgomery
Securities LLC
October 27, 1998
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
INVESTMENT LOCATIONS AS OF JUNE 30, 1998(1)
[MAP OF THE UNITED STATES SHOWING FFCA'S PROPERTIES BY INDUSTRY]
(1) Does not include four properties located in Alaska and Canada.
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING, AND YOU ARE URGED TO READ BOTH
THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL TO OBTAIN MATERIAL
INFORMATION CONCERNING THE NOTES AND AN INVESTMENT IN THE NOTES.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR INCORPORATED BY REFERENCE IN THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS ARE ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS SUPPLEMENT.
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TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary ................................. S-5
Risk Factors .................................................. S-12
Use of Proceeds ............................................... S-15
Capitalization ................................................ S-15
Selected Financial Data ....................................... S-16
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... S-18
Business and Properties ....................................... S-24
Management and Directors of the Company ....................... S-35
Description of the Notes ...................................... S-38
Underwriting .................................................. S-45
Legal Matters ................................................. S-46
PROSPECTUS
Available Information ......................................... 2
Incorporation of Certain Documents by Reference ............... 2
The Company ................................................... 3
Use of Proceeds ............................................... 3
Ratios of Earnings to Fixed Charges ........................... 3
Description of Debt Securities ................................ 4
Description of Common Stock ................................... 13
Description of Preferred Stock ................................ 14
Restrictions on Transfers of Capital Stock .................... 19
Certain Federal Income Tax Considerations ..................... 20
Plan of Distribution .......................................... 25
Legal Matters ................................................. 26
Experts ....................................................... 26
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THIS PAGE INTENTIONALLY LEFT BLANK
S-4
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectus. This summary is not complete and
does not contain all of the information that you should consider before
investing in the notes. You should read both the prospectus supplement and the
prospectus carefully.
THE COMPANY
FFCA is the largest U.S. REIT providing real estate financing to the chain
restaurant industry and a leading provider of real estate financing to the
convenience store and automotive services and parts industries. As a "one-stop
shop" financing source, FFCA provides flexible financing alternatives through a
variety of investment vehicles including sale-leaseback transactions, mortgage
loans, equipment loans, senior loans, participating mortgages and construction
loans. FFCA has financed chain restaurant real estate since 1980 and began
financing convenience stores and automotive services and parts stores in 1997.
FFCA's portfolio is diversified by geography, industry sector, operators and
chains, which has had a favorable impact on its access to, and cost of,
capital. As of June 30, 1998, FFCA had investments in 3,129 properties,
consisting of 2,600 chain restaurant properties, 465 convenience stores, 54
automotive services and parts stores and 10 other retail properties. FFCA's
portfolio included 1,734 properties represented by investments in real estate,
269 properties represented by investments in mortgage loans and 1,126
properties represented by securitized mortgage loans in which FFCA held a
residual interest. Over 400 operators in approximately
50 chains throughout North America operate the properties. FFCA provides
financing principally through sale-leaseback transactions and mortgage loans to
operators with experienced management in established retail chains. Generally,
multi-unit operators that have a national or regional presence operate the
properties.
FFCA is a fully integrated, self-administered REIT and its common stock is
traded on the New York Stock Exchange under the symbol "FFA." As of September
30, 1998, FFCA had an equity market capitalization of approximately $1.3
billion.
BUSINESS OBJECTIVES AND STRATEGIES
FFCA seeks to enhance its operating performance and financial position by
pursuing the following business objectives and strategies:
* UTILIZING CONSERVATIVE INVESTMENT STRUCTURING. FFCA structures its
investments to enhance the stability of its cash flows. FFCA structures
triple net leases in its sale-leaseback transactions, which provide that
lessees are responsible for the payment of all property operating expenses,
including property taxes, maintenance and insurance expenses. By
structuring triple net leases, FFCA avoids making significant capital
expenditures with respect to these properties. FFCA retains the leases in
its sale-leaseback transactions in its portfolio. The leases generally
provide for base rentals plus additional payments based upon specified
contractual increases or a participation in the gross sales from the
properties. FFCA's lease and mortgage financings generally have 20-year
terms. FFCA usually pools and sells the mortgage loans it originates in
securitized offerings, and typically retains or acquires interests in the
pool in the form of subordinated securities, interest only securities and
mortgage servicing rights. Securities retained or acquired by FFCA
represented less than 6% of FFCA's total assets as of June 30, 1998.
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* APPLYING RESEARCH-DRIVEN UNDERWRITING. FFCA targets quality investments by
applying conservative, research-driven underwriting criteria designed to
evaluate risk and return indicators. Before underwriting a transaction,
FFCA thoroughly researches various factors, including:
-- Chain store profitability -- Credit considerations
-- Chain store investment amount -- Physical condition
-- Site considerations -- Chain store suitability
-- Market considerations -- Environmental considerations
-- Operator experience
* FOCUSING ON EXPERIENCED MULTI-UNIT OPERATORS WITH BRAND NAME FRANCHISES.
FFCA seeks multi-unit operators conducting business under nationally or
regionally recognized brand names to operate the properties it finances. As
a result, FFCA believes it is able to achieve a better risk-adjusted return
for its shareholders. Generally, the operators include both chain store
franchisors and franchisees. Examples of well-known restaurant chains in
FFCA's portfolio include Applebee's, Arby's, Burger King, Chili's, Denny's,
Hardee's, Pizza Hut and Wendy's. Examples of well-known convenience stores
include Circle K, E-Z Serve, 7-Eleven and White Hen Pantry, and examples of
well-known automotive services and parts stores include Econo Lube N' Tune,
Midas and Checker Auto Parts.
* MAINTAINING APPROPRIATE INFRASTRUCTURE TO ACTIVELY MANAGE PORTFOLIO. Since
1980, members of FFCA's management group have gained extensive experience
in the development and refinement of systems of operation, management and
research, which has enhanced FFCA's ability to identify, evaluate and
structure new investments as well as actively monitor and manage its
investment portfolio. FFCA's experience in the real estate industry results
in in-house efficiency with respect to virtually every aspect of real
estate acquisition and management. This efficiency is reflected in each of
the Company's eight departments, which include Accounting, Asset
Management, Corporate Communications, Corporate Finance, Information
Systems, Legal Services, Property Management and Research and Underwriting.
FFCA uses its infrastructure to continually monitor and administer its
investments to enhance the stability of its cash flows. In-house staff
regularly inspects FFCA's properties to monitor asset condition and
collects financial data on the properties to determine profitability. Asset
Management staff monitors payment receipts, as well as property tax and
insurance compliance. Lease and mortgage payments are generally collected
by electronic account debits on the first day of each month. Property
Management and Legal Services personnel administer underperforming and
non-performing leases and also supervise the in-house administration of
property dispositions and tenant substitutions. For the three years ended
December 31, 1997 and the six months ended June 30, 1998, the occupancy
rate for FFCA's properties has been approximately 99%. FFCA has an
established record of resolving underperforming and non-performing leased
assets and loans.
* MINIMIZING INVESTMENT RISK THROUGH DIVERSIFICATION. In structuring its
portfolio, FFCA seeks diversification, which reduces risk and favorably
impacts its access to, and cost of, capital. Elements of FFCA's investment
diversification include: -- Geographic Diversification. FFCA's portfolio is
geographically diverse with investments in properties located in 48 states,
Washington, D.C. and Canada as of June 30, 1998. The map on the inside
front cover of this prospectus supplement shows the location of properties
in which FFCA had an investment as of June 30, 1998. -- Industry Sector
Diversification. FFCA's portfolio continues to become more diverse in terms
of industry sectors, with interests in 2,600 chain restaurant properties,
465 convenience stores, 54 automotive services and parts stores and 10
other retail properties as of June 30, 1998. Although FFCA intends to
continue expanding in the restaurant
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<PAGE>
sector, it intends to increase industry sector diversification by further
expanding in the convenience store and automotive services and parts store
sectors.
- -- Operator and Chain Diversification. FFCA's portfolio is diverse in terms of
operators and chains, with properties that were leased to, or owned by,
over 400 national and regional operating companies with no single operator
representing more than 10% of revenues for the three months ended June 30,
1998. Multi-unit operators are the predominant operators of FFCA's
properties. Additionally, over 50 chains are represented in FFCA's
portfolio. As of June 30, 1998, approximately 83% of the properties
financed by FFCA were chain restaurants including Applebee's, Arby's, Black
Eyed Pea, Burger King, Chili's, Denny's, Fuddruckers, Hardee's, Jack in the
Box, Kentucky Fried Chicken, Mrs. Winner's, Pizza Hut, Taco Bell, Wendy's
and Whataburger. In addition, approximately 15% of FFCA's investments were
in convenience stores, including Circle K, E-Z Serve, 7-Eleven and White
Hen Pantry, and 2% were in automotive services and parts stores, including
Econo Lube N' Tune, Midas and Checker Auto Parts.
* OFFERING OPERATORS ONE-STOP SHOPPING. FFCA provides its customers with a
variety of financing alternatives including sale-leaseback transactions,
mortgage loans, equipment loans, senior loans, participating mortgages and
construction loans. FFCA believes that offering its customers a "one-stop
shop" gives the Company a competitive advantage over traditional mortgage
lenders and other real estate financing companies. Additionally, FFCA
continuously reviews other financing products that it may offer operators
to further improve the Company's competitive position.
* MAINTAINING A CONSERVATIVE CAPITAL STRUCTURE. FFCA seeks to operate with a
moderate use of leverage and believes that its investments' stable,
predictable cash flows will permit it to continue obtaining attractive debt
and equity financing. FFCA seeks to maintain a ratio of total indebtedness
to total market capitalization of not more than 40%. Based on debt
outstanding on FFCA's balance sheet as of June 30, 1998 and its closing
stock price on September 30, 1998, FFCA's total indebtedness as a
percentage of total market capitalization was approximately 28.5%. Total
indebtedness includes debt associated with originating mortgages held for
sale. FFCA intends to use the proceeds from future mortgage securitizations
to repay such debt. FFCA has successfully removed debt from its balance
sheet and recycled capital by securitizing mortgages in its mortgage loan
inventory. To date, FFCA has successfully completed three mortgage
securitizations: (i) a $178.8 million securitization in 1996; (ii) a $260.8
million securitization in 1997; and (iii) a $335.3 million securitization
in May 1998.
RECENT DEVELOPMENTS
The following is a summary of certain recent developments affecting FFCA:
ACQUISITIONS AND FINANCINGS
* In January 1998, FFCA provided $46.5 million of mortgage financing to SSP
Partners, the largest licensee of Circle K convenience stores, for 83
Circle K locations in Texas and Oklahoma;
* In January 1998, FFCA provided $15.1 million of mortgage and equipment
financing to White Hen Pantry, the largest convenience store chain in the
Chicago area;
* In January 1998, FFCA provided $18.2 million and committed an additional
$3.2 million of mortgage financing to Carolina Restaurant Group, Inc. for
22 Wendy's locations in North and South Carolina;
* In June 1998, FFCA provided $88.3 million in the form of sale/leaseback
financing and a revolving credit facility to Quincy's Restaurants, Inc. for
the acquisition of the Quincy's Family Steakhouse chain from Advantica
Restaurant Group. The chain includes 193 restaurants throughout the
Southeast and Midwest;
S-7
<PAGE>
* In June 1998, FFCA committed to provide $47.2 million of sale/leaseback
financing to Dairy Mart Convenience Stores, Inc. for 40 locations in the
Midwest and Southeast;
* In June 1998, FFCA provided $44.2 million in the form of long-term mortgage
financing, a revolving line of credit and a letter of credit facility to
Uni-Marts, Inc., which operates convenience stores throughout the Northeast
and Mid-Atlantic; and
* In July 1998, FFCA provided $30.5 million of mortgage financing to
affiliates of JOTAR, LLC for 25 Applebee's locations in Florida and
Georgia.
EQUITY OFFERINGS
* From September 1997 to April 1998, FFCA sold approximately 4.1 million
shares of common stock to four separate unit investment trusts with net
proceeds from the sales totalling approximately $106 million;
* In February 1998, an affiliate of Colony Capital, Inc. made an equity
investment in FFCA of $100 million in the form of 3,792,112 shares of
common stock and has the right under certain conditions to purchase an
additional 1,476,908 shares of common stock. Colony is currently FFCA's
largest shareholder holding approximately 8% of FFCA's common stock. As
part of Colony's investment, Kelvin L. Davis, Colony's President and Chief
Operating Officer, joined FFCA's board of directors.
DEBT OFFERINGS AND LOAN SECURITIZATIONS
* In January 1998, FFCA received approximately $16.9 million in net proceeds
in an offering of 6.86% medium term notes due in 2007;
* In April 1998, FFCA received approximately $30.3 million in net proceeds in
an offering of 7.07% medium term notes due in 2008;
* In May 1998, FFCA completed a securitization transaction which was backed
by a total of 558 loans with an outstanding aggregate principal balance of
$335 million. Approximately 91% of the principal balance of the securitized
loan pool was sold to outside parties and FFCA retained subordinated
securities representing the remaining 9%.
* In August 1998, FFCA entered into a $600 million loan sale facility, of
which $300 million is currently committed, with an affiliate of Morgan
Stanley & Co. Incorporated. This facility permits a subsidiary of FFCA to
sell loans on a regular basis to a trust for an agreed upon advance rate.
Upon the sale of such loans, FFCA will act as servicer for the loans. As of
September 30, 1998, FFCA had sold 234 loans with an outstanding balance of
$118.8 million to the trust for proceeds of $99.5 million and retained
certificates evidencing ownership in the trust.
STRONG QUARTERLY EARNINGS
* In April 1998, FFCA announced financial results for the quarter ended March
31, 1998 with revenues of $39.4 million, up 20% from the first quarter of
1997, and Funds From Operations (as defined in "Summary Financial
Information") of $24.5 million, or $.56 per share assuming dilution, up 12%
from the first quarter of 1997; and
* In July 1998, FFCA announced financial results for the quarter ended June
30, 1998 with revenues of $40.4 million, up 17% from the second quarter of
1997, and Funds From Operations of $27.9 million, or $.57 per share
assuming dilution, up 10% from the second quarter of 1997.
FFCA's corporate offices are located at 17207 North Perimeter Drive,
Scottsdale, Arizona 85255-5402, and its telephone number is (602) 585-4500.
S-8
<PAGE>
THE OFFERING
Notes Offered .................. FFCA is offering a total of $150 million of
8.25% senior notes.
Issue Price .................... FFCA is offering the notes for $1,000 per
note purchased.
Maturity ....................... The notes will mature on October 30, 2003.
Interest ....................... FFCA will pay interest on the notes at an
annual rate of 8.25%. FFCA will pay the
interest due on the notes every six months
on April 30 and October 30. FFCA will make
the first payment on April 30, 1999.
Certain Covenants .............. FFCA will issue the notes under an indenture
with Norwest Bank Arizona, National
Association, as trustee. The indenture will,
among other things, restrict FFCA's ability,
and the ability of FFCA's subsidiaries, to:
* Incur debt.
* Secure debt with FFCA's assets or
those of FFCA's subsidiaries.
* Sell certain assets or merge with
other companies.
* For more details, see the section
"Description of the Notes" under
the heading "Additional Covenants
of the Company."
Ranking of the Notes ........... The notes represent senior unsecured debt of
FFCA:
* The notes will rank equally with
all of FFCA's current and future
debt that does not expressly
provide that it ranks junior to
senior unsecured debt of FFCA. On
June 30, 1998, on a "pro forma"
basis after giving effect to the
offering and the application of the
net proceeds, FFCA would have had
$526.3 million of senior unsecured
debt outstanding.
* The notes will rank ahead of all of
FFCA's current and future debt that
expressly provides that it is
subordinated to senior unsecured
debt of FFCA. On June 30, 1998, on
a "pro forma" basis after giving
effect to the offering and the
application of the net proceeds,
FFCA would have had no such debt
outstanding.
* The notes will rank behind any of
FFCA's mortgage and other secured
indebtedness and behind debt and
other liabilities of FFCA's
subsidiaries. On June 30, 1998, on
a "pro forma" basis after giving
effect to the offering and the
application of the net proceeds,
FFCA would have had $8.5 million of
such debt outstanding.
Optional Redemption ............ FFCA may redeem some or all of the notes at
any time at the redemption prices described
in the section "Description of the Notes"
under the heading "Optional Redemption,"
plus any interest that is due and unpaid on
the date FFCA redeems the notes.
Use of Proceeds ................ FFCA will use the net proceeds of the notes
to reduce amounts outstanding under FFCA's
unsecured revolving credit facility with
NationsBank of Texas, N.A.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
FFCA derived the historical financial information set forth below from
FFCA's audited financial statements for 1995 through 1997 and unaudited
financial statements for the six months ended June 30, 1997 and June 30, 1998.
The information is only a summary and you should read it together with FFCA's
historical financial statements (and related notes) contained in the annual and
quarterly reports and other information FFCA has filed with the Securities and
Exchange Commission (see "Incorporation of Certain Documents by Reference" in
the accompanying prospectus), as well as the financial information included in
this prospectus supplement (see "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------------- ---------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Rental ................................. $ 55,781 $ 49,221 $ 101,292 $ 95,612 $ 86,182
Mortgage loan interest .................. 15,591 5,118 10,987 15,738 14,118
Investment income and other ............ 8,384 5,893 13,672 6,955 2,283
Interest (related party) ............... -- 7,190 9,037 2,861 --
--------- --------- --------- --------- ---------
Total Revenues ........................ 79,756 67,422 134,988 121,166 102,583
--------- --------- --------- --------- ---------
Expenses:
Depreciation and amortization ............ 11,369 10,248 20,784 20,654 21,201
Operating, general and
administrative ........................ 6,428 5,535 11,106 11,488 10,283
Property costs ........................... 781 1,055 1,641 2,041 2,046
Interest ................................. 20,808 18,166 34,764 25,974 15,276
Interest (related party) ............... 500 493 986 973 961
--------- --------- --------- --------- ---------
Total Expenses ........................ 39,886 35,497 69,281 61,130 49,767
--------- --------- --------- --------- ---------
Income before gain on sale of
property and other costs ............... 39,870 31,925 65,707 60,036 52,816
Gain on sale of property, net(1) ............ 7,088 6,940 5,471 9,899 977
Equity in net income (loss) of affiliate . -- 920 1,719 (1,396) --
Extraordinary item-loss on early
extinguishment of debt .................. -- -- -- -- (2,464)
--------- --------- --------- --------- ---------
Net Income ................................. $ 46,958 $ 39,785 $ 72,897 $ 68,539 $ 51,329
========= ========= ========= ========= =========
Basic earnings per share .................. $ 1.02 $ 0.98 $ 1.78 $ 1.70 $ 1.28
========= ========= ========= ========= =========
Diluted earnings per share ............... $ 1.01 $ 0.97 $ 1.76 $ 1.69 $ 1.27
========= ========= ========= ========= =========
Other Data:
EBITDA(2) ................................. $ 79,635 $ 68,692 $ 129,431 $ 116,140 $ 88,767
FFO(3) .................................... 52,411 41,804 87,559 79,492 73,539
FFO per share, assuming dilution(3) ...... 1.13 1.02 2.12 1.96 1.83
Cash flows from operating activities ...... 51,106 38,939 86,324 85,949 78,621
Cash flows from investing activities ...... (108,610) 62,805 (207,521) (148,629) (259,715)
Cash flows from financing activities ...... 57,683 (109,764) 116,977 71,963 171,066
Ratio of earnings to fixed charges(4) ...... 3.20x 3.13x 3.04x 3.54x 4.16x
Ratio of EBITDA to interest
expense(2) .............................. 3.74x 3.68x 3.62x 4.31x 5.47x
Ratio of total debt to EBITDA(2) ......... 6.70x 5.56x 4.79x 3.94x 3.57x
Number of properties owned ............... 1,734 1,353 1,477 1,371 1,261
Number of properties secured by
mortgages .............................. 269 131 378 255 247
Number of properties in securitized
loans .................................... 1,126 627 626 243 --
</TABLE>
(Footnotes for table are located on next page)
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<TABLE>
<CAPTION>
As of June 30, As of December 31,
--------------------- -----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Real estate before accumulated
depreciation ..................... $1,106,244 $873,555 $ 951,305 $868,215 $794,580
Mortgage loans held for sale ...... 167,836 21,892 251,622 -- --
Mortgage loans receivable ......... 46,298 54,441 35,184 57,808 199,486
Real estate investment securities ... 75,599 56,425 55,185 29,733 --
Note receivable from affiliate(5) -- 27,406 -- 147,616 --
Total assets ..................... 1,285,274 917,397 1,179,198 988,776 843,504
Total debt ........................ 533,487 382,083 619,860 457,956 317,202
Total shareholders' equity ......... 710,798 501,634 522,996 495,370 493,817
</TABLE>
- ------------
(1) Results of operations may be largely impacted by gains or losses on the
sale of properties or as a result of securitization transactions. Of the
gain on the sale of property for the six months ended June 30, 1998 and
1997, $6.2 million and $430,000, respectively, related to the
securitization transactions completed in those periods. Of the gain on the
sale of property for the years ended December 31, 1997 and 1996, $430,000
and $7.1 million, respectively, related to the securitization transactions
completed in those years.
(2) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization. EBITDA is not intended to represent cash
flow from operations as defined by GAAP and you should not consider it as
an alternative to cash flow as a measure of liquidity or as an alternative
to net earnings as an indicator of operating performance. EBITDA is
included in this prospectus supplement because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt. EBITDA as calculated by FFCA may not be
comparable to calculations as presented by other companies, even in the
same industry.
(3) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations, or FFO, represents net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate-related
depreciation and amortization (excluding amortization of deferred
financing costs and depreciation of non-real estate assets) and after
adjustments for unconsolidated partnerships and joint ventures. Management
considers FFO an appropriate measure of performance of an equity REIT
because it is predicated on cash flow analyses. FFCA computes FFO in
accordance with standards established by the Board of Governors of NAREIT
in its March 1995 White Paper, which may differ from the methodology for
calculating FFO utilized by other REITs and, accordingly, may not be
comparable to such other REITs. While FFO is a relevant and widely used
measure of the operating performance of REITs, it does not represent cash
flow from operations or net income as defined by GAAP, and it should not
be considered as an alternative to those indicators in evaluating
liquidity or operating performance.
(4) For the purpose of computing such ratios, "earnings" represents net income
plus fixed charges. "Fixed charges" represents interest expense, which
includes amortization of debt issuance costs.
(5) Note receivable from FFCA's former affiliate, FFCA Mortgage Corporation,
which was dissolved in 1997, represents mortgage loans held for sale by
the affiliate.
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<PAGE>
RISK FACTORS
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS INCLUDE
"FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT INCLUDING IN PARTICULAR THE
STATEMENTS ABOUT FFCA'S PLANS, STRATEGIES AND PROSPECTS UNDER THE HEADINGS
"PROSPECTUS SUPPLEMENT SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS AND PROPERTIES."
ALTHOUGH FFCA BELIEVES THAT ITS PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN
OR SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, FFCA CAN GIVE
NO ASSURANCE THAT THESE PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED.
FFCA HAS SET FORTH IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD LOOKING STATEMENTS BELOW AND ELSEWHERE IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, INCLUDING UNDER THE
HEADINGS "BUSINESS -- FACTORS AFFECTING FUTURE OPERATING RESULTS," "--
REGULATION" AND "-- RECENT LEGISLATION" IN ITS ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1997 INCORPORATED BY REFERENCE IN THE ACCOMPANYING
PROSPECTUS. FFCA QUALIFIES THESE FORWARD-LOOKING STATEMENTS BY THE CAUTIONARY
STATEMENTS SET FORTH BELOW.
You should consider the following risks in deciding whether to purchase
the notes:
DEBT FINANCING RISKS
FFCA is subject to the risks associated with debt financing, including the
risk that the cash provided by FFCA's operating activities will be insufficient
to meet required payments of principal and interest and the risk that FFCA will
not be able to repay or refinance existing indebtedness or that the terms of
such refinancing will not be as favorable as the terms of existing
indebtedness. If FFCA is unable to refinance its indebtedness on acceptable
terms, it might be forced to dispose of properties on disadvantageous terms,
which might result in losses.
DEPENDENCE ON THE SUCCESS OF THE CONCEPTS AND FACILITIES FINANCED BY FFCA
FFCA invests primarily in chain restaurant properties and convenience and
automotive services and parts retail facilities. Investments in real estate in
the chain restaurant industry as well as the convenience store and automotive
services and parts industries are subject to conditions unique to such
industries. Industry risks include a decrease in demand for products, increased
labor costs, including minimum wage increases, an increase in the number of,
and the physical condition of, competing properties offering similar products
and dependence on operators for the profitable operation of the properties.
The chain restaurant industry is subject to the risks of changing consumer
demand and food preferences and contaminated food products. The convenience
store industry is subject to competition from new retail facilities offering
similar products in the immediate vicinity of each particular store, pending
legislation concerning the sale of tobacco products, and, to the extent
applicable, the margins available from the sale of gasoline and availability of
gasoline supplies. The automotive services and parts industry is subject to
technological changes in the production and maintenance of automobiles and
changing consumer preferences in transportation options. FFCA's success is
dependent on the success of these industries in general and the specific chains
and retail facilities which FFCA finances.
Furthermore, the chain restaurant, convenience store and automotive
services and parts industries are highly competitive. The chain store
properties in which FFCA invests compete with other similar facilities located
in the same areas. The principal areas of competition are segment, concept,
product, price, value, quality, service, convenience and the nature and
condition of the chain store facility. A chain store facility operator competes
with all operators of comparable facilities in the area in which its chain
store facility is located. Other competing facilities could have lower
operating costs, more favorable locations, more effective marketing, more
efficient operations or newer facilities. In addition, the business conducted
at each chain store facility may face competition from other industries and
industry segments. Increased competition among operators in each of the
industry segments could adversely affect income from a chain store facility,
and any decline in income as a result of such increased competition or
otherwise could have an adverse effect on an operator's ability to make
payments to FFCA under a lease or loan.
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The ability of the operators to pay their obligations to FFCA in a timely
manner will also depend on a number of other factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of any operator, may adversely affect the economic viability of the
chain store facility, including but not limited to: (i) national, regional and
local economic conditions (which may be adversely affected by industry
slowdowns, company relocations, prevailing employment conditions and levels of
employment and other factors); (ii) local real estate conditions (such as
competition from facilities having businesses similar to the chain store
facility); (iii) changes or weaknesses in specific industry segments; (iv)
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the chain store facility and of the related concept; (v)
changes in demographics, consumer tastes and traffic patterns; (vi) the ability
to obtain and retain capable management; (vii) retroactive changes to building
codes, similar ordinances and other legal requirements; (viii) the inability of
a particular operator's computer system to adequately address Year 2000 issues;
and (ix) increases in operating expenses.
Increases in minimum wages, taxes (including income, service, real estate
and other taxes) or mandatory employee benefits may adversely affect a chain
store facility's cash flow. Similarly, changes in laws increasing the potential
liability for environmental conditions existing on properties may result in
significant unanticipated expenditures which could adversely affect an
operator's ability to make payments to FFCA under a lease or loan.
For the three months ended June 30, 1998, 9.5% of FFCA's revenues (of
which approximately 3% is guaranteed by Arby's, Inc. and Triarc Companies,
Inc.) came from RTM, Inc. and its affiliates, which together are the largest
franchisee of Arby's restaurant and the owner and franchisor of the Mrs.
Winner's and Lee's Famous Recipe concepts. During the same period, 16.7% of
FFCA's revenues came from various operators of Burger King restaurant
facilities. Thus, RTM as an operator and Burger King as a concept continue to
have a meaningful impact on FFCA's revenues.
DEPENDENCE ON FRANCHISORS AND OTHERS
Each of the chain store facilities in which FFCA has an investment is
operating as part of a chain of restaurants, convenience stores or automotive
services and parts stores. The management practices of the franchisors of the
chains, a lack of support by such franchisors, franchisee organizations or
third parties, or the bankruptcy or business discontinuation of any such
franchisor, franchisee organization or third party, may adversely affect the
operating results of the related chain store facilities. Likewise, the
management practices or a lack of support with respect to the concepts owned by
the related operators also may adversely affect the results of operations at
the chain store facilities of such operators, which could have an adverse
effect on an operator's ability to make payments to FFCA under a lease or loan.
SECURITIZATION RISKS AND CHANGING MARKET CONDITIONS
FFCA currently securitizes the loans it originates and intends to continue
to originate and securitize loans, utilizing either the Morgan Stanley loan
sale facility or direct securitizations, and to retain responsibility for loan
servicing. 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 markets 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 recently
experienced volatility, which may impair FFCA's ablility to successfully
securitize its loans in the foreseeable future.
To the extent FFCA sells loans through the Morgan Stanley loan sale
facility or in connection with a direct securitization, such sales are
generally without recourse to FFCA, except with respect to breaches of
representations and warranties contained in the applicable loan sale agreement.
With
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respect to such breaches, FFCA will be required to: (i) cure such breach, (ii)
replace the loan in question with a loan that conforms to the representations
and warranties, or (iii) repurchase the loan. In addition, under the Morgan
Stanley loan sale facility, FFCA may be required in certain circumstances to
make certain payments to Morgan Stanley up to 10% of the total consideration
received by FFCA for the sale of the loans to the trust.
FFCA also owns subordinated interests in the loans it securitizes. Such
interests are in a "first loss" position relative to the more senior securities
sold to third parties, and accordingly carry a greater risk as it relates to
the nonpayment of the loans. At June 30, 1998, FFCA had approximately $75.6
million invested in such subordinated interests, which represented less than 6%
of FFCA's total assets. The value of these subordinated interests is marked to
market each calendar quarter with material changes in value impacting FFCA's
financial statements. Although no material changes have occurred to date, FFCA
may, in the future, recognize material changes which would result in a
reduction in their value on FFCA's financial statements. Such reductions could
negatively impact FFCA's net income and total assets in the future.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, FFCA could be liable for the costs of removal or remediation of
hazardous or toxic substances on, under, in or near a chain store property in
which it holds an interest. Additionally, FFCA did not perform certain
environmental audits on certain properties acquired from its predecessors.
While FFCA has purchased environmental insurance for some of the properties it
owns, such insurance may not cover all the costs associated with any
environmental liabilities.
HEDGING TRANSACTIONS
FFCA invests in derivative financial securities and instruments for the
sole purpose of providing protection against fluctuations in interest rates.
From the time FFCA's fixed-rate mortgage loans are originated until the time
they are sold through a securitization transaction, the Company hedges against
fluctuations in interest rates through the use of derivative financial
instruments. At September 30, 1998, FFCA had outstanding interest rate swap
contracts aggregating $86 million in notional amount. FFCA intends to terminate
these contracts upon securitization of the related fixed-rate mortgage loans.
Based on prevailing interest rates, FFCA would have paid approximately $3
million if it had terminated the swap contracts at September 30, 1998.
In addition, FFCA entered into a treasury lock agreement to hedge exposure
to fluctuations in interest rates on anticipated debt with a notional amount of
$100 million. Based on prevailing interest rates, FFCA would have paid $8.6
million to terminate this contract at September 30, 1998.
REIT TAX STATUS
FFCA has elected to be taxed as a REIT under the Internal Revenue Code of
1986, which entitles FFCA to a deduction for dividends paid to its shareholders
when calculating its taxable income. Although FFCA intends to operate so that
it will continue to qualify as a REIT, the complex nature of the rules
governing REITs, the ongoing importance of factual determinations and the
possibility of future changes in FFCA's circumstances preclude any assurance
that FFCA will qualify as a REIT in any given year. FFCA's failure to maintain
its REIT status would have a material adverse effect on FFCA. Income tax
treatment of REITs may be modified, prospectively or retroactively, by
legislative, judicial or administrative action at any time, which, in addition
to the direct effects such changes might have, could also affect the ability of
FFCA to realize its investment objectives.
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<PAGE>
TRADING MARKET FOR THE NOTES
Prior to the offering, there has been no public market for the notes. The
underwriters have advised FFCA that they intend to make a market in the notes;
however, the underwriters are not obligated to do so. The underwriters may
discontinue any market-making at any time, and there is no assurance that an
active public market for the notes will develop or, that if it develops, that
it will continue. Further, declines and volatility in the market for securities
generally, as well as changes in FFCA's financial performance or prospects, may
adversely affect the liquidity of, and trading market for, the notes.
USE OF PROCEEDS
FFCA will use the net proceeds (after expenses) from the offering (the
"Offering"), of the 8.25% Senior Notes due 2003 (the "Notes"), estimated to be
approximately $148,698,500, to reduce amounts outstanding under FFCA's $350
million unsecured revolving credit facility with NationsBank of Texas, N.A.
(the "Credit Agreement"). As of September 30, 1998, the amount outstanding
under the Credit Agreement was $246 million. Interest under the Credit
Agreement is due in periodic installments at a rate equal to the 30-day London
Interbank Offered Rate ("LIBOR") plus 100 basis points. The Credit Agreement
expires in December 2000.
CAPITALIZATION
Unless the context indicates otherwise, references to "FFCA" or the
"Company" in this prospectus supplement (the "Prospectus Supplement") shall be
deemed to mean Franchise Finance Corporation of America and its subsidiaries.
The following table sets forth the capitalization of FFCA as of June 30, 1998
and the capitalization of FFCA as of June 30, 1998, as adjusted to give effect
to the issuance and sale of the Notes offered hereby and the application of the
net proceeds from the Offering. See "Use of Proceeds." This information should
be read together with the information set forth under "Prospectus Supplement
Summary," "Selected Financial Data" and FFCA's consolidated financial
statements and the notes thereto incorporated by reference into the
accompanying prospectus (the "Prospectus").
As of June 30, 1998
-------------------------
Historical As Adjusted
---------- -----------
(Dollars in thousands)
8.25% Senior Notes due 2003 ...................... $ -- $ 150,000
Notes Payable ..................................... 356,987 356,987
Credit Agreement(1) ............................... 168,000 19,302
Mortgage Payable to Affiliate ................... 8,500 8,500
---------- ----------
Total Debt .................................. 533,487 534,789
---------- ----------
Shareholders' Equity: ............................
Common stock, par value $.01 per share,
authorized 200 million shares, issued
and outstanding 48,891,192 shares ............... 489 489
Preferred Stock, par value $.01 per share,
10 million shares authorized, none issued
or outstanding .................................. -- --
Capital in excess of par value ................... 769,761 769,761
Cumulative net income ............................ 249,064 249,064
Cumulative dividends ............................ (308,516) (308,516)
---------- ----------
Total Shareholders' Equity ................ 710,798 710,798
---------- ----------
Total Capitalization ...................... $1,244,285 $1,245,587
========== ==========
- ------------
(1) As of September 30, 1998, the amount outstanding under the Credit Agreement
was $246 million.
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<PAGE>
SELECTED FINANCIAL DATA
The Company derived the historical financial information set forth below
from FFCA's audited financial statements for 1994 through 1997 and unaudited
financial statements for the six months ended June 30, 1997 and June 30, 1998.
Financial data presented below for periods prior to June 1, 1994 represent the
operations of FFCA's predecessor companies. This data has been restated on a
combined basis to provide comparative information; however, it does not
necessarily represent results of operations as they would have been had FFCA
operated as a REIT for all periods presented. The predecessor companies were
primarily public real estate limited partnerships with a declining number of
properties in their investment portfolios and no opportunity for growth through
acquisitions; therefore, the investment objectives of FFCA are different than
the objectives of its predecessor companies. The information set forth below is
only a summary and you should read it together with FFCA's historical financial
statements (and related notes) contained in the annual and quarterly reports
and other information FFCA has filed with the Securities and Exchange
Commission, as well "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Six Months Ended June 30,
--------------------------
1998 1997
---- ----
(Dollars in thousands,
except per share data)
Statement of Income Data:
Revenues:
Rental .................................... $ 55,781 $ 49,221
Mortgage loan interest .................. 15,591 5,118
Investment income and other ............... 8,384 5,893
Interest (related party) .................. -- 7,190
---------- ----------
Total Revenues ........................... 79,756 67,422
---------- ----------
Expenses:
Depreciation and amortization ............ 11,369 10,248
Operating, general and administrative . 6,428 5,535
Property costs ........................... 781 1,055
Interest ................................. 20,808 18,166
Interest (related party) .................. 500 493
---------- ----------
Total Expenses ........................... 39,886 35,497
---------- ----------
Income before gain on sale of property
and other costs ........................... 39,870 31,925
Gain on sale of property, net(2) ......... 7,088 6,940
Equity in net income (loss) of affiliate ... -- 920
REIT transaction related costs ............ -- --
Extraordinary item-loss on early
extinguishment of debt .................. -- --
---------- ----------
Net Income(3) .............................. $ 46,958 $ 39,785
========== ==========
Basic earnings per share .................. $ 1.02 $ 0.98
========== ==========
Diluted earnings per share ............... $ 1.01 $ 0.97
========== ==========
Other Data:
EBITDA(4) ................................. $ 79,635 $ 68,692
FFO(5) .................................... 52,411 41,804
FFO per share, assuming dilution(5) ...... 1.13 1.02
Cash flows from operating activities ...... 51,106 38,939
Cash flows from investing activities ...... (108,610) 62,805
Cash flows from financing activities ...... 57,683 (109,764)
Ratio of earnings to fixed charges(6) ...... 3.20x 3.13x
Ratio of EBITDA to interest expense(4) . 3.74x 3.68x
Ratio of total debt to EBITDA(4) ......... 6.70x 5.56x
Number of properties owned ............... 1,734 1,353
Number of properties secured by
mortgages ................................. 269 131
Number of properties in securitized loans 1,126 627
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994(1) 1993(1)
---- ---- ---- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Rental .................................... $ 101,292 $ 95,612 $ 86,182 $ 81,760 $ 83,095
Mortgage loan interest .................. 10,987 15,738 14,118 5,596 4,889
Investment income and other ............... 13,672 6,955 2,283 3,706 5,805
Interest (related party) .................. 9,037 2,861 -- -- --
---------- ---------- ---------- --------- ----------
Total Revenues ........................... 134,988 121,166 102,583 91,062 93,789
---------- ---------- ---------- --------- ----------
Expenses:
Depreciation and amortization ............ 20,784 20,654 21,201 22,810 22,704
Operating, general and administrative . 11,106 11,488 10,283 11,195 13,111
Property costs ........................... 1,641 2,041 2,046 2,310 2,850
Interest ................................. 34,764 25,974 15,276 2,477 316
Interest (related party) .................. 986 973 961 951 941
---------- ---------- ---------- --------- ----------
Total Expenses ........................... 69,281 61,130 49,767 39,743 39,922
---------- ---------- ---------- --------- ----------
Income before gain on sale of property
and other costs ........................... 65,707 60,036 52,816 51,319 53,867
Gain on sale of property, net(2) ......... 5,471 9,899 977 2,784 (156)
Equity in net income (loss) of affiliate ... 1,719 (1,396) -- -- --
REIT transaction related costs ............ -- -- -- (28,198) --
Extraordinary item-loss on early
extinguishment of debt .................. -- -- (2,464) -- --
---------- ---------- ---------- --------- ----------
Net Income(3) .............................. $ 72,897 $ 68,539 $ 51,329 $ 25,905 $ 53,711
========== ========== ========== ========= ==========
Basic earnings per share .................. $ 1.78 $ 1.70 $ 1.28 $ 0.64 $ 1.33
========== ========== ========== ========= ==========
Diluted earnings per share ............... $ 1.76 $ 1.69 $ 1.27 $ 0.64 $ 1.33
========== ========== ========== ========= ==========
Other Data:
EBITDA(4) ................................. $ 129,431 $ 116,140 $ 88,767 $ 80,341 $ 77,672
FFO(5) .................................... 87,559 79,492 73,539 73,720 76,571
FFO per share, assuming dilution(5) ...... 2.12 1.96 1.83 1.83 1.90
Cash flows from operating activities ...... 86,324 85,949 78,621 75,983 78,068
Cash flows from investing activities ...... (207,521) (148,629) (259,715) (55,683) 15,452
Cash flows from financing activities ...... 116,977 71,963 171,066 (60,053) (82,115)
Ratio of earnings to fixed charges(6) ...... 3.04x 3.54x 4.16x 16.78x 43.73x
Ratio of EBITDA to interest expense(4) . 3.62x 4.31x 5.47x 23.44x 61.79x
Ratio of total debt to EBITDA(4) ......... 4.79x 3.94x 3.57x 0.84x 0.14x
Number of properties owned ............... 1,477 1,371 1,261 1,087 1,072
Number of properties secured by
mortgages ................................. 378 255 247 89 13
Number of properties in securitized loans 626 243 -- -- --
As of June 30, As of December 31,
----------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)
---- ---- ---- ---- ---- ------- -------
Selected Balance Sheet Data:
Real estate before accumulated
depreciation ........................... $1,106,244 $873,555 $ 951,305 $868,215 $794,580 $681,126 $661,576
Mortgage loans held for sale ............ 167,836 21,892 251,622 -- -- -- --
Mortgage loans receivable ............... 46,298 54,441 35,184 57,808 199,486 65,980 38,091
Real estate investment securities ...... 75,599 56,425 55,185 29,733 -- -- --
Note receivable from affiliate(7) ...... -- 27,406 -- 147,616 -- -- --
Total assets ........................... 1,285,274 917,397 1,179,198 988,776 843,504 612,228 619,443
Total debt .............................. 533,487 382,083 619,860 457,956 317,202 67,500 10,942
Total shareholders' equity ............ 710,798 501,634 522,996 495,370 493,817 514,107 576,775
</TABLE>
(Footnotes for table are located on next page)
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- ------------
(1) The information for periods prior to June 1, 1994 is, in effect, a
restatement of the historical operating results of Franchise Finance
Corporation of America I ("FFCA I") and the public limited partnerships as
if they had been consolidated since January 1, 1993. The per share amounts
for the same periods were computed as if 40.251 million shares of FFCA
stock were outstanding each year.
(2) Results of operations may be largely impacted by gains or losses on the
sale of properties or as a result of securitization transactions. Of the
gain on the sale of property for the six months ended June 30, 1998 and
1997, $6.2 million and $430,000, respectively, related to the
securitization transactions completed in those periods. Of the gain on the
sale of property for the years ended December 31, 1997 and 1996, $430,000
and $7.1 million, respectively, related to the securitization transaction
completed in those years.
(3) Net income for the year ended December 31, 1994 was impacted by REIT
transaction costs of approximately $28.2 million recognized upon
consummation of the merger of FFCA and its predecessor entities.
(4) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization. EBITDA is not intended to represent cash
flow from operations as defined by GAAP and investors should not consider
it as an alternative to cash flow as a measure of liquidity or as an
alternative to net earnings as an indicator of operating performance.
EBITDA is included in this Prospectus Supplement because management
believes that certain investors find it to be a useful tool for measuring
a company's ability to service its debt. EBITDA as calculated by FFCA may
not be comparable to calculations as presented by other companies, even in
the same industry. EBITDA for 1994 does not include approximately $28.2
million in non-recurring REIT formation transaction costs.
(5) As defined by NAREIT, FFO represents net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate-related depreciation and
amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO
an appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. FFCA computes FFO in accordance with
standards established by the Board of Governors of NAREIT in its March
1995 White Paper, which may differ from the methodology for calculating
FFO utilized by other REITs and, accordingly, may not be comparable to
such other REITs. While FFO is a relevant and widely used measure of the
operating performance of REITs, it does not represent cash flow from
operations or net income as defined by GAAP, and it should not be
considered as an alternative to those indicators in evaluating liquidity
or operating performance.
(6) For the purpose of computing such ratios, "earnings" represents net income
plus fixed charges and REIT formation transaction costs. "Fixed charges"
represents interest expense, which includes amortization of debt issuance
costs.
(7) Note receivable from FFCA's former affiliate, FFCA Mortgage Corporation,
which was dissolved in 1997, represents mortgage loans held for sale by
the affiliate.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
FFCA is a fully integrated and self-administered REIT which provides real
estate financing to the chain restaurant industry, as well as to the
convenience store and automotive services and parts industries through various
financial products, including sale-leaseback transactions, mortgage loans,
equipment loans, senior loans, participating mortgages and construction
financing. At June 30, 1998, FFCA had interests in 3,129 properties consisting
of investments in 2,600 chain restaurant properties, 465 convenience stores, 54
automotive services and parts stores and 10 other retail properties. FFCA's
portfolio included 2,003 chain store properties represented by investments in
real estate and mortgage loans and 1,126 properties represented by securitized
mortgage loans in which FFCA holds a residual interest.
LIQUIDITY AND CAPITAL RESOURCES
FFCA's investment activities are funded initially by cash generated from
operations and draws on the Company's Credit Agreement. This loan facility is
used as a warehousing line until a sufficiently large pool of portfolio
investments is accumulated to warrant the sale of loans through a
securitization transaction, or the issuance of additional debt or equity
securities of FFCA. In addition, the Company has entered into a loan sale
facility with Morgan Stanley Securitization Funding Inc. in an aggregate amount
of $600 million, of which $300 million is currently committed. As of September
30, 1998, FFCA had received proceeds of $99.5 million in connection with this
facility and retained certificates evidencing ownership in the trust.
During the second quarter of 1998, the Company funded $258 million in new
sale-leaseback and mortgage loan investments, representing $196.9 million in
chain restaurant properties, $39.5 million in convenience stores and $22
million in automotive services and parts stores. Total investments for the
first six months of 1998 were $444 million, up 120% from $201 million in the
first six months of 1997. At June 30, 1998, the Company's portfolio represented
3,129 locations in 48 states, Washington, D.C. and Canada, 381 of which were
financed in the second quarter of 1998. In addition to this geographic
diversification, the portfolio is also represented by more than 400 different
operators in approximately 50 retail chains.
During the quarter ended June 30, 1998, FFCA completed a securitization
transaction, its third and largest transaction. The transaction, backed by a
total of 558 chain store loans with an outstanding aggregate principal balance
of $335 million, consisted of a diversified pool of fixed-rate and
floating-rate mortgage and equipment loans. Approximately 91% of the principal
balance of the securitized loan pool was sold to outside parties, while the
Company currently holds subordinated certificates representing the remaining
9%. The Company also retained the servicing rights on the loans. Asset-backed
securities aggregating $305 million were priced in eleven classes (all of which
were rated investment grade) and sold to outside parties. The net cash proceeds
to the Company were used to reduce amounts outstanding under the Credit
Agreement. A net gain approximating $6 million was recognized on this
transaction (after deductions for transaction costs). At June 30, 1998, the
Company held approximately $76 million in subordinated securities related to
its three securitization transactions. The value of these subordinated
securities is marked to market each calendar quarter with material changes in
value impacting FFCA's financial statements. Although no material changes have
occurred to date, FFCA may, in the future, recognize material changes which
would result in a reduction in their value on FFCA's financial statements in
the future. Such reductions could negatively impact FFCA's net income and total
assets in the future. At June 30, 1998, investments in subordinated securities
represented less than 6% of FFCA's total assets.
From the time fixed-rate mortgage loans are originated until the time they
are sold through a securitization transaction, the Company hedges against
fluctuations in interest rates through the use of derivative financial
instruments. At September 30, 1998, FFCA had outstanding interest rate swap
contracts aggregating $86 million in notional amount. The Company intends to
terminate these contracts upon securitization of the related fixed-rate
mortgage loans, at which time the Company would generally expect to receive (if
rates rise) or pay (if rates fall) an amount equal to the present value of the
difference between the LIBOR rate set at the beginning of the interest rate
agreement and the then existing LIBOR
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rate. At that time, both the gain or loss on the securitization of the
fixed-rate mortgage loans and the gain or loss on the termination of the
interest rate swap contracts will be measured and recognized in the statement
of operations. Based on the level of interest rates prevailing, FFCA would have
paid approximately $3 million if it had terminated the swap contracts at
September 30, 1998. In addition, the Company entered into a treasury lock
agreement to hedge exposure to fluctuations in interest rates on anticipated
debt with a notional amount of $100 million. The gain or loss to be realized
upon settlement of this agreement, and related costs, will be deferred and
amortized into interest expense over the period of the underlying debt. Based
on interest rates prevailing, the Company would have paid $8.6 million if it
had terminated this contract at September 30, 1998.
Rental and mortgage interest revenue generated by FFCA's portfolio
investments has, and will continue to, comprise the majority of the cash
generated from operations. Operations during the six-month period ended June
30, 1998 provided net cash of $51 million as compared to $39 million in 1997.
The increase in cash provided by operations is primarily due to increased
revenues from the growth in the size of the portfolio. Cash generated from
operations provides distributions to the shareholders in the form of quarterly
dividends. This cash also may be used on an interim basis to fund new
investments in properties or to pay down debt.
The Company's primary source of interim funding for new investments
continues to be the Credit Agreement. The Company also intends to use the
Morgan Stanley loan sale facility whenever possible for the loans which it
originates. At June 30, 1998, the Company had cash and cash equivalents of $7.3
million and $182 million available under its Credit Agreement. The Company
anticipates funding any forward commitments, and other investments in chain
store properties, through amounts available under its Credit Agreement, the
Morgan Stanley loan sale facility, issuance of additional unsecured debt,
issuance of mortgage-backed securities through securitization, or issuance of
additional equity securities of FFCA.
In April 1998, the Company issued $30.5 million in unsecured notes due in
2008 bearing interest at a rate of 7.07%. Also in April, the Company raised $24
million in equity through the sale of approximately 893,000 shares of common
stock to a unit investment trust.
The Company has a dividend reinvestment plan that allows shareholders to
acquire additional shares of the Company's stock by automatically reinvesting
their quarterly dividends. As of June 30, 1998, shareholders owning
approximately 6.5% of the outstanding shares of the Company's common stock
participated in the dividend reinvestment plan and dividends reinvested during
the quarter ended June 30, 1998 totaled approximately $1.5 million. The Company
declared a second quarter 1998 dividend of $0.47 per share, or $1.88 per share
on an annualized basis, payable on August 20, 1998 to shareholders of record on
August 10, 1998. Management anticipates that cash generated from operations
will be sufficient to meet operating requirements and provide the level of
shareholder dividends required to maintain the Company's status as a REIT.
During 1997, the Company completed the design of its new accounting and
servicing information system that was begun in 1996. This new system was
implemented successfully on January 1, 1998. The Company has completed the
design of its new property management system and is currently in the process of
deploying this system. The design and implementation of these new systems,
including related upgrades in computer hardware, was necessary to develop a
more efficient portfolio servicing system that would permit a high level of
growth in the Company portfolio while containing operating costs. FFCA has
invested $1.6 million during 1997 and $70,000 during 1996 towards the
development and installation of these systems. The new systems are also Year
2000 compliant, which means that the systems will know how to handle any dates
that refer to the 21st century. This issue has received much publicity in
recent months because many computer systems built over the last 30 years
contain two digits to express the year, assuming that all dates refer to the
20th century. Such computer systems will fail after December 31, 1999 because
the systems will not know how to handle a year expressed as "00." With the
planned installation of the new property management system in 1998, all of the
Company's significant information systems will be Year 2000 compliant; however,
FFCA is also addressing the other support and maintenance systems that are
sensitive to dates, such as the telephone and power systems, elevators,
security systems, and so on.
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The Company is taking a proactive approach in dealing with Year 2000
issues and a five-phase process to address this challenge has been approved by
the Company's computer steering committee. This plan includes: (1) an inventory
and assessment of the systems and electronic devices that may be at risk; (2)
the identification of potential solutions; (3) the implementation of upgrades
or replacements to affected systems or devices; (4) the verification of
compliance and testing of the revised systems; and (5) the training of users on
the new systems. To date, FFCA has successfully completed testing its computer
hardware, as well as its operating system and database software, and has
received statements of Year 2000 compliance from the related vendors. The
Company is in the process of assessing the Year 2000 readiness of the key
suppliers that it relies upon, in addition to the other systems that are
sensitive to dates (such as the telephone and power systems, elevators,
security systems, and so on). While the Company has developed a plan for any
such systems that are found to be noncompliant, the failure of any of these
systems would not have a material adverse effect on the Company. The Company
estimates all of its systems will be Year 2000 compliant during 1999. Based on
current estimates and plans, FFCA believes the cost of addressing the Year 2000
issue will not be material to the Company's operations or financial condition.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 1997. The Company's operations for the second quarter of
1998 resulted in net income of $28 million ($.58 per share diluted) as compared
to net income of $22 million ($.53 per share diluted) in the comparable quarter
of 1997. For the six-months ended June 30, 1998, the Company reported net
income of $47 million ($1.01 per share diluted) as compared to net income of
$40 million ($.97 per share diluted). The increase in net income between 1997
and 1998 resulted from an increase in the size of the Company's real estate
investment portfolio and from an increase in interest rate spreads (the
difference between interest rates earned on the Company's real estate assets
and interest rates paid on the related debt).
Total revenues rose approximately 17% to $40.4 million during the second
quarter from $34.6 million in the comparable quarter of 1997 primarily due to
the growth of the Company's investment portfolio. Total revenues for the
six-month period rose approximately 18% to $79.8 from $67.4 million in the
comparable period of 1997. The Company's primary source of revenue growth is
rental revenues generated by investments in restaurant properties. As a result
of the Company's 1997 expansion into the financing of convenience stores and
the automotive services and parts industry, 66% of the new investments during
1998 were made in the restaurant industry, 28% in convenience stores and 6% in
the automotive services and parts industry. The Company believes that such
investment diversity is likely to continue.
Since the second quarter of 1997, FFCA made new investments in property
subject to operating leases of approximately $266 million, including $123
million in the second quarter of 1998. Weighted average base lease rates on new
investments rose to 10.4% in the first six months of 1998, as compared to 9.7%
for the comparable six-month period in 1997. Partially offsetting the rental
revenue increases generated by new investments were decreases in rental revenue
related to properties sold. Certain leases in the Company's portfolio provide
for contingent rentals based on a percentage of the gross sales of the related
restaurants. Such contingent rentals totaled $1.9 million in the second quarter
of 1998 as compared to $1.6 million in the comparable quarter of 1997.
Contingent rentals for the related six-month periods were $3.2 million in 1998
and $2.7 million in 1997. In May 1998, the Emerging Issues Task Force of the
Financial Accounting Standards Board reached a consensus on Issue 98-9 relating
to the accounting for contingent rent in interim financial periods. The
consensus requires that a lessor defer recognition of contingent rental revenue
in interim periods until the specified target that triggers the contingent
rental revenue is achieved. The implementation of this pronouncement did not
have a material impact on the results of operations for the quarter ended June
30, 1998. Future quarterly contingent rental revenues may be affected based on
the timing of the dates on which specified targets are achieved by FFCA's
lessees.
Mortgage interest income generated by the Company's loan portfolio totaled
$6.7 million for the quarter ended June 30, 1998 and $15.6 million for the six
months ended June 30, 1998. The majority of
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the mortgage interest income is generated by mortgage loans that are held for
sale. In 1997, mortgage investment activity was split between the Company and
an unconsolidated affiliate, FFCA Mortgage Corporation ("Mortgage Corp."). When
considered together, the mortgage interest income from the Company's direct
investments in mortgage loans and related party interest income from indirect
investments in mortgage loans (through Mortgage Corp.), totaled $6.5 million
and $12.3 million for the quarter and six months ended June 30, 1997,
respectively. Rates achieved on the loans originated during the first six
months of 1998 averaged 9% which is relatively unchanged from the rates
achieved during the first six months of 1997. Increases and decreases in
mortgage interest income between quarters has been, and will continue to be,
impacted by the amount of loans held for sale and the timing of the sale of
these loans through securitization transactions. Although the Company no longer
receives mortgage interest income from the mortgages it has sold, it retains
certain interests through the purchase of subordinated investment securities.
These securities generate revenues that are included in "Investment Income and
Other" in the Company's financial statements and represent the majority of the
increase in this income between years.
Expenses increased to $19 million during the quarter ended June 30, 1998
from $18.7 million in the comparable quarter of 1997 primarily due to an
increase in depreciation and amortization expense related to property purchases
in the past 12 months. Expenses increased to $39.9 million during the six
months ended June 30, 1998 from $35.5 million in the comparable period of 1997
due to an increase in interest expense, depreciation and amortization expense
and operating, general and administrative expenses. Interest expense rose $2.6
million due to the use of borrowings for investment in chain store properties.
The Company's outstanding borrowings averaged $570 million during the first six
months of 1998 as compared to $490 million during the first six months of 1997.
Operating, general and administrative expenses in the first six months of 1998
increased by $893,000 as compared to the same period in 1997. The increase is
primarily attributable to the addition of personnel and other resources devoted
to the expansion of FFCA's line of financial products. Also included in 1998 is
compensation expense representing the amortization over the five-year vesting
period of the market value of 29,886 shares of restricted stock granted in 1998
at $27.625 per share.
During the second quarter of 1998, the Company sold 12 properties (as
compared to 15 properties sold in the second quarter of 1997) and recorded net
gains totaling $820,000 on these sales, as compared to net gains of $3.2
million recorded in the second quarter of 1997. Cash proceeds from the sale of
property and from mortgage loan and note payoffs during the quarter, totaling
$11 million, were used to fund new investments. Year to date, such sales
totaled 22 properties, representing $19 million in cash proceeds.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1996 AND 1995. The Company had net income of $72.9 million ($1.76 per
share, assuming dilution) in 1997 as compared to $68.5 million ($1.69 per
share) in 1996 and income before an extraordinary loss on the retirement of
debt of $53.8 million ($1.33 per share) in 1995. Due to the continued growth in
the Company's portfolio, revenues rose to $135 million in 1997 from $121
million in 1996 and $103 million in 1995.
The Company's primary source of revenues continues to be rental revenues
generated by its portfolio of restaurant properties leased to restaurant
operators on a triple-net basis. Half of the increase in total revenues during
1996 and 1997 related to increases in rental revenues due to new investments.
New investments in property subject to operating leases totaled $140.2 million
in 1997, $128.7 million in 1996 and $143.3 million in 1995. Generally, property
purchases occur throughout the year, resulting in weighted average balances for
these new investments of $43 million in 1997 and $60 million in both 1996 and
1995. Weighted average base lease rates on the new investments were 9.3% in
1997 as compared to 10.5% in 1996 and 10.9% in 1995. While the average base
lease rates were down in 1997 from prior years, FFCA's cost of borrowings was
also lower. Partially offsetting the revenue increases generated by the new
investments were decreases in rental revenue related to properties sold and the
expiration of original equipment leases.
Certain leases in FFCA's portfolio provide for contingent rentals based on
a percentage of the gross sales of the related restaurants. Such contingent
rentals totaled $6.4 million in 1997 as compared to $5
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million in 1996 and $4 million in 1995. The increases relate primarily to
increases in individual restaurant-level sales volume and to lessees whose
sales levels have, for the first time, exceeded the threshold where contingent
rentals are due. The Company anticipates that, based on historical restaurant
sales growth, the contingent rental provision of the leases will continue to
provide increases in revenues in the near future.
During 1997, the Company and United Guaranty Commercial Insurance Company
of Iowa (which had provided rent guaranty insurance coverage on certain
properties) reached an agreement to settle all outstanding and future claims
which FFCA had under all rent guaranty policies still in effect. Over the last
three years, rent guaranty insurance revenue has dropped steadily from $3.3
million in 1995 to $1 million in 1997 due to expiring rent insurance policies.
A portion of FFCA's revenues relates to the origination and subsequent
sale of mortgage loans through securitization transactions. In order to
facilitate the loan origination and securitization process, the Company formed
Mortgage Corp. during 1996. This taxable affiliate was designed primarily to
originate mortgage loans held for sale. This affiliate originated mortgage
loans during 1996 and 1997; however, its financial statements are not
consolidated with FFCA and, accordingly, the mortgage interest income generated
by the loans originated by Mortgage Corp. are not reflected in the Company's
financial statements. During 1997, the loan origination process was transferred
to the Company's wholly-owned subsidiary, FFCA Acquisition Corporation, and by
the end of 1997 Mortgage Corp. was dissolved.
Mortgage interest income generated by FFCA's loan portfolio totaled $11
million in 1997, $15.7 million in 1996 and $14.1 million in 1995. Rates
achieved on the loans originated during 1997 averaged 9.2% as compared to 9.4%
achieved during 1996 and 10.9% in 1995. The average interest rates on the
Credit Agreement used to fund these new loans also reflected a decrease during
these periods. Increases and decreases in mortgage interest income between
years has been, and will continue to be, impacted by the amount of loans held
for sale and the timing of the sale of these loans through securitization
transactions. Although FFCA no longer receives mortgage interest income from
the mortgages it sold, it retains certain interests through the purchase of
subordinated investment securities as discussed below. These securities
generate revenues that are include in "Investment Income and Other" in the
Company's financial statements and represent the majority of the increase in
this income between years.
Certain mortgage loans originated by the Company, its predecessors and
affiliate totaling $261 million in 1997 and $179 million in 1996 were
securitized and Secured Franchise Loan Pass-Through and Trust Certificates were
sold to investors through a trust. Approximately 89% of the $261 million
securitized loan pool was sold to third parties in 1997. The Company holds
investments representing the remaining 11% of the mortgage loan pool balance.
In 1996, FFCA retained certain interests in approximately 12.5% of the $179
million securitized loan pool and also purchased the interest-only
certificates. These certificates, totaling $55.2 million and $29.7 million at
December 31, 1997 and 1996, respectively, generated $7.7 million and $2.7
million of revenue in 1997 and 1996, respectively. The subordinated investment
securities held by the Company 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 the Company; however, FFCA originates and services mortgage loans
and has the infrastructure in place to deal with potential defaults on the
securitized portfolio (as it does with the mortgage loans it holds for
investment). To date, there have been no defaults on the mortgage loans held in
either securitized loan pool. The Company also retained the servicing rights on
the mortgage loans it sold and the right to receive any participations based on
the gross sales of the related restaurant properties. Approximately $430,000
and $7.1 million of gain in 1997 and 1996, respectively, was generated by the
sale of mortgages in these securitization transactions. The gains recognized
represent the difference between the carrying amount of the mortgage loans sold
and their adjusted sales price. It also includes deferred gains recognized on
certain of the mortgages sold. The gains on the sale of the mortgage loans were
reduced by establishing reserves for estimated probable losses under the
subordination provisions of the securitization transactions.
The Company, as owner of all of the issued and outstanding nonvoting
preferred stock of Mortgage Corp., was entitled to receive 95% of all dividends
paid by Mortgage Corp. prior to its dissolution on
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December 31, 1997. At dissolution, cash dividends were paid to the common
stockholder and the remaining assets were distributed to the Company in
satisfaction of its note receivable from Mortgage Corp. The Company recorded
95% of Mortgage Corp.'s net income (loss) for 1997 and 1996 as "Equity in Net
Income (Loss) of Affiliate" in the accompanying financial statements. During
1996 and 1997, the Company provided Mortgage Corp. with a secured revolving
line of credit at a spread above the Company's borrowing rate. Interest income
generated on this line of credit totaled $9 million in 1997 and $2.9 million in
1996 and is reflected in revenues as "Interest (Related Party)" in the
Company's financial statements.
Expenses increased to $69.3 million in 1997 as compared to $61.1 million
in 1996 and $49.8 million in 1995, due primarily to an increase in interest
expense. Interest expense rose by $8.8 million in 1997 and $10.7 million in
1996 due to the use of borrowings for investments in chain store properties.
The Company's average debt balance increased to $470 million in 1997 from $335
million in 1996 and $175 million in 1995. Although the Company's average debt
balance has increased over the past two years, its overall cost of borrowings
has decreased. In February 1996, FFCA broadened its sources of capital by
issuing its first unsecured medium-term notes, which were six- and seven-year
obligations, totaling $60 million. In November 1996, the Company issued an
additional $40 million in unsecured notes due 2026, but callable by the holder
in the year 2004. The unsecured notes issued during 1996 carry a weighted
average interest rate of 6.98%. In October 1997, FFCA issued $10.15 million in
unsecured notes due 2007 at a rate of 6.86%. Proceeds from unsecured notes in
both years were used to pay down the Company's Credit Agreement. In December
1996, the Company amended its Credit Agreement with participating banks to,
among other things, decrease the interest rate by .5%. During 1997, the Credit
Agreement provided that the Company could borrow at rates that are
competitively bid among the participating banks. The changes in FFCA's debt
structure, together with an overall decrease in the interest rate environment,
reduced its effective borrowing rate from 7.82% during 1995 to 7.15% during
1996 and 6.93% during 1997.
Despite the growth in revenues of 32% from 1995 to 1997, operating,
general and administrative expense saw an increase of only 8% during this same
period. The slightly higher operating expenses in 1996 as compared to 1995
primarily related to a $1.4 million provision for loan loss created in 1996.
The overall increase in operating expenses resulted primarily from the addition
of personnel needed to increase the Company's investment origination and
servicing capacity. The Company's recent investments in computer system
technology has increased the efficiency of its information and portfolio
servicing systems, which enables FFCA to expend its revenue base while
containing operating costs.
At December 31, 1997, approximately three-fourths of the Company's land
and building leases provide for purchase options and approximately two-thirds
of these options are currently exercisable; however, only 12 properties were
sold through purchase options in 1997 and only 15 and 10 such properties were
sold in 1996 and 1995, respectively. Where applicable, the lessee also has the
option to purchase equipment at the end of the related equipment lease term,
although few of these options remain unexercised as of December 31, 1997.
Generally, the purchase options are exercisable at fair market value (but not
less than original cost in most cases). FFCA expects that the exercise of
purchase options will continue to be insignificant.
The Company recorded net gains of $5.5 million on the sale of property
during 1997 as compared to $9.9 million during 1996 and $977,000 in 1995.
Approximately $430,000 and $7.1 million of the total gains in 1997 and 1996,
respectively, were generated by the sale of mortgages in securitization
transactions. The remaining gains represent the net effect of gains and losses
from sales of property, which occur primarily through the lessee's exercise of
purchase options and through the disposition of underperforming properties.
During 1997, the Company sold 55 properties and related equipment as compared
to 79 properties sold in 1996 and 22 sold in 1995. In addition, during 1997,
FFCA had a $20 million mortgage payoff representing 60 restaurant properties.
There were more property sales in 1997 and 1996 as compared to 1995 due to the
Company's decision to sell certain underperforming properties where remarketing
efforts had failed to produce a suitable lessee.
The Company periodically reviews its real estate portfolio for impairment
whenever events or changes in circumstances indicate that the carrying amount
of the property may not be recoverable, such as may be the case with vacant
restaurant properties. If an impairment loss is indicated, the loss is measured
as the amount by which the carrying amount of the asset exceeds the fair value
of the asset.
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Gain on the sale of property on the consolidated statements of income for the
years ended December 31, 1997, 1996 and 1995 is net of approximately $1.9
million, $3.3 million and $3.4 million, respectively, of loss related to vacant
and underperforming properties. Vacant properties held for sale represented
less than 1% of FFCA's total real estate investment portfolio as of June 30,
1998.
BUSINESS AND PROPERTIES
BUSINESS OBJECTIVES AND STRATEGIES
FFCA seeks to enhance its operating performance and financial position by
pursuing the following business objectives and strategies:
UTILIZING CONSERVATIVE INVESTMENT STRUCTURING. FFCA structures its
investments to enhance the stability of its cash flows. FFCA structures triple
net leases in its sale-leaseback transactions, which provide that lessees are
responsible for the payment of all property operating expenses, including
property taxes, maintenance and insurance expenses. By structuring triple net
leases, FFCA avoids making significant capital expenditures with respect to
these properties. FFCA retains the leases in its sale-leaseback transactions in
its portfolio. The leases generally provide for base rentals plus additional
payments based upon specified contractual increases or a participation in the
gross sales from the properties. FFCA's lease and mortgage financings generally
have 20-year terms. FFCA usually pools and sells the mortgage loans it
originates in securitized offerings, and typically retains or acquires
interests in the pool in the form of subordinated securities, interest only
securities and mortgage servicing rights. Securities retained or acquired by
FFCA represented less than 6% of FFCA's total assets as of June 30, 1998.
APPLYING RESEARCH-DRIVEN UNDERWRITING. FFCA targets quality investments by
applying conservative, research-driven underwriting criteria designed to
evaluate risk and return indicators. Before underwriting a transaction, FFCA
thoroughly researches various factors, including: (i) chain store
profitability; (ii) chain store investment amount; (iii) site considerations;
(iv) market considerations; (v) operator experience; (vi) credit
considerations; (vii) physical condition; (viii) chain store suitability; and
(ix) environmental considerations.
FOCUSING ON EXPERIENCED MULTI-UNIT OPERATORS WITH BRAND NAME
FRANCHISES. FFCA seeks multi-unit operators conducting business under
nationally or regionally recognized brand names to operate the properties it
finances. As a result, FFCA believes it is able to achieve a better
risk-adjusted return for its shareholders. Generally, the operators include
both chain store franchisors and franchisees. Examples of well-known restaurant
chains in FFCA's portfolio include Applebee's, Arby's, Burger King, Chili's,
Denny's, Hardee's, Pizza Hut and Wendy's. Examples of well-known convenience
stores include Circle K, E-Z Serve, 7-Eleven and White Hen Pantry, and examples
of well-known automotive services and parts stores include Econo Lube N' Tune,
Midas and Checker Auto Parts.
MAINTAINING APPROPRIATE INFRASTRUCTURE TO ACTIVELY MANAGE PORTFOLIO. Since
1980, members of FFCA's management group have gained extensive experience in
the development and refinement of systems of operation, management and
research, which has enhanced FFCA's ability to identify, evaluate and structure
new investments as well as actively monitor and manage its investment
portfolio. FFCA's experience in the real estate industry results in in-house
efficiency with respect to virtually every aspect of real estate acquisition
and management. This efficiency is reflected in each of the Company's eight
departments, which include Accounting, Asset Management, Corporate
Communications, Corporate Finance, Information Systems, Legal Services,
Property Management and Research and Underwriting.
FFCA uses its infrastructure to continually monitor and administer its
investments to enhance the stability of its cash flows. In-house staff
regularly inspects FFCA's properties to monitor asset condition and collects
financial data on the properties to determine profitability. Asset Management
staff monitors payment receipts, as well as property tax and insurance
compliance. Lease and mortgage payments are generally collected by electronic
account debits on the first day of each month. Property Management and Legal
Services personnel administer underperforming and non-performing leases and
also supervise the in-house administration of property dispositions and tenant
substitutions. For the three years ended
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December 31, 1997 and the six months ended June 30, 1998, the occupancy rate
for FFCA's properties has been approximately 99%. FFCA has an established
record of resolving underperforming and non-performing leased assets and loans.
MINIMIZING INVESTMENT RISK THROUGH DIVERSIFICATION. In structuring its
portfolio, FFCA seeks diversification, which reduces risk and favorably impacts
its access to, and cost of, capital. Elements of FFCA's investment
diversification include:
-- Geographic Diversification. FFCA's portfolio is geographically diverse
with investments in properties located in 48 states, Washington, D.C.
and Canada as of June 30, 1998. The map on the inside front cover of
this prospectus supplement shows the location of properties in which
FFCA had an investment as of June 30, 1998.
-- Industry Sector Diversification. FFCA's portfolio continues to become
more diverse in terms of industry sectors, with interests in 2,600
chain restaurant properties, 465 convenience stores, 54 automotive
services and parts stores and 10 other retail properties as of June
30, 1998. Although FFCA intends to continue expanding in the
restaurant sector, it intends to increase industry sector
diversification by further expanding in the convenience store and
automotive services and parts store sectors.
-- Operator and Chain Diversification. FFCA's portfolio is diverse in
terms of operators and chains, with properties that were leased to, or
owned by, over 400 national and regional operating companies with no
single operator representing more than 10% of revenues for the three
months ended June 30, 1998. Multi-unit operators are the predominant
operators of FFCA's properties. Additionally, over 50 chains are
represented in FFCA's portfolio. As of June 30, 1998, approximately
83% of the properties financed by FFCA were chain restaurants
including Applebee's, Arby's, Black Eyed Pea, Burger King, Chili's,
Denny's, Fuddruckers, Hardee's, Jack in the Box, Kentucky Fried
Chicken, Mrs. Winner's, Pizza Hut, Taco Bell,Wendy's and Whataburger.
In addition, approximately 15% of FFCA's investments were in
convenience stores, including Circle K, E-Z Serve, 7-Eleven and White
Hen Pantry, and 2% were in automotive services and parts stores,
including Econo Lube N' Tune, Midas and Checker Auto Parts.
OFFERING OPERATORS ONE-STOP SHOPPING. FFCA provides its customers with a
variety of financing alternatives including sale-leaseback transactions,
mortgage loans, equipment loans, senior loans, participating mortgages and
construction loans. FFCA believes that offering its customers a "one-stop shop"
gives the Company a competitive advantage over traditional mortgage lenders and
other real estate financing companies. Additionally, the Company continuously
reviews other financing products that it may offer operators to further improve
the Company's competitive position.
MAINTAINING A CONSERVATIVE CAPITAL STRUCTURE. FFCA seeks to operate with a
moderate use of leverage and believes that its investments' stable, predictable
cash flows will permit it to continue obtaining attractive, debt and equity
financing. FFCA seeks to maintain a ratio of total indebtedness to total market
capitalization of not more than 40%. Based on debt outstanding on FFCA's
balance sheet as of June 30, 1998, and its closing stock price on September 30,
1998, FFCA's total indebtedness as a percentage of total market capitalization
was approximately 28.5%. Total indebtedness includes debt associated with
originating mortgages held for sale. FFCA intends to use the proceeds from
future mortgage securitizations to repay such debt. FFCA has successfully
removed debt from its balance sheet and recycled capital by securitizing
mortgages in its mortgage loan inventory. To date, FFCA has successfully
completed three mortgage securitizations: (i) a $178.8 million securitization
in 1996; (ii) a $260.8 million securitization in 1997; and (iii) a $335.3
million securitization in May 1998.
COMPETITIVE ADVANTAGES
The financing of real estate in the chain restaurant, convenience store
and automotive services and parts industries is both competitive and
fragmented, and competition exists in every geographic market in which the
Company seeks to invest. Other competing participants include banks, insurance
companies, finance companies, leasing companies, other real estate investment
trusts and other companies which
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specialize in the origination, financing and securitization of franchise loans.
The Company believes that its competitive advantages, which enable it to be
selective with respect to its real estate investments, include the following:
SIZE. FFCA believes that its position as the largest U.S. REIT providing
real estate financing to the chain restaurant, convenience store and automotive
services and parts industries, and its large market capitalization permit it to
make both large and small real estate investments and to obtain capital from
numerous sources at competitive rates.
DIVERSIFICATION. FFCA's real estate investments comprise properties that
are diversified by geographic location, industry sector, operator and chain. As
FFCA continues to grow and diversify, it anticipates that this diversification
will continue to reduce risk and have a favorable impact on the Company's
access to, and cost of, capital.
MARKET POSITION. FFCA, together with its predecessors, has established
itself as a leader in chain restaurant real estate investments since 1980. FFCA
has a "Preferred Client Program" designed to offer forward financing
commitments and a streamlined financing process for leading chain operators.
The Preferred Client Program emphasizes the building of long-term business
relationships instead of the historic industry practice of financing real
estate on an inefficient, transaction-by-transaction basis. FFCA believes that
it will continue to benefit in the future from these long established
restaurant industry relationships, which will result in new investment
opportunities.
SPECIALIZATION AND KNOWLEDGE. FFCA believes it offers superior client
service resulting from the continuity of its management and its industry
specialization and knowledge. FFCA has invested in the development of research
and a specialized information system which management believes enhances its
ability to identify, evaluate and structure potential investments.
FINANCING FLEXIBILITY. FFCA believes that its ability to provide customers
with a one-stop shopping source provides the Company with a competitive
advantage in obtaining financing opportunities.
INFORMATION SYSTEMS
To enhance its investment evaluation and origination, the Company has
invested extensively in information systems which are specific to the chain
restaurant industry. FFCA has also recently developed a competitive database,
similar to the restaurant industry database, for the convenience store and
automotive services and parts industry. The Company's databases with respect to
the chain restaurant industry include specific chain restaurant location data
for over 105,000 locations in the United States, and demographic information,
traffic volumes and information regarding surrounding retail and other
commercial development that generate customer traffic. FFCA also maintains a
database of approximately 7,000 chain restaurant industry participants, as well
as databases of restaurant-level financial performance for existing and
prospective clients. The Company has the ability to integrate the information
in its locations, participants and restaurant-level financial databases in a
geographic information system which contains demographic, retail space, traffic
count and street information for every significant market in the United States.
FFCA has also collected extensive data regarding management practices within
the chain restaurant industry, franchisor practices and industry trends.
The information collected by the Company is actively used to assess
investment opportunities, measure prospective investment risk, evaluate
portfolio performance and manage underperforming and non-performing assets.
FFCA publishes research on the chain restaurant industry which includes
observations of industry issues and trends, areas of growth, and the economics
of chain restaurant operation. It is also in the process of creating similar
reports for the convenience store industry and the automotive services and
parts industries. The Company employs its client and collections data, gathered
over a fifteen year period, to develop statistical models which aid in the
evaluation of potential investments. FFCA intends to continually develop,
improve and use its real estate industry knowledge through research and broader
application of information technology to lower portfolio risk, improve
performance and improve its competitive advantage.
The Company has internally developed portfolio management systems suited
to its specialized focus on the financing of chain stores. As a result of the
development by FFCA of its automated systems
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technology, the Company can monitor issues associated with large diversified
portfolios, including lease and mortgage payments made through automated bank
account debits, property taxes, property insurance coverage and property
financial performance.
INVESTMENT CRITERIA
Real estate investment opportunities undergo an underwriting process
designed to maintain a conservative investment profile. The process includes a
review of the following factors:
CHAIN STORE PROFITABILITY. FFCA seeks to invest in chain store real estate
where the unit level economics from operations provide adequate cash flow to
support lease or mortgage payments related to the site.
CHAIN STORE INVESTMENT AMOUNT. FFCA seeks to invest in properties for
amounts that do not exceed the sum of the fair market value of the land and the
replacement cost of the buildings and improvements thereon.
SITE CONSIDERATIONS. FFCA seeks to invest in high profile, high traffic
real estate which it believes exhibits strong retail property fundamentals.
MARKET CONSIDERATIONS. FFCA seeks to emphasize investments in properties
used by chains having significant market area penetration.
OPERATING EXPERIENCE. FFCA seeks to invest in properties of multi-unit
chain store operators with strong operating and industry backgrounds.
CREDIT CONSIDERATIONS. FFCA seeks to invest in properties owned and
operated by multi-unit operators with strong, overall corporate profitability.
FFCA's investments generally have full tenant or borrower recourse. Many of the
Company's leases and mortgages also have recourse to guarantors who are owners
or affiliates of the tenant or borrower. FFCA reviews tenant, borrower and
guarantor financial strength to assess the availability of alternate sources of
payment in the event that cash flow from operations might be insufficient to
provide the funds necessary to make lease or mortgage payments. In general, the
Company requires all properties that are leased to the same multi-unit chain
store operator or its affiliates to be cross-defaulted and requires all
mortgage loans that are made to the same multi-unit operator or its affiliates
to be both cross-collateralized and cross-defaulted.
PHYSICAL CONDITION. FFCA seeks to invest in well-maintained existing
properties or in newly constructed properties. Each property financed by the
Company is subject to a physical site inspection, the majority of which are
conducted by the Company's staff of appraisal professionals.
CHAIN STORE SUITABILITY. FFCA seeks to primarily invest in real estate
utilized by large national and regional chain store systems having annual
system-wide sales of more than $250 million.
ENVIRONMENTAL CONSIDERATIONS. For each property in which it invests, other
than certain properties FFCA acquired from its predecessors in 1994, FFCA
either obtains a Phase I environmental assessment (and a Phase II environmental
assessment or other environmental tests, if recommended by the related Phase I)
or an environmental insurance policy from a third-party insurance carrier.
PROPERTIES
PROPERTY CHARACTERISTICS. FFCA provides financing to the chain restaurant
industry as well as the convenience store and automotive services and parts
store industries primarily through sale-leaseback and mortgage loan financing
transactions. At June 30, 1998, FFCA had interests in 3,129 properties
consisting of investments in 2,600 chain restaurants, 465 convenience stores,
54 automotive services and parts stores and 10 other retail properties. FFCA's
portfolio included 1,734 properties represented by investments in real estate,
269 properties represented by investments in mortgage loans and 1,126
properties represented by securitized mortgage loans in which FFCA held a
residual interest. FFCA also held title to the equipment on approximately 5% of
these properties at June 30, 1998. The real estate owned by FFCA consists of
the land and buildings comprising each chain property, except for 120
properties at June 30, 1998 on which FFCA holds title to the land only and made
mortgage loans for the related buildings. The properties and land owned by FFCA
are leased to the chain operators under long-term triple net leases.
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FFCA's chain store properties are typically located in areas with
significant automobile traffic and are characterized by high visibility and
easy access required for retail properties. Locations generally fall into five
categories: (i) shopping center and mall pad or outparcel sites; (ii)
interstate highway locations; (iii) central business district locations; (iv)
residential neighborhood locations; and (v) retail and commercial corridor
locations. A chain store is located on each of the properties except for 10 of
the properties which were converted into other retail uses. Chain properties
generally have standard configurations which conform to each chain's
specifications. Generally, all properties owned or financed by FFCA are free
standing and surrounded by paved parking areas. Buildings are typically
constructed using various combinations of stucco, steel, wood, brick and tile.
The land size for a typical fast food restaurant generally ranges from
30,000 to 40,000 square feet, with land acquisition costs generally ranging
from $200,000 to $400,000. Fast food restaurant buildings generally range from
1,500 to 4,000 square feet in size, with the larger stores having a greater
seating capacity and equipment area. Site preparation costs vary depending on
the area in which the fast food restaurant is located, the size of the building
and the size of the site. Building and site preparation costs generally range
from $250,000 to $700,000 for each property. Land size for full service
restaurants generally ranges from 40,000 to 80,000 square feet and land
acquisition costs generally range from $500,000 to $900,000. Full service
restaurant buildings range from 5,000 to 9,000 square feet in size and from
$750,000 to $1.2 million in building acquisition costs.
Convenience store sizes range from 800 square feet for a gas station with
a store that sells only the fast moving items found in a traditional
convenience store (tobacco, beverages and snacks) to 5,000 square feet for a
store that offers services such as a bakery, a sit down restaurant area or a
pharmacy (many of these locations also sell gasoline). The typical convenience
stores generally range in size from 2,000 to 3,000 square feet. In 1997, the
original investment per new store averaged $1 million for a rural convenience
store and $1.2 million for an urban convenience store.
Automotive services and parts stores range in size depending on the type
of store. Automotive parts store buildings generally range from 6,000 to 9,000
square feet with total original acquisition costs ranging from $800,000 to $1.8
million. Quick lube buildings are typically 2,500 square feet and are on 17,000
to 25,000 square feet of land. Most are located within shopping centers and
have two to six bays, with total acquisition costs ranging between $500,000 and
$700,000. Combination specialty stores (offering brakes, mufflers, lube, etc.)
are typically free standing, drive-through buildings generally ranging from
2,200 and 3,400 square feet on a lot or shopping center pad of approximately
15,000 to 25,000 square feet. Total acquisition costs range from $550,000 to
$900,000.
FFCA's lease and mortgage financing documents require each chain store
operator to make any expenditures necessary to comply with applicable laws and
any applicable franchise agreements. Therefore, FFCA is generally not required
to make significant capital expenditures in connection with
any property it finances. Capital expenditures amounted to approximately
$120,000 for the six months ended June 30, 1998. There were no capital
expenditures on properties in 1997 and $16,000 in capital expenditures in 1996.
Approximately 70% of revenues for the six months ended June 30, 1998 were
derived from net lease equity real estate investments. The leases are generally
twenty years in length and have been originated by the Company and its
predecessors since May 1981. The expiration schedule of the initial term of the
Company's leases extends through 2018, with a weighted life of such investments
of 12.4 years as of June 30, 1998. Approximately 13.3% of the Company's lease
revenues are derived from leases which expire in 2005. In all other years, the
lease expirations are less than 10% of total lease revenues.
As of June 30, 1998, all but 11 of the Company's 3,129 properties were
performing under a lease or a mortgage loan agreement. All of the nonperforming
properties are currently held for sale after extensive efforts to remarket
these properties did not produce suitable lessees. Vacant properties held for
sale represent less than 1% of FFCA's total real estate investment portfolio.
GEOGRAPHIC DIVERSIFICATION. FFCA's portfolio is geographically diverse. As
of June 30, 1998, the Company had investments in 3,129 chain properties in 48
states, Washington, D.C. and Canada. The Company's investments, based upon
property revenues for the period from January 1, 1998 to June 30,
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1998, were located in the South (39% of such revenue), the East (23% of such
revenue), the Midwest (22% of such revenue) and the West (16% of such revenue).
Particular states of concentration include Texas (11% of such revenue), Florida
(8% of such revenue), Georgia (7% of such revenue) and California (7% of such
revenue). No other state comprises more than 5% of such revenue.
A map illustrating geographic distribution of the Company's real estate
investments is included in the inside front cover page of this Prospectus
Supplement. The following table sets forth certain information regarding the
diversification of the Company's real estate investments by geographic region:
GEOGRAPHIC DIVERSIFICATION
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
TOTAL PERCENT OF NUMBER OF PERCENT OF
REGION REVENUES(1) TOTAL REVENUES PROPERTIES TOTAL PROPERTIES
- ------ ----------- -------------- ---------- ----------------
EAST
Mideast............... $ 5,815 15% 558 18%
Northeast............. 2,991 8 363 12
MIDWEST
East North Central.... 5,692 15 423 13
West North Central.... 2,907 7 216 7
SOUTH
Southeast............. 9,258 23 742 24
Southwest............. 6,458 16 454 14
WEST
Mountain.............. 3,136 8 197 6
Pacific............... 3,240 8 173 6
CANADA................. 19 -- 3 --
------- --- ----- ---
$39,516 100% 3,129 100%
======= === ===== ===
- ------------
(1) Total revenues does not include other miscellaneous income.
INDUSTRY SECTOR DIVERSIFICATION. FFCA's portfolio continues to become more
diverse in terms of industry sectors, with interests in 2,600 chain restaurant
properties, 465 convenience stores, 54 automotive services and parts stores and
10 other retail properties as of June 30, 1998. Chain restaurant properties
represented 83% of the Company's investments as of June 30, 1998, as compared
to over 99% of the Company's investments as of December 31, 1996. Although FFCA
intends to continue expanding in the restaurant sector, FFCA intends to
increase industry sector diversification by further expanding in the
convenience store and automotive services and parts store sectors. The
following table sets forth certain information regarding the diversification of
the Company's real estate investments among different industry sectors:
INDUSTRY SECTOR DIVERSIFICATION
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
TOTAL PERCENT OF NUMBER OF PERCENT OF
SECTOR REVENUES(1) TOTAL REVENUES PROPERTIES TOTAL PROPERTIES
- ------ ----------- -------------- ---------- ----------------
Restaurant.............. $36,253 92% 2,600 83%
Convenience Stores...... 2,696 7 465 15
Automotive Services
and Parts.............. 439 1 54 2
Other................... 128 -- 10 --
------- --- ----- ---
Total .............. $39,516 100% 3,129 100%
======= === ===== ===
- ------------
(1) Total revenues does not include other miscellaneous income.
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OPERATOR AND CHAIN DIVERSIFICATION. FFCA's portfolio is diverse in terms
of operators and chains with investments that were leased to, or owned by, over
400 national and regional operating companies as of June 30, 1998. Multi-unit
operators are the predominant operators of FFCA's investments. Additionally,
approximately 50 chains are represented in the properties. Management
anticipates the Company's portfolio will continue to become more diverse in
terms of operators and chains as a result of future financings. The following
table sets forth certain information regarding the diversification of the
Company's real estate investments by chain:
CHAIN DIVERSIFICATION
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
TOTAL PERCENT OF NUMBER OF PERCENT OF
CHAIN(1) REVENUES(2) TOTAL REVENUES PROPERTIES TOTAL PROPERTIES
- -------- ----------- -------------- ---------- ----------------
Burger King ............. $ 6,592 16.7% 400 12.8%
Arby's .................. 4,450 11.3 340 10.9
Wendy's ................. 3,255 8.2 185 5.9
Hardee's ................ 3,250 8.2 361 11.5
Jack in the Box ......... 3,104 7.9 171 5.5
Taco Bell ............... 1,477 3.7 90 2.9
Kentucky Fried Chicken... 1,451 3.7 113 3.6
E-Z Serve(3) ............ 1,404 3.6 148 4.7
Pizza Hut ............... 1,291 3.3 187 6.0
Applebee's .............. 1,277 3.2 46 1.5
Black Eyed Pea .......... 911 2.3 34 1.1
Circle K(3) ............. 892 2.3 83 2.7
Fuddrucker's ............ 853 2.2 26 0.8
Perkin's ................ 742 1.9 36 1.2
Chili's ................. 690 1.7 25 0.8
White Hen Pantry(3) ..... 676 1.7 45 1.4
7-Eleven(3) ............. 650 1.6 59 1.9
Quincy's ............... 607 1.5 97 3.1
Lee's Famous Recipe ..... 560 1.4 38 1.2
Mrs. Winner's ........... 424 1.1 76 2.4
Whataburger ............. 422 1.1 26 0.8
Max & Ermas ............. 396 1.0 8 0.3
Denny's ................. 366 0.9 19 0.6
Fazoli's ................ 348 0.9 25 0.8
Popeyes ................. 318 0.8 25 0.8
Bojangles ............... 271 0.7 16 0.5
TGIF .................... 231 0.6 6 0.2
Black Angus ............. 209 0.5 4 0.1
Other(4) ................ 2,399 6.0 440 14.0
------- ----- ----- -----
Total ................ $39,516 100.0% 3,129 100.0%
======= ===== ===== =====
- ------------
(1) The chain distribution shown does not represent concentration of specific
operators under lease or mortgage loan agreements. These agreements are
with the operators, not the chains. The names of the concepts are a
trademark or service mark of their respective owners.
(2) Total revenues does not include other miscellaneous income.
(3) Represents convenience store properties.
(4) Includes all automotive services and parts stores.
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RTM, Inc. and its affiliates, which together are the largest franchisee of
Arby's restaurants and the owner and franchisor of the Mrs. Winner's and Lee's
Famous Recipe concepts, contributed 9.0% of the Company's total rental and
mortgage loan interest revenues during 1997 and 9.5% for the three months ended
June 30, 1998 (of which approximately 3% is guaranteed by Arby's, Inc. and
Triarc Companies, Inc.). RTM, Inc. accounted for 8.2% and 8.0% of the Company's
total rental and mortgage loan interest revenues during 1996 and 1995,
respectively. Foodmaker, which predominantly operates Jack in the Box
restaurants, contributed 9.6% of the Company's total rental and mortgage loan
interest revenues (generated from its investment portfolio) during 1997 and
7.8% for the three months ended June 30, 1998. Foodmaker accounted for 10.9%
and 12.5% of the Company's total rental and mortgage loan interest revenues
during 1996 and 1995, respectively.
COMPOSITION OF INVESTMENTS. As of June 30, 1998, approximately 78% of the
Company's investments were in fee-owned properties subject to lease agreements,
with the remainder in mortgages, securitized mortgage loans, equipment, senior
debt and lines of credit as set forth in the following table:
TOTAL INVESTMENT MIX
AS OF JUNE 30, 1998
(DOLLARS IN THOUSANDS)
Percent of
Gross Investment Total Investments
---------------- ------------------
Real estate investments, at cost .......... $1,106,244 78%
Mortgage loans held for securitization .... 167,836 12%
Subordinated securities in securitized
mortgage loan pools ...................... 75,599 5%
Mortgage loan investments ................ 46,298 3%
Other investments ......................... 32,144 2%
----------- ----
Total .................................. $1,428,121 100%
=========== ====
THE FOOD SERVICE INDUSTRY
The food service industry, as defined by the U.S. Department of Commerce,
is one of the largest sectors of the nation's economy. During 1997, the
industry generated an estimated $321 billion of revenue, representing over 4%
of the Gross Domestic Product of the United States. The food service industry
grew at an estimated inflation-adjusted rate of 1.7% during 1997, representing
the sixth consecutive year of real sales growth for the industry.
The food service industry is composed of three major food segments:
commercial, institutional and military. The commercial food service sector
includes full service and fast food restaurants, cafeterias/buffet restaurants,
social caterers and ice cream/yogurt retail stores. Within the restaurant
industry, the fast food group is typically defined as those restaurants
perceived by consumers as fast food or take-out establishments without table
service, specializing in pizza, chicken, hamburgers and similar food items.
Full service includes those restaurants in the family, steak and casual dining
sections that do not meet the criteria for fast food. Although these segments
can be further differentiated by price, it is consumer perception, as well as
average meal price, that influences how individual restaurant chains are
categorized. Research indicates that an average fast food meal price
approximates $5, while full service meal price averages between $7 and $15.
Sales in the restaurant industry have increased by $59 billion from 1986
to 1996, while total expenditures on food and beverages everywhere have
increased only $55 billion. This implies that full service and fast food
restaurants have actually taken business away from grocery and other retail
outlets, which saw revenues from food as a percent of total revenues decrease
from 1986 to 1996.
The Company believes that the restaurant industry will continue to
experience consolidation, as the largest chains become increasingly dominant in
an industry where cost control and economies of scale are critical. During the
past decade, restaurant chains have increased market position in comparison to
independent restaurant companies by achieving economies of scale and by
developing strong brand equity. Much of the chains' market share gains in the
past came at the expense of small, independent
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operators, who tended to be less sophisticated and less focused on new
restaurant development. The top chains may face greater chain-versus-chain
competition, however, rather than chain-versus-independent competition.
During 1997, the fast food segment in the top 100 restaurant chains
accounted for an estimated 70.5% of total sales and 84.8% of total units. As a
result, FFCA's restaurant portfolio consists primarily of fast food concepts.
Successful fast food operators have developed a low-cost structure, through a
focus on efficient meal preparation processes and a strong retail distribution
network that provides convenient, quality meals at affordable prices.
Successful fast food operators have relatively simple operations, which
contribute to their success as low-cost providers. Fast food operators can
differentiate themselves from the competition through marketing efforts,
increasing productivity by training employees and upgrading technology, and
simplifying instore processes.
During 1996 and 1997, the top 100 restaurant chains reported average
annual systemwide new store development of 4.3%. The top 100 chains added 4,879
net new properties during 1997 compared to 6,028 in 1996. Restaurant industry
maturing has resulted in a slow relative pace of new store development. As a
result, FFCA principally finances existing properties rather than new
construction. In recent years, investments in newly constructed restaurants
have been a small percentage of new business for the Company. In 1997 and 1996,
the percentage of the Company's new business related to existing restaurants
(as compared to new restaurant construction) was 93% and 85%, respectively.
CHAIN RESTAURANT INDUSTRY
According to NPD Recount, a national consulting group which specializes in
the restaurant industry, restaurant chains having three or more properties
accounted for approximately 47% of all restaurants in the United States in
1997. The majority of these properties are fast food restaurants, with others
generally in the full service segment. Of the 210,000 chain restaurants having
an identified restaurant concept as of December 31, 1997, approximately 117,500
were within the 100 largest restaurant chains. Each of these restaurant chains
had 1997 projected total system-wide sales exceeding $174 million.
The Company believes that the largest national restaurant chains, along
with prominent regional chains, are best positioned to compete effectively and
retain or increase market share in the food service industry. These chains have
strong regional or national presence, which provide them with a brand equity
which translates into resilience within a mature and competitive industry.
Accordingly, the Company believes that a diversified portfolio of real estate
investments primarily centered in major restaurant chains will lower investment
risk. Restaurant chains with numerous corporate locations and extensive
franchisee networks have effectively become significant food distribution
systems with distinct competitive advantages over smaller chains and many
independent restaurant operators. The establishment of such food distribution
networks requires significant time and effort which results in certain
restaurant chains having longer-term track records and more predictable
performance patterns. This has resulted in the larger restaurant chains gaining
greater dominance in the industry and growth in market share. However, the
chain restaurant industry is a regional market type of business and nationally
prominent restaurant chains often have definitive regional areas of strength
and weakness. Therefore, the Company's investment policy emphasizes strong
restaurant operators who can successfully manage known restaurant chains in
their markets and also takes into account the strength of specific restaurant
chains.
THE CONVENIENCE STORE INDUSTRY
The convenience store industry is a subset of two major industries: the
food industry and the oil and gas industry. The convenience store portion of
the sector evolved primarily out of neighborhood grocery stores, while the
retail gas portion is a relatively small part of the large oil and gas
industry, which also includes exploration and production of both oil and gas,
refining, and transportation as well as retail sales.
Convenience store sales have increased every year since the National
Association of Convenience Stores started tracking industry sales in 1971.
Industry sales in 1997 were $156.2 billion, 46.4% in merchandise sales and
53.6% in gasoline sales. Because of gasoline margin volatility and pending
tobacco legislation, many petroleum marketers have added or are adding
convenience stores and other ancillary services to their businesses, such as
car washes, lube shops, and fast food stores to contribute more consistent
margins.
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Operators are closing older and underperforming gasoline stations because
of three factors: (i) costs associated with underground storage tank upgrades
to be in compliance by a December 1998 regulatory deadline; (ii) increased
costs of doing business; and (iii) low margins. The net effect on the industry
is a decrease in the number of gasoline stations and an increase in both the
number of convenience stores with gasoline and the number of gasoline
dispensers available per location, reflecting the increase in both the gasoline
demand and average station size. The number of convenience stores increased
1.6% in 1997 to 95,700, while the number of gasoline stations declined 1.2%
between mid-1996 and mid-1997.
Gasoline prices have decreased in recent months and retail margins have
been squeezed. Over the past twelve months, price decreases have been
attributable to a warm winter, lower demand in Asia, and increased production
from OPEC as well as non-OPEC entities. However, the lower gasoline prices have
caused some drivers to use a better grade of gasoline, providing higher
margins. The Energy Information Agency forecasts a 3% increase in gasoline
demand in 1998 and that retail prices should remain depressed as well.
Increased competition, margin volatility, and the increased cost of doing
business are expected to fuel further consolidation in the industry. To improve
refining, transportation and marketing (downstream) margins, several major oil
companies have merged downstream operations. In addition, mergers and
acquisitions are occurring among traditional convenience store chains. Many
chains are closing unprofitable locations and re-focusing on core markets,
divesting locations outside their core area. The largest North American
convenience store chains are adding more units, with the top 10 adding 1,452
convenience stores in 1997 and the top 50 adding 781 convenience stores in
1997. Nine of the top 10 chains are petroleum marketers, which also dominate
the top 50, operating approximately 60% of all outlets held by the top 50
companies.
AUTOMOTIVE SERVICES AND PARTS INDUSTRY
The automotive services and parts industry refers to companies engaged in
the service, repair, maintenance and sale of products for motor vehicles after
their sales to the public. Basic categories in the automotive aftermarket
include parts and services. The parts sector is comprised of accessories and
replacement parts, while the services sector includes fluids, under the car,
under the hood, tires, autobody, and various combinations of these services.
Competitors in the automotive aftermarket include automotive dealerships, parts
stores, full service gasoline stations, general repair garages, tire outlets,
discounters and mass merchandisers, and specialty shops (mufflers, tune-ups,
transmissions, paint and bodywork, fast lube oil changes and auto glass). While
some companies adopt a single service/product line approach, others have
expanded to multiple lines.
The 1997 automotive aftermarket reached $136.7 billion in sales, a 3.3%
increase over 1996 according to the Lang Marketing Resources, an acknowledged
industry expert. Purchased services, i.e. all labor costs (not including parts)
paid by end users, totaled $36.0 billion, or 26.3% of the automotive
aftermarket, a 4.1% increase over 1996. Car products accounted for 30.4% of the
automotive aftermarket, down from 31.6% in 1996; truck products exceeded car
products for the second year at 35.5% of the automotive aftermarket and other
products accounted for 7.8% of the automotive aftermarket.
Products do not include autobody parts, crash parts, audio equipment,
sound accessories, fuel, tires, wheels, and other miscellaneous accessories.
Do-it-yourselfers (DIY) purchased $19.3 billion in car and truck aftermarket
products in 1997, a 6% increase over 1990. On the contrary, purchased services
have increased nearly 80% between 1987 and 1997, totaling $36 billion in 1997.
The implications are that purchased services is a growth area and DIY products
sales (sold at auto parts stores) is mature.
The growth in the Do-it-for-me sector is attributed to two-income families
with increased time pressures, a general increase in consumer demand for
convenience, an increase in the number of foreign vehicles, emissions testing
requirements, increased vehicle sophistication, decreasing blue collar jobs,
and most importantly, aging baby boomers with disposable income. The last
trend, aging baby boomers, is expected to continue to drive growth in this
sector into the next century. In recent years, specialty shops began to
franchise and rapidly expand, which is expected to continue.
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Many of these chains are growing by acquisition of smaller, independent
operators. Lube chains have been pursuing franchisees of other brands to join
with them. The industry growth rate for fast lube services was 7.5% between
1996 and 1997. The top 10 fast lube chains account for over 33.4% of all fast
lube outlets and an estimated 12.4% of all stores that change oil. The
anticipated 1998 growth rate for the top 10 lube chains is 20.5%.
Specialty repair shop share of the car and light truck service market grew
from 12.6% in 1986 to 20.5% in 1997. Between 1993 and 1997, product sales
growth for specialty repair shops was 46.9%. Specialty repair shops captured an
18% share of service bays in 1997, increasing their number of bays 18.5%
between 1987 and 1997, while the number of bays operated by service stations
and garages and vehicle dealers decreased significantly, 20.1% and 10.4%
respectively, during the same period. Service bays are handling more vehicles,
approximately 160 vehicles per service bay in 1997 (up from 126 in 1987), and
are estimated to grow to 175 by the year 2002.
Auto parts retail chains, servicing the DIY customer, have experienced
rapid consolidation as small regional chains sell stores to larger chains. A
positive factor for this sector is that the average age of vehicles is
increasing, while new car prices continue to climb. Aiding the overall industry
is an increase in the average number of miles driven annually, an increase in
the number of drivers, and closure of full service gas stations. However, with
the advent of vehicles that can drive 100,000 miles before a tune-up and
generally improved product quality, product sales are not likely to see major
increases in the next few years. Retail auto parts stores sell 38% of DIY
customer purchased products. The number of retail auto parts stores increased
21.9% between 1990 and 1997 to 13,320, and is expected to increase to nearly
16,000 stores by the year 2000, a 20.1% increase over the 1997 count. The top
10 parts retailers accounted for over 41.9% of auto parts stores and
experienced a 9.3% increase in outlets between early 1996 and year-end 1997.
REGULATION
FFCA, through its ownership and financing of real estate, is subject to a
variety of environmental, health, land-use, fire and safety, and other
regulation by federal, state and local governments that affects the development
and regulation of chain store properties. The Company's leases and mortgage
loans impose the primary obligation for regulatory compliance on the operators
of the chain store properties. Subject to the environmental discussion below,
in most instances, the Company does not have primary responsibility for
regulatory compliance and any obligation of the Company would be based upon the
failure of chain store operators to comply with applicable laws and
regulations.
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of
removal or remediation of certain hazardous substances released on or within
its property. Such liability may be imposed without regard to whether the owner
or operator knew of, or caused the release of, the hazardous substances. In
addition to liability for cleanup costs, the presence of hazardous substances
on a property could result in the owner or operator incurring liability as a
result of a claim by an employee or another person for personal injury or a
claim by an adjacent property owner for property damage.
The Company has performed environmental assessments or obtained
environmental insurance on each property acquired or financed by the Company
since 1994. Properties acquired from the Company's predecessors, accounting for
28% of the Company's properties, did not have environmental audits performed
either at the time the Company acquired the properties from its predecessors or
when such properties were acquired by such predecessor entities. FFCA is not
currently a party to any litigation or administrative proceeding with respect
to any property's compliance with environmental standards. Furthermore, the
Company is not aware of nor does it anticipate any such action, or the need to
expend any of its funds in the foreseeable future in connection with its
operations or ownership of existing properties which would have a material
adverse effect upon the Company.
INSURANCE
Management believes that all of FFCA's properties are covered by adequate
comprehensive liability, fire, flood and extended loss insurance provided by
reputable companies, with commercially reasonable
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and customary deductibles and limits. Certain types and amounts of insurance
are required to be carried by each operator under the financing agreements with
the Company. There are, however, certain types of losses (such as from wars or
earthquakes) that may be either uninsurable or not economically insurable in
some or all locations. An uninsured loss could result in a loss to the Company
of both its capital investment and anticipated profits from the affected
property.
LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business.
MANAGEMENT AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company are:
NAME OFFICE AGE
---- ------ ---
Morton H. Fleischer ........ Director, Chairman of the Board, President 61
and Chief Executive Officer
John R. Barravecchia ....... Executive Vice President, Chief Financial 43
Officer, Treasurer and Assistant Secretary
Christopher H. Volk ........ Executive Vice President, Chief Operating 42
Officer, Secretary and Assistant Treasurer
Dennis L. Ruben ............ Executive Vice President, General Counsel 45
and Assistant Secretary
Stephen G. Schmitz ......... Executive Vice President, Chief Investment 44
Officer and Assistant Secretary
Catherine F. Long .......... Senior Vice President--Finance, Principal 42
Accounting Officer, Assistant Secretary and
Assistant Treasurer
Robert W. Halliday ......... Director and Chairman Emeritus of the Board 78
Willie R. Barnes ........... Director 66
Kelvin L. Davis ............ Director 34
William C. Foxley .......... Director 63
Donald C. Hannah ........... Director 66
Dennis E. Mitchem .......... Director 67
Louis P. Neeb .............. Director 59
Kenneth B. Roath ........... Director 62
Wendell J. Smith ........... Director 66
Casey J. Sylla ............. Director 55
Shelby Yastrow ............. Director 62
The following is a description of the name, principal occupation or
employment during the past five years and other directorships of the directors
and executive officers of the Company:
MORTON H. FLEISCHER has served as a director of the Company since June 22,
1993. Mr. Fleischer is also Chairman of the Board, President and Chief
Executive Officer of the Company. Mr. Fleischer previously served as the
President, Chief Executive Officer and director of Franchise Finance
Corporation of America I, a Delaware corporation ("FFCA I") (a predecessor
corporation of the Company), since its formation in 1980. Mr. Fleischer acted
as an individual general partner (or general partner of the general partner) of
the eleven public limited partnerships that were consolidated to form the
Company in 1994. In addition, he is a general partner (or general partner of
the general partner) in the following public limited partnerships whose
investments are set forth in parentheticals: Participating Income Properties
1986, L.P. (travel plazas); Participating Income Properties II, L.P. (travel
plazas); Participating Income Properties III Limited Partnership (travel
plazas); and Scottsdale Land Trust Limited Partnership (commercial land
development).
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JOHN R. BARRAVECCHIA is Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary. Mr. Barravecchia has served as an executive
officer of the Company since June 1, 1994. Mr. Barravecchia previously served
as Senior Vice President, Chief Financial Officer and Treasurer of the Company
from June 1, 1994 until July 28, 1995, and as Senior Vice President of FFCA I
from October 1989 until June 1, 1994. Prior to joining FFCA I in March 1984,
Mr. Barravecchia was associated with the international public accounting firm
of Arthur Andersen.
CHRISTOPHER H. VOLK is Executive Vice President, Chief Operating Officer,
Secretary and Assistant Treasurer. Mr. Volk has served as an executive officer
of the Company since June 1, 1994. Mr. Volk previously served as Senior Vice
President-Underwriting and Research of the Company from June 1, 1994 until July
28, 1995, and as Vice President-Research of FFCA I from October 1989 until June
1, 1994. Mr. Volk is a member of NAREIT and has served as co-chair of its
Public Relations Committee.
DENNIS L. RUBEN is Executive Vice President, General Counsel and Assistant
Secretary. Mr. Ruben has served as an executive officer of the Company since
June 1, 1994. Mr. Ruben served as Senior Vice President and General Counsel of
the Company from June 1, 1994 to January 28, 1997. Mr. Ruben previously served
as an attorney and counsel of FFCA I from March 1991 until June 1, 1994. Prior
to joining FFCA I, Mr. Ruben was a partner with the national law firm of Kutak
Rock.
STEPHEN G. SCHMITZ is Executive Vice President, Chief Investment Officer
and Assistant Secretary. Mr. Schmitz has served as an executive officer of the
Company Since May 31, 1995. Mr. Schmitz served as Senior Vice
President-Corporate Finance from June 1, 1994 to January 28, 1997. Mr. Schmitz
previously served as Senior Vice President of the Company and served in various
positions as an officer of FFCA I from 1986 to June 1, 1994.
CATHERINE F. LONG is Senior Vice President-Finance, Principal Accounting
Officer, Assistant Secretary and Assistant Treasurer. Ms. Long has served as an
executive officer of the Company since June 1, 1994. Ms. Long served as Vice
President-Finance of the Company from June 1, 1994 to January 28, 1997. Ms.
Long previously served as Vice President-Finance of FFCA I from June 1990 until
June 1, 1994. From 1978 to May 1990, Ms. Long was associated with the
international public accounting firm of Arthur Andersen.
ROBERT W. HALLIDAY is a director and Chairman Emeritus of the Board of the
Company. Mr. Halliday has been with the Company since June 22, 1993. Mr.
Halliday previously served as the Chairman of the Board of the Company since
its organization and of the FFCA I since its formation in 1980. He has served
as a director of several publicly held American and Canadian companies,
including Great Pacific Corporation, Mitchell Energy & Development Corporation,
Boise Cascade Corporation and Jim Pattison Enterprises.
WILLIE R. BARNES is a director of the Company. Mr. Barnes has been with
the Company since March 14, 1995. Mr. Barnes is a corporate and securities law
attorney. Mr. Barnes has been a partner in the law firm of Musick, Peeler &
Garrett since June 1992. He was a partner in the law firm of Katten, Muchin
Zavis & Weitzman from March 1991 to January 1992. He is a member of the
Business Law Section of the American Bar Association, in addition to other
committees. Mr. Barnes was appointed as the Commissioner of Corporations for
the State of California in 1975 and is a member of the California Senate
Commission on Corporate Governance, Shareholder Rights and Securities
Transactions. He is currently a director and secretary of American Shared
Hospital Services.
KELVIN L. DAVIS is a director of the Company. Mr. Davis has been with the
Company since March 13, 1998. Mr. Davis is President and Chief Operating
Officer of Colony Capital, Inc., an international real estate-related
investment firm. He has been with Colony since its formation in 1991. He also
serves as Co-Managing General Partner of Colony's active discretionary equity
funds, including Colony Investors II, L.P., and Colony Investors III, L.P.
Prior to 1991, Mr. Davis was a principal of RMB Realty, Inc. Prior to that time
he was employed by Goldman, Sachs & Co. and Trammell Crow Company.
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<PAGE>
WILLIAM C. FOXLEY is a director of the Company. Mr. Foxley has been with
the Company since August 1, 1994. Mr. Foxley is the President of Foxley Cattle
Company. From 1983 to 1993, Mr. Foxley served as a consultant to a group of
investment limited partnerships managed by Bridge Capital of Teaneck, New
Jersey. He previously served as chairman of Flavorland Industries, a publicly
held company. He is currently Chairman of the Board of the Museum of Western
Art in Denver.
DONALD C. HANNAH is a director of the Company. He has been with the
Company since August 1, 1994. Mr. Hannah is Chairman and Chief Executive
Officer of U.S. Properties, Inc. Mr. Hannah is a member of the Chief Executives
Organization and the World Presidents' Organization, and is a director of the
Precision Standard Corporation (NASDAQ), the Samoth Capital Corporation and the
Marine Resources Foundation.
DENNIS E. MITCHEM is a director of the Company. He has been with the
Company since January 29, 1996. Mr. Mitchem is Executive Director of Habitat
for Humanity, Valley of the Sun, since April 1996, and prior to that time was
an independent management consultant for privatization and financial services
projects. From March 1994 to December 1995, Mr. Mitchem worked in Moscow
serving as a consultant to the Russian Privatization Center in the
establishment of its local Privatization Centers. From July 1992 to February
1994, he was Managing Director of CAJV, a joint venture between Arthur Andersen
and Castillo Company, Inc., and managed the Denver, Colorado, financial
processing center of the Resolution Trust Corporation. From 1954 to June 1993,
he was employed by Arthur Andersen, where he became a partner in 1967 and
retired as a senior partner in June 1993.
LOUIS P. NEEB is a director of the Company. Mr. Neeb has been with the
Company since August 1, 1994. Mr. Neeb is Chairman of the Board and Chief
Executive Officer of Casa Ole Restaurants, Inc. since October 1995. Mr. Neeb
also serves as President of Neeb Enterprises, Inc., a restaurant consulting
firm. He was President and Chief Executive Officer of Spaghetti Warehouse,
Inc., from 1991 to January 1994 and President of Geest Foods USA from September
1989 to June 1991, prior to which he served as President and Chief Executive
Officer of Taco Villa, Inc. Mr. Neeb spent ten years with the Pills-bury
Company in various positions which included: Executive Vice President,
Pillsbury; Chairman of the Board, Burger King; and President, Steak 'N Ale
Restaurants. Mr. Neeb is also a director of ShowBiz Pizza Time, Inc. and Silver
Diner Development Inc. and was previously a director of On the Border Cafes,
Inc.
KENNETH B. ROATH is a director of the Company. Mr. Roath has been with the
Company since August 1, 1994. Mr. Roath is Chairman and Chief Executive Officer
of Health Care Property Investors, Inc., a real estate investment trust
organized in 1985 to invest, on a net lease basis, in health care properties.
Mr. Roath is a director and chairman of the compensation committee of Arden
Realty, Inc. (NYSE), a real estate investment trust. Mr. Roath is also the past
Chairman of NAREIT and is currently a member of the Board of Governors of
NAREIT.
WENDELL J. SMITH is a director of the Company. Mr. Smith has been with the
Company since August 1, 1994. Mr. Smith is President of W.J.S. & Associates,
which was established by Mr. Smith in 1984 as a consultant to pension funds and
pension fund real estate advisors. Mr. Smith also serves as a director of
Shurgard Storage Centers (NYSE), a real estate investment trust organized to
invest in self-storage facilities. He is a member of the Board of Directors of
Chastain Capital Corporation. He is also a member of the Board of Directors of
PGA Tour Properties, which invests in golf courses throughout the world. Mr.
Smith retired in 1991 from the State of California Public Employees Retirement
System ("CALPERS"), after 27 years of employment. During the last 21 years of
his employment with CALPERS, Mr. Smith was responsible for all real estate
equities and mortgage acquisitions for CALPERS. Mr. Smith previously served on
the Western and National Advisory Boards of the Federal National Mortgage
Association, on the Advisory Board of the Center for Real Estate Research at
the University of California, and as a director of Real Estate Investment Trust
of California.
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<PAGE>
CASEY J. SYLLA is a director of the Company. Mr. Sylla has been with the
Company since August 1, 1994. Mr. Sylla is Senior Vice President and Chief
Investment Officer of Allstate Insurance Company. From 1992 until July 1995,
Mr. Sylla was an Executive Officer and Vice President and head of the
Securities Department of The Northwestern Mutual Life Insurance Company.
SHELBY YASTROW is a director of the Company. Mr. Yastrow has been with the
Company since July 24, 1997. Mr. Yastrow is an attorney and counsel to the law
firm of Sonnenschein Nath & Rosenthal in Chicago, Illinois. He joined
McDonald's Corporation in 1978 as Vice President, Chief Counsel of Litigation
and Assistant Secretary. He was appointed Vice President, General Counsel of
McDonald's Corporation in 1982 and Senior Vice President in 1988, before being
named Executive Vice President in 1995. He retired from McDonald's Corporation
in December 1997. Mr. Yastrow received his law degree from Northwestern
University in 1959.
DESCRIPTION OF THE NOTES
The Notes offered by this Prospectus Supplement and the accompanying
Prospectus constitute a separate series of Debt Securities (which are more
fully described in the accompanying Prospectus) to be issued pursuant to an
indenture dated as of November 21, 1995 (the "Indenture") between the Company
and Norwest Bank Arizona, National Association, as trustee (the "Trustee"), as
supplemented by an officer's certificate setting forth certain terms of the
Notes. The following description of the particular terms of the Notes
supplements and replaces inconsistent provisions contained in the description
of the general terms and provisions of the Debt Securities set forth in the
Prospectus.
Investors are directed to the description of the Debt Securities set forth
under "Description of Debt Securities" in the accompanying Prospectus. The
terms of the Notes include certain provisions contained in the Trust Indenture
Act of 1939, as amended (the "TIA"), and holders of Notes are referred to the
Indenture and the TIA for further information. The following summary of certain
provisions of the Indenture is not complete and is qualified in its entirety by
reference to the Indenture, including the definitions set forth in the
Indenture of certain terms used below. Copies of the Indenture and the Notes
are available for inspection at the office of the Trustee located at 3300 North
Central Avenue, MS 9030, Phoenix, Arizona 85012. As used in this section, the
"Company" means Franchise Finance Corporation of America exclusive of its
subsidiaries.
GENERAL
The Notes will be limited in aggregate principal amount to $150,000,000.
The Notes will be direct, senior unsecured obligations of the Company and will
rank equally with all other senior unsecured indebtedness of the Company from
time to time outstanding. The Notes will be effectively subordinated to
mortgage and other secured indebtedness of the Company and to indebtedness and
other liabilities of the Company's Subsidiaries (as defined below); such
indebtedness would have aggregated $8.5 million as of June 30, 1998 on a pro
forma basis assuming application of the net proceeds of this Offering as
described under "Use of Proceeds."
As of June 30, 1998, on a pro forma basis after giving effect to the sale
of the Notes offered hereby and the application of the net proceeds therefrom,
the total outstanding indebtedness of the Company and its Subsidiaries would
have been approximately $534.8 million. Subject to the limitations set forth in
the Notes as described below under "--Additional Covenants of the Company," the
Indenture will permit the Company and its Subsidiaries to incur additional
secured and unsecured indebtedness.
The Notes will be issued only as Global Securities (as defined below) in
fully registered book-entry form without coupons, except under the limited
circumstances described below under "--Book Entry System."
Reference is made to the section titled "Description of Debt
Securities-Certain Covenants" in the accompanying Prospectus and "--Additional
Covenants of the Company" below for a description of the covenants applicable
to the Notes. Compliance with these covenants generally may not be waived by
the Trustee unless the holders of at least a majority in principal amount of
outstanding Notes consent to such waiver with respect to such series; provided,
however, that the defeasance and covenant defeasance
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<PAGE>
provisions of the Indenture described under "Description of Debt
Securities-Discharge, Defeasance and Covenant Defeasance" in the accompanying
Prospectus will apply to the Notes.
Except as described under "Description of Debt Securities--Merger,
Consolidation or Sale of Assets" in the accompanying Prospectus or
"--Additional Covenants of the Company" below, the Indenture does not contain
any other provisions that would afford holders of the Notes protection in the
event of (a) a highly leveraged or similar transaction involving the Company,
(b) a change of control, or (c) a reorganization, restructuring, merger or
similar transaction involving the Company that may adversely affect the holders
of the Notes. In addition, subject to the limitations set forth under
"Description of Debt Securities--Merger, Consolidation or Sale of Assets" in
the accompanying Prospectus, the Company may, in the future, enter into certain
transactions such as the sale of all or substantially all of its assets or the
merger or consolidation of the Company with another entity that would increase
the amount of the Company's indebtedness or substantially reduce or eliminate
the Company's assets, which may have an adverse affect on the Company's ability
to service its indebtedness, including the Notes.
The Company has no present intention of engaging in a highly leveraged or
similar transaction involving the Company. In addition, certain restrictions on
ownership and transfers of the Company's capital stock designed to preserve its
status as a REIT may act to prevent or hinder any such transaction or a change
of control.
INTEREST AND MATURITY
The Notes will bear interest at the rate set forth on the cover page of
this Prospectus Supplement from the date of issuance or the most recent
Interest Payment Date (as defined below) to which interest has been paid or
provided for, payable semi-annually on April 30 and October 30 of each year,
commencing on April 30, 1999 (each, an "Interest Payment Date"), to the person
in whose name a Note is registered at the close of business on April 15 or
October 15, as the case may be, next preceding such Interest Payment Date.
The Notes will mature on October 30, 2003. The Notes are not subject to
any sinking fund provisions.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the option of the Company, in whole or in
part at any time or from time to time, upon not less than 30 and not more than
60 days' notice, on any date prior to maturity (the "Redemption Date"). The
redemption price shall be equal to 100% of the principal amount of the Notes to
be redeemed plus accrued interest to the Redemption Date (subject to the right
of holders of record on the relevant record date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date), plus a
Make-Whole Premium, if any (the "Redemption Price"). In no event will the
Redemption Price ever be less than 100% of the principal amount of the Notes
plus accrued interest to the Redemption Date.
The amount of the Make-Whole Premium with respect to any Note (or portion
thereof) to be redeemed will be equal to the excess, if any, of:
(1) the sum of the present values, calculated as of the Redemption Date,
of:
(a) each interest payment that, but for such redemption, would have been
payable on the Note (or portion thereof) being redeemed on each Interest
Payment Date occurring after the Redemption Date (excluding any accrued
interest for the period prior to the Redemption Date); and
(b) the principal amount that, but for such redemption, would have been
payable at the final maturity of the Note (or portion thereof) being
redeemed; over
(2) the principal amount of the Note (or portion thereof) being redeemed.
The present values of interest and principal payments referred to in
clause (1) above will be determined in accordance with generally accepted
principles of financial analysis. Such present values will be calculated by
discounting the amount of each payment of interest or principal from the date
that each such payment would have been payable, but for the redemption, to the
Redemption Date at a discount rate equal to the Treasury Yield (as defined
below) plus 25 basis points.
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<PAGE>
The Make-Whole Premium will be calculated by an independent investment
banking institution of national standing appointed by the Company; provided,
that if the Company fails to make this appointment at least 30 calendar days
prior to the Redemption Date, or if the institution so appointed is unwilling
or unable to make this calculation, the calculation will be made by Salomon
Smith Barney Inc. ("Salomon"), or its affiliate, or, if Salomon is unwilling or
unable to make the calculation, by an independent investment banking
institution of national standing appointed by the Trustee (in any such case, an
"Independent Investment Banker").
For purposes of determining the Make-Whole Premium, "Treasury Yield" means
a rate of interest per annum equal to the weekly average yield to maturity of
United States Treasury Notes that have a constant maturity that corresponds to
the remaining term to maturity of the Notes, calculated to the nearest 1|M/12th
of a year (the "Remaining Term"). The Treasury Yield will be determined as of
the third business day immediately preceding the applicable Redemption Date.
The weekly average yields of United States Treasury Notes will be
determined by reference to the most recent statistical release published by the
Federal Reserve Bank of New York and designated "H.15(519) Selected Interest
Rates" or any successor release (the "Release"). If the Release sets forth a
weekly average yield for United States Treasury Notes having a constant
maturity that is the same as the Remaining Term, then the Treasury Yield will
be equal to this weekly average yield. In all other cases, the Treasury Yield
will be calculated by interpolation on a straight-line basis, between the
weekly average yields on the United States Treasury Notes that have a constant
maturity closest to and greater than the Remaining Term and the United States
Treasury Notes that have a constant maturity closest to and less than the
Remaining Term (in each case as set forth in the Release). Any weekly average
yields so calculated by interpolation will be rounded to the nearest 1|M/100th
of 1%, with any figure of 1|M/200th of 1% or above being rounded upward.
If weekly average yields for United States Treasury Notes are not
available in the Release or otherwise, then the Treasury Yield will be
calculated by interpolation of comparable rates selected by the Independent
Investment Banker.
Any notice to the holders of Notes of such a redemption need not set forth
the redemption price of such Notes but need only set forth the calculation
thereof as described above. The redemption price, calculated as set forth
above, shall be set forth in an Officers' Certificate (as defined in the
Indenture) delivered to the Trustee no later than two business days prior to
the Redemption Date.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in a principal amount equal
to the unredeemed portion will be issued in the Holder's name upon cancellation
of the original Note.
ADDITIONAL COVENANTS OF THE COMPANY
Reference is made to the section titled "Description of Debt Securities"
in the accompanying Prospectus for a description of the covenants applicable to
the Notes. In addition to those covenants, the following covenants of the
Company will apply to the Notes for the benefit of the holders of the Notes:
LIMITATION ON INCURRENCE OF TOTAL DEBT. The Company will not, and will not
permit any Subsidiary to, incur any Debt (as defined below) if, immediately
after giving effect to the incurrence of such additional Debt and the
application of the proceeds therefrom, the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries on a consolidated basis
determined in accordance with generally accepted accounting principles is
greater than 60% of the sum of (a) the Company's Total Assets (as defined
below) as of the end of the calendar quarter prior to the incurrence of such
additional Debt and (b) the increase in Total Assets from the end of such
quarter including, without limitation, any increase in Total Assets caused by
the incurrence of such additional Debt.
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<PAGE>
LIMITATION ON INCURRENCE OF SECURED DEBT. In addition to the foregoing
limitation on the incurrence of Debt, the Company will not, and will not permit
any Subsidiary to, incur any Debt secured by any mortgage, lien, charge,
pledge, encumbrance or security interest of any kind on any of its properties,
and will not otherwise grant or convey any such mortgage, charge, pledge,
encumbrance or security interest of any kind, if immediately after giving
effect thereto, the aggregate principal amount of all outstanding Debt of the
Company and its Subsidiaries on a consolidated basis determined in accordance
with generally accepted accounting principles which is secured by any mortgage,
charge, pledge, encumbrance or security interest of any kind on property of the
Company or any Subsidiary is greater than 40% of the sum of (a) the Company's
Total Assets as of the end of the calendar quarter prior to the incurrence of
such Debt, and (b) any increase in Total Assets from the end of such quarter
including, without limitation, any increase in Total Assets caused by the
incurrence of such additional Debt.
DEBT SERVICE COVERAGE. In addition to the foregoing limitations on the
incurrence of Debt, the Company will not, and will not permit any Subsidiary
to, incur any Debt if the ratio of Consolidated Income Available for Debt
Service (as defined below) to Annual Service Charge (as defined below) for the
four consecutive calendar quarters most recently ended prior to the date on
which such additional Debt is to be incurred is less than 1.5 to 1.0 on a pro
forma basis after giving effect to the incurrence of such Debt and the
application of the proceeds therefrom.
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The Company will maintain at all
times Total Unencumbered Assets (as defined below) of not less than 150% of the
aggregate outstanding principal amount of all outstanding unsecured Debt of the
Company and its Subsidiaries.
As used herein:
"ANNUAL SERVICE CHARGE" means the interest expense of the Company and
its Subsidiaries for the four consecutive fiscal quarters most recently
ended, including, without limitation, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, net costs pursuant to hedging obligations, the interest
component of all payments associated with Capitalized Leases, amortization
of debt issuance costs, amortization of original issue discount, non-cash
interest payments and the interest component of any deferred payment
obligations.
"CAPITALIZED LEASE" means any lease of property by the Company or any
Subsidiary as lessee that is reflected on the Company's consolidated
balance sheet as a capitalized lease in accordance with generally accepted
accounting principles.
"CONSOLIDATED INCOME AVAILABLE FOR DEBT SERVICE" for any period means
Consolidated Net Income (as defined below) of the Company and its
Subsidiaries plus amounts which have been deducted, and minus amounts which
have been added, for (a) interest on Debt of the Company and its
Subsidiaries, (b) provision for taxes of the Company and its Subsidiaries
based on income, (c) amortization of debt discount, (d) provisions for
gains and losses on properties, (e) depreciation, (f) the effect of any
non-cash charge resulting from a change in accounting principles in
determining Consolidated Net Income for such period and (g) amortization of
deferred charges.
"CONSOLIDATED NET INCOME" for any period means the amount of
consolidated net income (or loss) of the Company and its Subsidiaries for
such period determined on a consolidated basis in accordance with generally
accepted accounting principles.
"DEBT" means any indebtedness of the Company or any Subsidiary, whether
or not contingent, in respect of (a) borrowed money or evidenced by bonds,
notes, debentures or similar instruments, (b) indebtedness secured by any
mortgage, pledge, lien, charge, encumbrance or any security interest
existing on property owned by the Company or any Subsidiary, (c) letters of
credit or amounts representing the balance deferred and unpaid of the
purchase price of any property except any such balance that constitutes an
accrued expense or trade payable or (d) Capitalized Leases, in the case of
items of indebtedness under (a) through (c) above to the extent that any
such items (other than letters of credit) would appear as liabilities on
the Company's consolidated balance sheet in accordance with generally
accepted accounting principles, and also includes, to the extent not
otherwise
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<PAGE>
included, any obligation by the Company or any Subsidiary to be liable for,
or to pay, as obligor, guarantor or otherwise (other than for purposes of
collection in the ordinary course of business), indebtedness of another
person (other than the Company or any Subsidiary) (it being understood that
Debt shall be deemed to be incurred by the Company or any Subsidiary
whenever the Company or such Subsidiary shall create, assume, guarantee or
otherwise become liable in respect thereof).
"SUBSIDIARY" means (a) any corporation, association, joint venture or
other business entity of which more than 50% of the total voting power of
shares of stock or other ownership interests entitled to vote in the
election of the directors, managers, trustees or other persons having the
power to direct or cause the direction of the management and policies
thereof is at the time owned or controlled, directly or indirectly, by the
Company or one or more of the other Subsidiaries of the Company, and (b)
any partnership or limited liability company in which the Company or one or
more of the other Subsidiaries of the Company, directly or indirectly,
possesses more than a 50% interest in the total capital or total income of
such partnership or limited liability company.
"TOTAL ASSETS" as of any date means the sum of (a) Undepreciated Real
Estate Assets and (b) all other assets of the Company and its Subsidiaries
determined in accordance with generally accepted accounting principles (but
excluding accounts receivable and intangibles).
"TOTAL UNENCUMBERED ASSETS" means Total Assets minus the value of any
properties of the Company and its Subsidiaries that are encumbered by any
mortgage, charge, pledge, lien, security interest or other encumbrance of
any kind, including the value of any stock of any Subsidiary that is so
encumbered. For purposes of this definition, the value of each property
shall be equal to the purchase price or cost of each such property and the
value of any stock subject to any encumbrance shall be determined by
reference to the value of the properties owned by the issuer of such stock
as aforesaid.
"UNDEPRECIATED REAL ESTATE ASSETS" as of any date means the amount of
real estate assets of the Company and its Subsidiaries on such date, before
depreciation and amortization determined on a consolidated basis in
accordance with generally accepted accounting principles.
BOOK-ENTRY SYSTEM
The Notes will be issued in the form of a single fully registered Note in
book-entry form (a "Global Security") which will be deposited with, or on
behalf of, the Depository Trust Company ("DTC") and registered in the name of
DTC or its nominee. Unless and until it is exchanged in whole or in part for
the individual Notes represented thereby, a Global Security may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or another nominee of DTC or by DTC or any such nominee to a successor
depository or any nominee of such successor.
So long as DTC or its nominee is the registered owner of a Global
Security, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by a Global Security for all purposes
under the Indenture and the beneficial owners of the Notes will be entitled
only to those rights and benefits afforded to them in accordance with DTC's
regular operating procedures. Except as provided below, owners of beneficial
interest in a Global Security will not be entitled to have any of the
individual Notes registered in their names, will not receive or be entitled to
receive physical delivery of any such Notes in definitive form and will not be
considered the owners or holders thereof under the Indenture. The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. Such laws may impair the ability to
transfer beneficial interests in a Global Security.
If any of the following occur, the Company will issue individual Notes in
certificated form in exchange for a Global Security:
* DTC is at any time unwilling or unable to continue as depository or if
at any time DTC ceases to be a clearing agency registered under the Securities
Exchange Act of 1934, as amended, and a successor depository is not appointed
by the Company within 90 days;
S-42
<PAGE>
* an Event of Default under the Indenture with respect to the Notes has
occurred and is continuing and the beneficial owners representing a majority in
principal amount of the Notes represented by a Global Security advise DTC to
cease acting as depository; or
* the Company, in its sole discretion, determines at any time that the
Notes shall no longer be represented by a Global Security.
In any such instance, an owner of a beneficial interest in a Global
Security will be entitled to physical delivery of individual Notes in
certificated form of like tenor, equal in principal amount to such beneficial
interest and to have such Notes in certificated form registered in its name.
Notes so issued in certificated form will be issued in denominations of $1,000
or any integral multiple thereof, and will be issued in registered form only,
without coupons.
DTC has advised the Company of the following information regarding DTC:
DTC is:
* a limited-purpose trust company organized under the New York Banking
Law;
* a "banking organization" within the meaning of the New York Banking Law;
* a member of the Federal Reserve System;
* a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
* a "clearing agency" registered pursuant to the provisions of Section 17A
of the Securities Exchange Act of 1934, as amended.
DTC holds securities that its participants ("Participants") deposit with
DTC. DTC also facilitates the settlement among its Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in its Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct Participants of DTC include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations ("Direct
Participants"). DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect Participants").
The rules applicable to DTC and its Participants are on file with the
Commission.
Purchases of Notes under the DTC system must be made by or through Direct
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual purchaser of each Note ("Beneficial Owner")
is in turn recorded on the Direct and Indirect Participants' records. A
Beneficial Owner does not receive written confirmation from DTC of its
purchase, but such Beneficial Owner is expected to receive a written
confirmation providing details of the transaction, as well as periodic
statements of its holdings, from the Direct or Indirect Participant through
which such Beneficial Owner entered into the transaction.
Transfers of ownership interests in Notes are accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners do not receive certificates representing their ownership interests in
Notes, except in the event that use of the book-entry system for the Notes is
discontinued.
To facilitate subsequent transfers, the Notes are registered in the name
of DTC's partnership nominee, Cede & Co. The deposit of the Notes with DTC and
their registration in the name of Cede & Co. effects no change in beneficial
ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes;
DTC records reflect only the identity of the Direct Participants to whose
accounts Notes are credited, which may or may not be the Beneficial Owners. The
Participants remain responsible for keeping account of their holdings on behalf
of their customers.
Delivery of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners are governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
S-43
<PAGE>
Redemption notices shall be sent to Cede & Co. If less than all of the
Notes represented by a Global Security are to be redeemed, DTC's practice is to
determine by lot the amount of the interest of each Direct Participant to be
redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the Notes.
Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy") to the
issuer as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Notes are credited on the record date (identified on a list
attached to the Omnibus Proxy).
Principal and interest payments on the Notes will be made by the Company
to the Trustee and from the Trustee to DTC. DTC's practice is to credit Direct
Participant's accounts on the payable date in accordance with their respective
holdings as shown on DTC's records unless DTC has reason to believe that it
will not receive payment on the payable date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
such Participant and not of DTC, the Trustee or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal and interest to DTC is the responsibility of the Company
or the Trustee, disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Notes at any time by giving reasonable notice to the Company or
the Trustee. Under such circumstances, in the event that a successor securities
depository is not appointed, Note certificates are required to be printed and
delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
Note certificates will be printed and delivered.
None of the Company, the Trustee, any Paying Agent, the Security Registrar
or the Underwriters will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Security for any Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
any other aspect of the relationship between DTC and its Participants or the
relationship between such Participants and the owners of beneficial interests
in a Global Security owned through such Participants.
S-44
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement dated the date of this Prospectus Supplement (the "Underwriting
Agreement"), FFCA has agreed to sell to each of the Underwriters named below
(the "Underwriters"), and each of the Underwriters has severally agreed to
purchase from FFCA, the principal amount of the Notes set forth opposite its
name below:
Principal Amount of
Underwriter the Notes
- ----------- -------------------
Salomon Smith Barney Inc. ................... $ 50,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ............................... 50,000,000
NationsBanc Montgomery Securities LLC ....... 50,000,000
------------
Total .................................... $150,000,000
============
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Notes offered hereby if any Notes are purchased.
The Underwriters have advised FFCA that they propose initially to offer
the Notes to the public at the public offering price set forth on the cover
page of this Prospectus Supplement, and to certain dealers at this price less a
concession not in excess of .35% of the principal amount of the Notes. The
Underwriters may allow, and such dealers may reallow, a concession to certain
other dealers not in excess of .12% of the principal amount of the Notes. After
the initial public offering, the public offering prices and such concessions
may be changed from time to time.
FFCA has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments which
the Underwriters may be required to make in respect thereof.
The Underwriters have advised FFCA that they intend to make a market in
the Notes after the consummation of the Offering; however, the Underwriters are
not obligated to do so, and any such market-making, if commenced, may be
terminated at any time without notice. No assurance can be given as to the
liquidity of the trading market, if any, for the Notes.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
PURCHASES OF THE NOTES TO STABILIZE THEIR MARKET PRICES, PURCHASES OF THE NOTES
TO COVER SOME OR ALL OF A SHORT POSITION IN THE NOTES MAINTAINED BY THE
UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Notes. As an exception to
these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Notes.
If the Underwriters create a short position in the Notes in connection
with this Offering (i.e., if they sell more Notes than are set forth on the
cover page of this Prospectus Supplement), the Underwriters may reduce that
short position by purchasing Notes in the open market.
The Underwriters may also impose a penalty bid on selling group members.
This means that if the Underwriters purchase Notes in the open market to reduce
the Underwriters' short position or to stabilize the price of the Notes, they
may reclaim the amount of the selling concession from the selling group members
who sold those Notes as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither FFCA nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes.
S-45
<PAGE>
In addition, neither FFCA nor any of the Underwriters makes any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The Underwriters and their respective affiliates have from time to time,
provided investment banking and commercial banking services to FFCA, for which
they received customary fees. In addition, the Underwriters and their
affiliates may provide, in the future, such services to FFCA. An affiliate of
NationsBanc Montgomery Securities LLC is a lender under FFCA's Credit
Agreement. FFCA intends to use the net proceeds from the sale of the Notes to
repay amounts outstanding under the Credit Agreement. See "Use of Proceeds."
LEGAL MATTERS
The legality of the Notes to be issued in connection with this offering is
being passed upon for FFCA by the law firm of Kutak Rock, Denver, Colorado.
Certain legal matters relating to this offering are being passed upon for the
Underwriters by the law firm of Latham & Watkins, Los Angeles, California.
Members and attorneys of Kutak Rock own an aggregate of approximately 32,000
shares of common stock of FFCA.
S-46
<PAGE>
PROSPECTUS
FRANCHISE FINANCE CORPORATION OF AMERICA
$1,000,000,000
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
Franchise Finance Corporation of America (the "Company") may from time to
time offer in one or more series (i) its debt securities (the "Debt
Securities"), or (ii) shares of its preferred stock (the "Preferred Stock"), or
(iii) shares of its Common Stock, par value $.01 per share (the "Common
Stock"), with an aggregate public offering price of up to $1,000,000,000 on
terms to be determined at the time of offering. The Debt Securities, the
Preferred Stock and the Common Stock (collectively, the "Securities") may be
offered, separately or together, in separate series, in amounts, at prices and
on terms to be set forth in one or more supplements to this Prospectus (each, a
"Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus
is being delivered will be set forth in the applicable Prospectus Supplement
and will include, where applicable: (i) in the case of Debt Securities, the
specific title, aggregate principal amount, currency, form (which may be
registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the Company's option or repayment at the
holder's option, terms for sinking fund payments, terms for conversion into
Preferred Stock or Common Stock, covenants and any initial public offering
price; and (ii) in the case of Preferred Stock, the specific designation and
stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; and (iii) in the case of
Common Stock, any initial public offering price. In addition, such specific
terms may include limitations on actual or constructive ownership and
restrictions on transfer of the Securities, in each case as may be appropriate
to preserve the status of the Company as a real estate investment trust
("REIT") for federal income tax purposes. See "Restrictions on Transfers of
Capital Stock."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities
covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from
time to time by the Company, or to or through underwriters or dealers. If any
agents or underwriters are involved in the sale of any of the Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable
from the information set forth, in the applicable Prospectus Supplement. See
"Plan of Distribution." No Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the
offering of such series of Securities.
------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------
The date of this Prospectus is April 16, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company makes its filings electronically. The Commission maintains a website
that contains reports, proxy and information statements and other information
regarding registrants that file electronically, which information can be
accessed at http://www.sec.gov. In addition, the Common Stock is listed on the
New York Stock Exchange and similar information concerning the Company can be
inspected and copied at the New York Stock Exchange, 20 Broad Street, New York,
New York 10005.
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Prospectus by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(ii) the Company's Current Report on Form 8-K dated January 27, 1998;
(iii) the Company's Current Report on Form 8-K dated February 17, 1998;
and
(iv) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed June 28, 1994.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to termination of the offering of the Securities, shall be
deemed to be incorporated by reference in this Prospectus from the date of the
filing of such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Prospectus shall be deemed to be modified or
superseded to the extent that a statement contained in this Prospectus or in
any document filed after the date of this Prospectus which is deemed to be
incorporated by reference in this Prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents incorporated by reference in this Prospectus
(not including exhibits to the documents that have been incorporated herein by
reference unless the exhibits are themselves specifically incorporated by
reference). Such written or oral request should be directed to the Corporate
Secretary at 17207 North Perimeter Drive, Scottsdale, Arizona 85255, telephone
number (602) 585-4500.
2
<PAGE>
THE COMPANY
Franchise Finance Corporation of America (the "Company") is a specialty
retail finance company dedicated primarily to providing real estate financing
to the chain restaurant industry, as well as to the convenience store and
automotive parts and service industries. The Company's primary strategy is to
provide all necessary financing for multi-unit operators and franchisors who
operate retail properties in which the Company invests. The Company's
investments are diversified by geographic region, operator and chain. The
Company's Common Stock trades on the New York Stock Exchange (the "NYSE") under
the symbol FFA. The Company is a Delaware corporation and maintains its
corporate offices at 17207 North Perimeter Drive, Scottsdale, Arizona 85255 and
its telephone number is (602) 585-4500.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include investment in additional
properties, the expansion and improvement of certain properties in the
Company's portfolio and the repayment of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The ratio shown for the year ended December 31, 1993 is derived
from the combined historical financial information of Franchise Finance
Corporation of America I, a Delaware corporation, and eleven real estate
limited partnerships, the predecessors to the Company (the "Combined
Predecessors"). The ratio shown for the year ended December 31, 1994 is derived
from the financial information of both the Combined Predecessors and the
Company. The ratios shown for the years ended December 31, 1995, 1996 and 1997
are for the Company.
The Company commenced operations on June 1, 1994 as a result of the merger
of the Combined Predecessors. The information for the periods prior to that
date is, in effect, a restatement of the historical operating results of
Franchise Finance Corporation of America I and eleven real estate limited
partnerships as if they had been consolidated since January 1, 1993. The
predecessor companies were primarily public real estate limited partnerships
which were prohibited from borrowing for real estate acquisitions and had no
opportunity for growth through acquisitions; therefore, the investment
objectives of the Company are different than the objectives of the Combined
Predecessors, and the information presented below does not necessarily present
the ratios of earnings to fixed charges as they would have been had the Company
operated as a REIT for all periods presented.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
43.73 16.78 4.16 3.54 3.04
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income (including gain
or loss on the sale of property) before REIT transaction related costs plus
fixed charges. Fixed charges consist of interest expense (including interest
costs capitalized, if any) and the amortization of debt issuance costs. To
date, the Company has not issued any Preferred Stock; therefore, the ratios of
earnings to combined fixed charges and preferred share dividends are the same
as the ratios presented above.
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<PAGE>
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may
be secured or unsecured, and which may be senior or subordinated indebtedness
of the Company. An unqualified opinion of counsel as to legality of the Debt
Securities will be obtained by the Company and filed by means of a
post-effective amendment or Form 8-K prior to the time any sales of the Debt
Securities are made. The Debt Securities will be issued under an indenture,
dated as of November 21, 1995, subject to such amendments or supplements as may
be adopted from time to time (the "Indenture") between the Company and Norwest
Bank Arizona, National Association, as trustee (the "Trustee"). The Indenture
will be subject to, and governed by, the Trust Indenture Act of 1939, as
amended. The statements made hereunder relating to the Indenture and the Debt
Securities to be issued thereunder are summaries of certain provisions thereof,
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all provisions of the Indenture and such Debt
Securities. Capitalized terms used but not defined herein shall have the
respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along
with any applicable modifications of or additions to the general terms of the
Debt Securities as described herein and in the applicable Indenture and any
applicable material federal income tax considerations. Accordingly, for a
description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus.
The Indenture provides that the Debt Securities may be issued without
limits as to aggregate principal amount, in one or more series, in each case as
established from time to time by the Company's Board of Directors or as
established in one or more indentures supplemental to the Indenture. All Debt
Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the
holders (the "Holders") of the Debt Securities of such series, for issuances of
additional Debt Securities of such series.
The Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under the Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may
be appointed to act with respect to such series. If two or more persons are
acting as Trustee with respect to different series of Debt Securities, each
such Trustee shall be a Trustee of a trust under the Indenture separate and
apart from the trust administered by any other Trustee and, except as otherwise
indicated herein, any action described herein to be taken by a Trustee may be
taken by each such Trustee with respect to, and only with respect to, the one
or more series of Debt Securities for which it is Trustee under the Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities offered thereby for the specific terms thereof, including:
(a) the title of such Debt Securities;
(b) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount (subject to certain exceptions
described in the Indenture);
(c) the price (expressed as a percentage of the principal amount
thereof or otherwise) at which such Debt Securities will be issued and, if
other than the principal amount thereof, the portion of the principal
amount thereof payable upon declaration of acceleration of the maturity
thereof, or (if applicable) the portion of the principal amount of such
Debt Securities that is convertible into Common Stock or Preferred Stock or
the method by which any such portion shall be determined;
(d) if convertible into Common Stock, Preferred Stock, or both, the
terms on which such Debt Securities are convertible (including the initial
conversion price or rate and conversion period) and,
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<PAGE>
in connection with the preservation of the Company's status as a REIT, any
applicable limitations on conversion or on the ownership or transferability
of the Common Stock or the Preferred Stock into which such Debt Securities
are convertible;
(e) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(f) the rate or rates, at which such Debt Securities will bear
interest, if any, or the method by which such rate or rates shall be
determined, the date or dates, or the method for determining such date or
dates, from which any interest will accrue, the dates upon which any such
interest will be payable, the record dates for payment of such interest, or
the method by which any such dates shall be determined, and the basis upon
which interest shall be calculated if other than that of a 360-day year of
twelve 30-day months;
(g) the place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for conversion, registration of
transfer, or exchange (each to the extent applicable), and where notices or
demands to or upon the Company in respect of such Debt Securities and the
Indenture may be served;
(h) the period or periods, if any, within which, the price or prices
at which, and the terms and conditions upon which such Debt Securities may
be redeemed, as a whole or, in part, at the Company's option (if the
Company has the option to redeem);
(i) the obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or periods
within which, the price or prices at which and the terms and conditions
upon which such Debt Securities will be redeemed, repaid or purchased, as a
whole or in part, pursuant to such obligation;
(j) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency, currency unit, or a composite currency or currencies, and the
terms and conditions relating thereto;
(k) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not, be based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(l) whether such Debt Securities will be issued in certificated and/or
book-entry form, and the identity of any applicable depositary for such
Debt Securities;
(m) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(n) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof or addition thereto;
(o) any deletions from, modifications of or additions to the events of
default or covenants of the Company, described herein or in the Indenture
with respect to such Debt Securities, and any change in the right of any
Trustee or any of the Holders to declare the principal amount of any such
Debt Securities due and payable;
(p) whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge to Holders that are not United States
persons, and, if so, whether the Company will have the option to redeem
such Debt Securities in lieu of making such payment (and the terms of any
such option);
(q) the subordination provisions, if any, relating to such Debt
Securities;
(r) the provisions, if any, relating to any security provided for such
Debt Securities; and
5
<PAGE>
(s) any other terms of such Debt Securities not inconsistent with the
provisions of the Indenture.
If so provided in the applicable Prospectus Supplement, the Debt
Securities may be issued at a discount below their principal amount and provide
for less than the entire principal amount thereof to be payable upon
declaration of acceleration of the maturity thereof ("Original Issue Discount
Securities"). In such cases, any special U.S. federal income tax, accounting
and other considerations applicable to Original Issue Discount Securities will
be described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt
Securities will not contain any provisions that would limit the Company's
ability to incur indebtedness or that would afford Holders of Debt Securities
protection in the event of a highly leveraged or similar transaction involving
the Company or in the event of a change of control. Certain existing
restrictions on ownership and transfers of the Common Stock and Preferred Stock
are, however, designed to preserve the Company's status as a REIT and,
therefore, may act to prevent or hinder a change of control. See "Restrictions
on Transfers of Capital Stock." Reference is made to the applicable Prospectus
Supplement for information with respect to any deletions from, modifications of
or additions to the events of default or covenants of the Company that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of
Debt Securities will be payable at the applicable Trustee's corporate trust
office, the address of which will be set forth in the applicable Prospectus
Supplement; provided, however, that, at the Company's option, payment of
interest may be made by check mailed to the address of the person entitled
thereto as it appears in the applicable register for such Debt Securities or by
wire transfer of funds to such person at an account maintained within the
United States.
Subject to certain limitations imposed on Debt Securities in the
Indenture, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tender upon surrender of such Debt
Securities at the applicable Trustee's corporate trust office or at the
applicable office of any agency of the Company. In addition, subject to certain
limitations imposed on Debt Securities in the Indenture, the Debt Securities of
any series may be surrendered for registration by transfer thereof at the
applicable Trustee's corporate trust office or at the applicable office of any
agency of the Company. Every Debt Security surrendered for registration of
transfer or exchange shall be duly endorsed or accompanied by a written
instrument of transfer and evidence of title and identity satisfactory to the
Trustee, the Company, or its transfer agent, as applicable. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities. However, (with certain exceptions) the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. If the applicable Prospectus Supplement refers to any
transfer agent (in addition to the applicable Trustee) initially designated by
the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location through which any such transfer agent acts, except that the
Company will be required to maintain a transfer agent in each place of payment
for such series. The Company may at any time designate additional transfer
agents with respect to any series of Debt Securities.
Neither the Company nor any Trustee shall be required to (a) issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before the day of mailing
of notice of redemption of any Debt Securities of that series that may be
selected for redemption and ending at the close of business on the day of
mailing the relevant notice of redemption (or publication of such notice with
respect to bearer securities); (b) register the transfer of or exchange any
Debt Security, or portion thereof, so selected for redemption, in whole or in
part, except the
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unredeemed portion of any Debt Security being redeemed in part; or (c) issue,
register the transfer of or exchange any Debt Security that has been
surrendered for repayment at the Holder's option, except the portion, if any,
of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may, with or without the
consent of the Holders of any outstanding Debt Securities, consolidate with, or
sell, lease or convey all or substantially all of its assets to, or merge with
or into, any other entity, provided that (a) either the Company shall be the
continuing entity, or the successor entity (if other than the Company) formed
by or resulting from any such consolidation or merger or which shall have
received the transfer of such assets shall be an entity organized and existing
under the laws of the United States or a state thereof and such successor
entity shall expressly assume the Company's obligation to pay the principal of
(and premium, if any) and interest on all the Debt Securities and shall also
assume the due and punctual performance and observance of all the covenants and
conditions contained in the Indenture; (b) immediately after giving effect to
such transaction and treating any indebtedness that becomes an obligation of
such successor entity, the Company or any subsidiary as a result thereof as
having been incurred by such successor entity, the Company or such subsidiary
at the time of such transaction, no event of default under the Indenture, and
no event that, after notice or the lapse of time, or both, would become such an
event of default, shall have occurred and be continuing; and (c) an officers'
certificate and legal opinion covering such conditions shall be delivered to
each Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "Merger, Consolidation or Sale of
Assets," the Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, material rights (by certificate of incorporation, bylaws and
statute) and material franchises; provided, however, that the Company shall not
be required to preserve any right or franchise if its Board of Directors
determines that the preservation thereof is no longer desirable in the conduct
of its business.
MAINTENANCE OF PROPERTIES. The Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on or in connection therewith may be properly and
advantageously conducted at all times; provided, however, that the Company and
its subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business.
INSURANCE. The Indenture will require the Company to, and to cause each of
its subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be customary in the industry in accordance
with prevailing market conditions and availability.
PAYMENT OF TAXES AND OTHER CLAIMS. The Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied
or imposed on it or any subsidiary or on the income, profits or property of the
Company or any subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith by appropriate proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
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documents with the Commission if the Company were so subject, (a) to transmit
by mail to all Holders of Debt Securities, as their names and addresses appear
in the applicable register for such Debt Securities, without cost to such
Holders, copies of the annual reports, quarterly reports and other documents
that the Company would have been required to file with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act if the Company were subject to such
Sections, (b) to file with the Trustee copies of the annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the
Company were subject to such Sections, and (c) to supply, promptly upon written
request and payment of the reasonable cost of duplication and delivery, copies
of such documents to any prospective Holder of Debt Securities.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Prospectus Supplement, the
following events are "events of default" with respect to any series of Debt
Securities issued under the Indenture: (a) default for 30 days in the payment
of any installment of interest on any Debt Security of such series; (b) default
in the payment of the principal of (or premium, if any, on) any Debt Security
of such series at its Maturity; (c) default in making any sinking fund payment
as required for any Debt Security of such series; (d) default in the
performance or breach of any other covenant or warranty of the Company
contained in the Indenture (other than a covenant or warranty a default in the
performance of which or the breach of which is elsewhere in this paragraph
specifically dealt with), continued for 60 days after written notice as
provided in the applicable Indenture; (e) a default under any bond, debenture,
note or other evidence of indebtedness for money borrowed by the Company or any
of its subsidiaries (including obligations under leases required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles), in an aggregate principal amount in excess of $10
million or under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any indebtedness for money
borrowed by the Company or any of its subsidiaries (including such leases), in
an aggregate principal amount in excess of $10 million, whether such
indebtedness now exists or shall hereafter be created, which default shall have
resulted in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable or such
obligations being accelerated, without such acceleration having been rescinded
or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary of the Company; and (g) any other Event of Default as
defined with respect to a particular series of Debt Securities. The term
"Significant Subsidiary" has the meaning ascribed to such term in Regulation
S-K promulgated under the Securities Act.
If an event of default under the Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or indexed securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at
any time after such a declaration of acceleration with respect to Debt
Securities of such series has been made, but before a judgment or decree for
payment of the money due has been obtained by the applicable Trustee, the
holders of not less than a majority of the principal amount of the outstanding
Debt Securities of such series may rescind and annul such declaration and its
consequences if (a) the Company shall have deposited with the applicable
Trustee all required payments of the principal of (and premium, if any) and
overdue interest on the Debt Securities of such series, plus certain fees,
expenses, disbursements and advances of the applicable Trustee and (b) all
events of default, other than the nonpayment of accelerated principal (or
specified portion thereof), with respect to Debt Securities of such series have
been cured or waived as provided in the Indenture. The Indenture will also
provide that the holders of not less than a majority in principal amount of the
outstanding Debt Securities of any series may waive any past default with
respect to such series and
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its consequences, except a default (y) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (z) in
respect of a covenant or provision contained in the Indenture that cannot be
modified or amended without the consent of the holder of each outstanding Debt
Security affected thereby.
The Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived; provided, however, that such Trustee
may withhold notice to the holders of any series of Debt Securities of any
default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of the Trustee
consider such withholding to be in such holders' interest.
The Indenture will provide that no holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect to
the Indenture or for any remedy thereunder, except in the case of failure of
the Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it and no
contrary directions from the holders of more than 50% of the outstanding Debt
Securities of such series. This provision will not prevent, however, any holder
of Debt Securities from instituting suit for the enforcement of payment of the
principal of (and premium, if any) and interest on such Debt Securities at the
respective due dates thereof.
The Indenture will provide that the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding
under the Indenture, unless such holders shall have offered to the Trustee
reasonable security or indemnity. The holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or of exercising any trust or power
conferred upon the Trustee. The Trustee may, however, refuse to follow any
direction that is in conflict with any law or the Indenture or that may involve
the Trustee in personal liability or that may be unduly prejudicial to the
holders of Debt Securities of such series not joining therein.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture with respect to any series
will be permitted only with the consent of the holders of not less than a
majority in principal amount of all outstanding Debt Securities of such series;
provided, however, that no such modification or amendment may, without the
consent of the holder of each Debt Security of such series, (a) change the
Stated Maturity of the principal of (or premium, if any, on), or any
installment of principal of or interest on any such Debt Security; (b) reduce
the principal amount of, or the rate or amount of interest on, or any premium
payable on redemption of, any such Debt Security, or reduce the amount of
principal of an Original Issue Discount Security that would be due and payable
upon declaration of acceleration of the Maturity thereof or would be provable
in bankruptcy, or adversely affect any right of repayment of the holder of any
such Debt Security; (c) change the place of payment, or the coin or currency,
for payment of principal of (or premium, if any), or interest on any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security on or after the Stated
Maturity or redemption date thereof; (e) reduce the above-stated percentage of
Outstanding Debt Securities of any series necessary to modify or amend the
Indenture, to waive compliance with certain provisions thereof or certain
defaults and consequences thereunder or to reduce the quorum or voting
requirements set forth in the Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage to
effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of such Debt Security.
The holders of a majority in aggregate principal amount of outstanding
Debt Securities of each series may, on behalf of all holders of Debt Securities
of that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the Indenture.
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Modifications and amendments of the Indenture will be permitted to be made
by the Company and the Trustee without the consent of any holder of Debt
Securities for any of the following purposes: (a) to evidence the succession of
another person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company
in the Indenture; (c) to add additional events of default for the benefit of
the holders of all or any series of Debt Securities; (d) to add or change
certain provisions of the Indenture to facilitate the issuance of, or to
liberalize certain terms of, Debt Securities in bearer form, or to permit or
facilitate the issuance of Debt Securities in uncertificated form, provided
that such action shall not adversely affect the interests of the holders of the
Debt Securities of any series in any material respect; (e) to change or
eliminate any provisions of the Indenture, provided that any such change or
elimination shall become effective only when there are no Debt Securities
outstanding of any series created prior thereto that are entitled to the
benefit of such provision; (f) to secure the Debt Securities; (g) to establish
the form or terms of Debt Securities of any Series, including the provisions
and procedures, if applicable, for the conversion of such Debt Securities into
Common Stock or Preferred Stock; (h) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under the Indenture by more than one Trustee; (i) to cure any ambiguity,
defect or inconsistency in the Indenture; provided, however, that such action
shall not adversely affect the interests of holders of Debt Securities of any
series in any material respect; or (j) to supplement any of the provisions of
the Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of such Debt Securities, provided, however, that such
action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect.
The Indenture provides that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (a) the principal amount of an Original Issue Discount Security
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (b) the principal amount
of any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (a) above), (c) the
principal amount of an indexed security that shall be deemed outstanding shall
be the principal face amount of such indexed security at original issuance,
unless otherwise provided with respect to such indexed security in the
applicable Indenture, and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
The Indenture contains provisions for convening meetings of the holders of
Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee, and also, upon request, by the Company or the holders of
at least 10% in principal amount of the outstanding Debt Securities of such
series, in any such case upon notice given as provided in the Indenture. Except
for any consent that must be given by the holder of each Debt Security affected
by certain modifications and amendments of the Indenture, any resolution
presented at a meeting or adjourned meeting duly reconvened at which a quorum
is present may be adopted by the affirmative vote of the holders of a majority
in principal amount of the outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
outstanding Debt Securities of a series may be adopted at a meeting or
adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal
amount of the outstanding Debt Securities of that series. Any resolution passed
or decision taken at any meeting of holders of Debt Securities of any series
duly held in accordance with the Indenture will be binding on all holders of
Debt Securities of that series. The quorum at any meeting called to adopt a
resolution, and at any reconvened meeting, will be persons holding or
representing a majority in principal amount of the outstanding Debt Securities
of a series; provided, however, that if any action is to be taken at such
meeting with respect to a consent or waiver
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that may be given by the holders of not less than a specified percentage in
principal amount of the outstanding Debt Securities of a series, the persons
holding or representing such specified percentage in principal amount of the
outstanding Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indenture provides that if
any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders
of such series and one or more additional series: (a) there shall be no minimum
quorum requirement for such meeting and (b) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been
made, given or taken under the Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
If provided for in the applicable Prospectus Supplement, the Company will
be permitted, at its option, to discharge certain obligations to holders of any
series of Debt Securities by irrevocably depositing with the applicable
Trustee, in trust, funds in such currency or currencies, currency unit or units
or composite currency or currencies in which such Debt Securities are payable
in an amount sufficient to pay the entire indebtedness on such Debt Securities
in respect of principal (and premium, if any) and interest.
If provided for in the applicable Prospectus Supplement, the Company may
elect either to (a) defease and be discharged from any and all obligations with
respect to any series of Debt Securities (except for the obligation to pay
additional amounts, if any, upon the occurrence of certain events of tax,
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold money for payment in trust) ("defeasance") or (b) be
released from certain obligations with respect to such Debt Securities under
the applicable Indenture (generally being the restrictions described under
"Certain Covenants", herein) or, if provided in the applicable Prospectus
Supplement, its obligations with respect to any other covenant, and any
omission to comply with such obligations shall not constitute a default or an
event of default with respect to such Debt Securities ("covenant defeasance"),
in either case upon the irrevocable deposit by the Company with the applicable
Trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such Debt Securities are
payable at Stated Maturity, or Government Obligations (as defined below), or
both, applicable to such Debt Securities that through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company
has delivered to the applicable Trustee an opinion of counsel (as specified in
the applicable indenture) to the effect that the holders of such Debt
Securities will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of such defeasance or covenant defeasance and will be
subject to U.S. federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred, and such opinion of counsel, in the case of
defeasance, must refer to and be based on a ruling of the Internal Revenue
Service (the "IRS") or a change in applicable U.S. federal income tax law
occurring after the date of the Indenture. In the event of such defeasance, the
holders of such Debt Securities would thereafter be able to look only to such
trust fund for payment of principal (and premium, if any) and interest.
"Government Obligations" means securities that are (a) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged, or (b) obligations
of a
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person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the foreign
Currency in which the Debt Securities of such series are payable, the payment
of which is unconditionally guaranteed as a full faith and credit Obligation by
the United States of America or such other government, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall
also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the account of the holder of a depository receipt; provided,
however, that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the Government
Obligation or the specific payment of interest on or principal of the
Government Obligation evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if
after the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to the applicable Indenture or the terms of such Debt
Security to receive payment in a currency, currency unit or composite currency
other than that in which such deposit has been made in respect of such Debt
Security or (b) a Conversion Event (as defined below) occurs in respect of the
currency, currency unit or composite currency in which such deposit has been
made, the indebtedness represented by such Debt Security will be deemed to have
been, and will be, fully discharged and satisfied through the payment of the
principal of (and premium, if any) and interest on such Debt Security as they
become due out of the proceeds yielded by converting the amount so deposited in
respect of such Debt Security into the currency, currency unit or composite
currency in which such Debt Security becomes payable as a result of such
election or Conversion Event based on the applicable market exchange rate.
"Conversion Event" means the cessation of use of (i) a currency, currency unit
or composite currency both by the government of the country which issued such
currency and for the settlement of transactions by a central bank or other
public institution of or within the international banking community, (ii) the
ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities, or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a foreign currency
that ceases to be used by its government of issuance shall be made in U.S.
dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because
of the occurrence of any event of default other than the event of default
described in clause (d) under "Events of Default, Notice and Waiver" with
respect to the specified sections of the applicable Indenture (which sections
would no longer be applicable to such Debt Securities) or clause (g) thereunder
with respect to any other covenant as to which there has been covenant
defeasance, the amount in such currency, currency unit or composite currency in
which such Debt Securities are payable, and Government Obligations on deposit
with the applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their stated maturity, but may not be sufficient to
pay amounts due on such Debt Securities at the time of the acceleration
resulting from such event of default. The Company would, however, remain liable
to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether
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conversion will be, at the option of the holders or the Company, the events
requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such Debt Securities and any
restrictions on conversion, including restrictions directed at maintaining the
Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any Series of
Debt Securities will be payable at the Trustee's corporate trust office, the
address of which will be stated in the applicable Prospectus Supplement;
provided, however, that, at the Company's option, payment of interest may be
made by check mailed to the address of the person entitled thereto as it
appears in the applicable register for such Debt Securities or by wire transfer
of funds to such person at an account maintained within the United States.
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security
that remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for
payment thereof, subject to applicable state escheat laws.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such Series.
DESCRIPTION OF COMMON STOCK
The Company has authority to issue 200,000,000 shares of Common Stock, par
value $.01 per share (the "Common Stock"). At March 13, 1998, the Company had
outstanding 47,885,524 shares of Common Stock.
GENERAL
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that the Common Stock will
be issuable upon conversion of Debt Securities or Preferred Stock. An
unqualified opinion of counsel as to legality of the Common Stock will be
obtained by the Company and filed by means of a post-effective amendment or
Form 8-K prior to the time any sales of Common Stock are made. The statements
below describing the Common Stock are in all respects subject to and qualified
in their entirety by reference to the applicable provisions of the Company's
Second Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Bylaws.
TERMS
Subject to the preferential rights of any other shares or series of stock,
holders of Common Stock will be entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. Payment and declaration of dividends on the Common Stock and
purchases of shares thereof by the Company will be subject to certain
restrictions if the Company fails to pay dividends on the Preferred Stock, if
any. See "Description of Preferred Stock." Upon any liquidation, dissolution or
winding up of the Company, holders of Common Stock will be entitled to share
equally and ratably in any assets available for distribution to them, after
payment or provision for payment of the debts and other liabilities of the
Company and the preferential amounts owing with respect to any outstanding
Preferred Stock. The Common Stock will possess ordinary voting rights for the
election of
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directors and in respect of other corporate matters, each share entitling the
holder thereof to one vote. Holders of Common Stock will not have cumulative
voting rights in the election of directors, which means that holders of more
than 50% of all the shares of the Company's Common Stock voting for the
election of directors can elect all the directors if they choose to do so and
the holders of the remaining shares of Common Stock cannot elect any directors.
Holders of shares of Common Stock will not have preemptive rights, which means
they have no right to acquire any additional shares of Common Stock that may be
issued by the Company at a subsequent date. All shares of Common Stock now
outstanding are, and additional shares of Common Stock offered will be when
issued, fully paid and nonassessable; and no shares of Common Stock are or will
be subject to any exchange or conversion rights.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, actually or constructively, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year. To assist the Company in meeting this requirement, the
Company may take certain actions to limit the beneficial ownership, actually or
constructively, by a single person or entity of the Company's outstanding
equity securities. See "Restrictions on Transfers of Capital Stock."
TRANSFER AGENT
The registrar and transfer agent for the Common Stock is Gemisys Transfer
Agents, 7103 South Revere Parkway, Englewood, CO 80112.
DESCRIPTION OF PREFERRED STOCK
The Company has authority to issue up to 10,000,000 shares of Preferred
Stock as described below. At March 13, 1998, there were no shares of Preferred
Stock issued or outstanding.
GENERAL
The following description of the Preferred Stock sets forth certain
general terms and provisions of the Preferred Stock to which any Prospectus
Supplement may relate. An unqualified opinion of counsel as to legality of the
Preferred Stock will be obtained by the Company and filed by means of a
post-effective amendment or Form 8-K prior to the time any sales of Preferred
Stock are made. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Certificate of Incorporation (including the
applicable Certificate of Designations) and Bylaws.
Shares of Preferred Stock may be issued from time to time in one or more
series as authorized by the Company's Board of Directors. Subject to
limitations prescribed by the Delaware General Corporation Law and the
Certificate of Incorporation, the Company's Board of Directors is authorized to
fix the number of shares constituting each series of Preferred Stock and the
designations and powers, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions thereof,
including such provisions as may be desired concerning voting, redemption,
dividends, dissolution or the distribution of assets, conversion or exchange,
and such other subjects or matters as may be fixed by resolution by the Board
of Directors or a duly authorized committee thereof. Notwithstanding the
foregoing (i) any series of Preferred Stock may be voting or non-voting,
provided that the voting rights of any voting shares of Preferred Stock will be
limited to no more than one vote per share on matters voted upon by the holders
of such series, and (ii) in the event any person acquires 20% or more of the
outstanding shares of Common Stock and/or Preferred Stock, the Board of
Directors cannot issue any series of Preferred Stock unless such issuance is
approved by the vote of holders of at least 50% of the outstanding shares of
Common Stock. The Preferred Stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights.
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Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(a) the title and stated value of such Preferred Stock;
(b) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(c) the dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock;
(d) the date from which dividends on such Preferred Stock shall
accumulate;
(e) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(f) the provision for a sinking fund, if any, for such Preferred
Stock;
(g) any voting rights of such Preferred Stock;
(h) the provision for redemption, if applicable, of such Preferred
Stock;
(i) any listing of such Preferred Stock on any securities exchange;
(j) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(k) a discussion of material federal income tax considerations
applicable to such Preferred Stock;
(l) any limitations on actual, beneficial or constructive ownership
and restrictions on transfer, in each case as may be appropriate to
preserve the Company's REIT status;
(m) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(n) any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(o) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (a)
senior to all Common Stock and to all equity or other securities ranking junior
to such Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; (b) on a parity with all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank on a parity with the Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding
up of the affairs of the Company; and (c) junior to all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank senior to the Preferred Stock with respect to dividend rights
or rights upon liquidation, dissolution or winding up of the affairs of the
Company. For these purposes, the term "equity securities" does not include
convertible debt securities.
DIVIDENDS
Holders of shares of the Preferred Stock of each series shall be entitled
to receive, when, as and if declared by the Company's Board of Directors, out
of the Company's assets legally available for payment, cash dividends at such
rates and on such dates as will be set forth in the applicable Prospectus
Supplement. Each such dividend shall be payable to holders of record as they
appear on the Company's stock transfer books on such record dates as shall be
fixed by the Company's Board of Directors.
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Dividends on any series of Preferred Stock will be cumulative. Dividends
will be cumulative from and after the date set forth in the applicable
Prospectus Supplement.
If any shares of Preferred Stock of any series are outstanding, full
dividends shall not be declared or paid or set apart for payment on the
Preferred Stock of any other series ranking, as to dividends, on a parity with
or junior to the Preferred Stock of such series for any period unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment on the Preferred Stock of such series for all past dividend periods and
the then current dividend period. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the shares of
Preferred Stock of any series and the shares of any other series of Preferred
Stock ranking on a parity as to dividends with the Preferred Stock of such
series, all dividends declared on shares of Preferred Stock of such series and
any other series of Preferred Stock ranking on a parity as to dividends of such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share on the Preferred Stock of such series and such other series
of Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the shares of Preferred Stock of such series and
such other series of Preferred Stock bear to each other. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on Preferred Stock of such series that may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period, no dividends (other than in the Common Stock
or other capital stock of the Company ranking junior to the Preferred Stock of
such series as to dividends and upon liquidation) shall be declared or paid or
set aside for payment nor shall any other distribution be declared or made on
the Common Stock or any other capital stock of the Company ranking junior to or
on a parity with the Preferred Stock of such series as to dividends or upon
liquidation, nor shall the Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the Preferred Stock of such
series as to dividends or upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any amounts be paid to or made available for
a sinking fund for the redemption of any shares of any such stock) by the
Company (except by conversion into or exchange for other capital stock of the
Company ranking junior to the Preferred Stock of such series as to dividends
and upon liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series that remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accumulated and unpaid dividends thereon
to the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital stock of the Company, the terms of such
Preferred Stock may provide that, if no such capital stock shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable
capital stock of the Company pursuant to conversion provisions specified in the
applicable Prospectus Supplement.
Notwithstanding the foregoing, unless full cumulative dividends on all
shares of such series of Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof is
set apart for payment for all past dividend periods and the then current
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dividend period, no shares of such series of Preferred Stock shall be redeemed
unless all outstanding shares of Preferred Stock of such series are
simultaneously redeemed; provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of Preferred Stock of such series
to preserve the Company's REIT status or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series. In addition, unless full cumulative dividends on all
outstanding shares of such series of Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period, the Company shall not purchase or otherwise
acquire directly or indirectly any shares of Preferred Stock of such series
(except by conversion into or exchange for capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of shares of Preferred Stock of such series to preserve
the Company's REIT status or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series.
If fewer than all the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company that is consistent with the
Certificate of Incorporation.
Notice of redemption will be mailed at least 30, but not more than 60,
days before the redemption date to each holder of record of a share of
Preferred Stock of any series to be redeemed at the address shown on the
Company's stock transfer books. Each notice shall state: (a) the redemption
date; (b) the number of shares and series of the Preferred Stock to be
redeemed; (c) the redemption price; (d) the place or places where certificates
for such Preferred Stock are to be surrendered for payment of the redemption
price; (e) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (f) the date on which the holder's conversion
rights, if any, as to such shares shall terminate. If fewer than all the shares
of Preferred Stock of any series are to be redeemed, the notice mailed to each
such holder thereof shall also specify the number of shares of Preferred Stock
to be redeemed from each such holder and, upon redemption, a new certificate
shall be issued representing the unredeemed shares without cost to the holder
thereof. If notice of redemption of any shares of Preferred Stock has been
given and if the funds necessary for such redemption have been set aside by the
Company in trust for the benefit of the holders of any shares of Preferred
Stock so called for redemption, then from and after the redemption date
dividends will cease to accrue on such shares of Preferred Stock, such shares
of Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price. In order to facilitate the redemption of shares of Preferred
Stock of any series, the Board of Directors may fix a record date for the
determination of shares of such series of Preferred Stock to be redeemed.
Subject to applicable law and the limitation on purchases when dividends
on a series of Preferred Stock are in arrears, the Company may, at any time and
from time to time purchase any shares of such series of Preferred Stock in the
open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, then, before any distribution or payment shall
be made to the holders of the Common Stock or any other class or series of
capital stock of the Company ranking junior to any series of the Preferred
Stock in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Company, the holders of such series of
Preferred Stock shall be entitled to receive out of assets of the Company
legally available for distribution to shareholders liquidating distributions in
the amount of the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and
unpaid thereon. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Preferred Stock will
have no right or claim to any of the remaining assets of the Company. If, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
legally available assets of the Company are insufficient to pay the amount of
the
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liquidating distributions on all outstanding shares of any series of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of capital stock of the Company ranking on a parity with such series of
Preferred Stock in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of such series of Preferred Stock and all other
such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders
of any series of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of any other classes or series of capital stock
ranking junior to such series of Preferred Stock upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other entity, or the
sale, lease, transfer or conveyance of all or substantially all of the
Company's property or business, shall not be deemed to constitute a
liquidation, dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as
any shares of Preferred Stock of a series remain outstanding, the Company shall
not, without the affirmative vote or consent of the holders of at least a
majority of the shares of such series of Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class), (a) authorize or create, or increase the
authorized or issued amount of, any class or series of capital stock ranking
prior to such series of Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital stock of the Company into any such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (b) amend, alter or repeal
the provisions of the Certificate of Incorporation or the Certificate of
Designations for such series of Preferred Stock, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any right,
preference, privilege or voting power of such series of Preferred Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or any increase in the amount of authorized shares of such
series or any other series of Preferred Stock, in each case ranking on a parity
with or junior to the Preferred Stock of such series with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or
winding up, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption upon proper notice and sufficient
funds shall have been deposited in trust to effect such redemption.
Under Delaware law, notwithstanding anything to the contrary set forth
above, holders of each series of Preferred Stock will be entitled to vote as a
class upon a proposed amendment to the Certificate of Incorporation, whether or
not entitled to vote thereon by the Restated Certificate of Incorporation, if
the amendment would increase or decrease the aggregate number of authorized
shares of such series, increase or decrease the par value of the shares of such
series, or alter or change the powers, preferences or special rights of the
shares of such series so as to affect them adversely.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the
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conversion price or manner of calculation thereof, the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or
constructively, by five or fewer individuals (defined in the Code to include
certain entities) during the last half of a taxable year. To assist the Company
in meeting this requirement, the Company may take certain actions to limit the
beneficial ownership, actually or constructively, by a single person or entity
of the Company's outstanding equity securities. See "Restrictions on Transfers
of Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for any series of Preferred Stock will be
set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
actually or constructively, by five or fewer individuals (defined in the Code
to include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
355 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year. To ensure that the Company remains qualified as a REIT,
the Certificate of Incorporation, subject to certain exceptions, provides that
a transfer of Common Stock is void if it would result in Beneficial Ownership
(as defined below) of the Common Stock in excess of the Ownership Limit (as
defined below) or would result in the Common Stock being beneficially owned by
less than 100 persons. "Transfer" generally means any sale, transfer, gift,
assignment, devise or other disposition of Common Stock, whether voluntary or
involuntary, whether of record or beneficially and whether by operation of law
or otherwise. "Beneficial Ownership" generally means ownership of Common Stock
by a person who would be treated as an owner of such shares of Common Stock
either actually or constructively through the application of Section 544 of the
Internal Revenue Code of 1986, as modified by Section 856(h)(1)(B) of the
Internal Revenue Code of 1986. "Ownership Limit" generally means 9.8% of the
outstanding Common Stock of the Company and, after certain adjustments pursuant
to the Certificate of Incorporation, means such greater percentage of the
outstanding Common Stock as so adjusted. The Board of Directors may, in its
discretion, adjust the Ownership Limit of any Person provided that after such
adjustment, the Ownership Limit of all other persons shall be adjusted such
that in no event may any five persons Beneficially Own more than 49% of the
Common Stock. Any class or series of Preferred Stock may be subject to these
restrictions if so stated in the resolutions providing for the issuance of such
Preferred Stock. The Restated Certificate of Incorporation provides certain
remedies to the Board of Directors in the event the restrictions on Transfer
are not met.
All certificates of Common Stock, any other series of the Company's Common
Stock and any class or series of Preferred Stock will bear a legend referring
to the restrictions described above and as described in the certificate of
designation relating to any issuance of Preferred Stock. All persons who have
Beneficial Ownership or who are a shareholder of record of a specified
percentage (or more) of the outstanding capital stock of the Company must file
a notice with the Company containing information regarding their ownership of
stock as set forth in the Treasury Regulations. Under current Treasury
Regulations, the percentage is set between .5% and 5%, depending on the number
of record holders of capital stock.
This ownership limitation may have the effect of precluding acquisition of
control of the Company by a third party unless the Board of Directors
determines that maintenance of REIT status is no longer in the best interests
of the Company.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a summary of the material provisions which govern the
federal income tax treatment of the Company. The summary is based on current
law, is for general information only, and is not tax advice. The tax treatment
of a holder of any of the Securities will vary depending on the terms of the
specific Securities acquired by such holder, as well as his or her particular
situation. This discussion does not attempt to address any aspects of federal
income taxation relating to holders of Securities. Certain federal income tax
considerations relevant to a holder of Securities will be provided in the
Prospectus Supplement relating thereto.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT,
AS WELL AS HIS OR HER OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OR
HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE OFFERED SECURITIES, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE LAWS.
QUALIFICATION OF THE COMPANY AS A REIT; OPINION OF COUNSEL
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Code, commencing with its fiscal year ended December 31, 1994. The
election to be taxed as a REIT will continue until it is revoked or otherwise
terminated. The most important consequence to the Company of being treated as a
REIT for federal income tax purposes is that it will not be subject to federal
corporate income taxes on net income that is currently distributed to its
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that typically results when a corporation
earns income and distributes that income to stockholders in the form of a
dividend. Accordingly, if the Company at any time fails to qualify as a REIT,
the Company will be taxed on its distributed income, thereby reducing the amount
of cash available for distribution to its stockholders.
In the opinion of Kutak Rock, counsel to the Company, commencing with the
taxable year ended December 31, 1994, the Company has been organized in
conformity with the requirements for qualification as a REIT and its proposed
method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. This opinion is based on
various assumptions and is conditioned upon the representations of the Company
as to factual matters. Moreover, continued qualification and taxation as a REIT
will depend on the Company's ability to satisfy on a continuing basis certain
distribution levels, diversity of stock ownership and various income and asset
limitations, including certain limitations concerning the ownership of
securities, imposed by the Code as summarized below. While the Company intends
to operate so that it will continue to qualify as a REIT, given the highly
complex nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in the circumstances of
the Company, no assurance can be given by counsel or the Company that the
Company will so qualify for any particular year. Kutak Rock will not review
compliance with these tests on a continuing basis, and will not undertake to
update its opinion subsequent to the date hereof.
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal income tax on net income that is currently distributed to
its stockholders. The Company may, however, be subject to certain federal taxes
based on the amount of its distributions or its inability to meet certain REIT
qualification requirements. These taxes are the following:
TAX ON UNDISTRIBUTED INCOME. First, if the Company does not distribute all
of its net taxable income, including any net capital gain, the Company would be
taxed at regular corporate rates on the undistributed income or gains. The
Company may elect to retain and pay tax on its capital gains.
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TAX ON PROHIBITED TRANSACTIONS. Second, if the Company has net income from
certain prohibited transactions, including sales or dispositions of property
held primarily for sale to customers in the ordinary course of business, such
net income would be subject to a 100% confiscatory tax.
TAX ON FAILURE TO MEET GROSS INCOME REQUIREMENTS. Third, if the Company
should fail to meet either the 75% or 95% gross income test as described below
but still qualify for REIT status because, among other requirements, it was
able to show that such failure was due to reasonable cause, it will be subject
to a 100% tax on an amount equal to (a) the gross income attributable to the
greater of the amount, if any, by which the Company failed either the 75% or
the 95% gross income test, multiplied by (b) a fraction intended to reflect the
Company's profitability.
TAX ON FAILURE TO MEET DISTRIBUTION REQUIREMENTS. Fourth, if the Company
should fail to distribute during each calendar year at least the sum of (a) 85%
of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net
income for such year, and (c) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
ALTERNATIVE MINIMUM TAX. Fifth, the Company may be subject to alternative
minimum tax on certain items of tax preference.
TAX ON FORECLOSURE PROPERTY. Sixth, if the Company has (a) net income from
the sale or other disposition of foreclosure property that is held primarily
for sale to customers in the ordinary course of business or (b) other
nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income.
TAX ON BUILT-IN GAIN. Seventh, if during the 10-year period (the
"Recognition Period") beginning on the date that the Company's corporate
predecessor merged with and into the Company, the Company recognizes gain on
the disposition of any asset acquired by the Company from the corporate
predecessor, then to the extent of the excess of (a) the fair market value of
such asset as of the beginning of such Recognition Period over (b) the
Company's adjusted basis in such asset as of the beginning of such Recognition
Period, such gain will be subject to tax at the highest regular corporate rate
pursuant to IRS regulations that have not yet been promulgated.
OVERVIEW OF REIT QUALIFICATION RULES
The following summarizes the basic requirements for REIT status:
(a) The Company must be a corporation, trust or association that is
managed by one or more trustees or directors.
(b) The Company's stock or beneficial interests must be transferable
and held by more than 100 stockholders, and no more than 50% of the value
of the Company's stock may be held, actually or constructively, by five or
fewer individuals (defined in the Code to include certain entities).
(c) Generally, 75% (by value) of the Company's investments must be in
real estate, mortgages secured by real estate, cash or government
securities.
(d) The Company must meet three gross income tests:
(i) First, at least 75% of the gross income must be derived from
specific real estate sources;
(ii) Second, at least 95% of the gross income must be from the
real estate sources includable in the 75% test, or from dividends,
interest or gains from the sale or disposition of stock and
securities; and
(iii) Third, for taxable years beginning on or before August 5,
1997, less than 30% of the gross income may be derived from the sale
of real estate assets held for less than four years, from the sale of
certain "dealer" properties or from the sale of stock or securities
having a short-term holding period.
(e) The Company must distribute to its stockholders in each taxable
year an amount at least equal to 95% of the Company's "REIT taxable income"
(which is generally equivalent to taxable ordinary income and is defined
below).
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The discussion set forth below explains these REIT qualification
requirements in greater detail. It also addresses how these highly technical
rules may be expected to impact the Company in its operations, noting areas of
uncertainty that perhaps could lead to adverse consequences to the Company and
its stockholders.
SHARE OWNERSHIP. The Company's shares of stock are fully transferable and
are subject to transfer restrictions set forth in its Certificate of
Incorporation. Furthermore, the Company has more than 100 shareholders and its
Certificate of Incorporation, as a general matter, provides, to decrease the
possibility that the Company will ever be closely held, that no individual,
corporation or partnership is permitted to actually or constructively own more
than 9.8% of the number of outstanding shares of Common Stock. The Ownership
Limit may be adjusted, however, by the Company's Board of Directors in certain
circumstances. Purported transfers which would violate the Ownership Limit will
be void. In addition, shares of Common Stock acquired in excess of the
Ownership Limit may be redeemed by the Company. The ownership and transfer
restrictions pertaining generally to a particular issue of Preferred Stock will
be described in the Prospectus Supplement relating to such issue. In the case
of a REIT which solicits certain required information from its shareholders,
the failure to satisfy the closely held requirement described above will result
in disqualification only if the REIT had knowledge or upon the exercise of
reasonable diligence would have known of the failure to satisfy such
requirement.
NATURE OF ASSETS. On the last day of each calendar quarter, at least 75%
of the value of the Company's total assets must consist of (a) real estate
assets (including interests in real property and mortgages on loans secured by
real property), (b) cash and cash items (including receivables), and (c)
government securities (collectively, the "real estate assets"). Except for
certain partnerships and "qualified REIT subsidiaries," as described below, the
securities of any issuer, other than the United States government, may not
represent more than 5% of the value of the Company's total assets or 10% of the
outstanding voting securities of any one issuer.
While, as noted above, a REIT cannot own more than 10% of the outstanding
voting securities of any single issuer, an exception to this rule permits REITs
to own "qualified REIT subsidiaries." A "qualified REIT subsidiary" is any
corporation in which 100% of its stock is owned by the REIT. The Company owns
the stock or beneficial interests of several entities which will be treated as
"qualified REIT subsidiaries" and will not adversely affect the Company's
qualification as a REIT.
The Company may acquire interests in partnerships that directly or
indirectly own and operate properties similar to those currently owned by the
Company. The Company, for purposes of satisfying its REIT asset and income
tests, will be treated as if it owns a proportionate share of each of the
assets of these partnerships attributable to such interests. For these
purposes, the Company's interest in each of the partnerships will be determined
in accordance with its capital interest in such partnership. The character of
the various assets in the hands of the partnership and the items of gross
income of the partnership will remain the same in the Company's hands for these
purposes. Accordingly, to the extent the partnership receives qualified real
estate rentals and holds real property, a proportionate share of such qualified
income and assets, based on the Company's capital interest in the partnerships,
will be treated as qualified rental income and real estate assets of the
Company for purposes of determining its REIT characterization. It is expected
that substantially all the properties of the partnerships will constitute real
estate assets and generate qualified rental income for these REIT qualification
purposes.
This treatment for partnerships is conditioned on the treatment of these
entities as partnerships for federal income tax purposes (as opposed to
associations taxable as corporations). If any of the partnerships were treated
as an association (or, in some cases, a publicly traded partnership), it would
be taxable as a corporation. In such situation, if the Company's ownership in
any of the partnerships exceeded 10% of the partnership's voting interests or
the value of such interest exceeded 5% of the value of the Company's assets,
the Company would cease to qualify as a REIT. Furthermore, in such a situation,
distributions from any of the partnerships to the Company would be treated as
dividends, which are not taken into account in satisfying the 75% gross income
test described below and which could therefore make it more difficult for the
Company to qualify as a REIT for the taxable year in which such distribution
was received. In addition, in such a situation, the interest in any of the
partnerships held by the
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Company would not qualify as "real estate assets," which could make it more
difficult for the Company to meet the 75% asset test described above. Finally,
in such a situation, the Company would not be able to deduct its share of any
losses generated by the partnerships in computing its taxable income. The
Company will take all steps reasonably necessary to ensure that any partnership
in which it acquires an interest will be treated for tax purposes as a
partnership (and not as an association taxable as a corporation). However,
there can be no assurance that the IRS may not successfully challenge the tax
status of any such partnership.
INCOME TESTS. To maintain its qualification as a REIT, the Company must
meet three gross income requirements that must be satisfied annually. First, at
least 75% of the REIT's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the REIT's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments, and from
dividends, interest and gain from the sale or disposition of stock or
securities, from any combination of the foregoing or from certain hedging
agreements entered into to reduce interest rate risks. Third, for taxable years
commencing on or before August 5, 1997, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
from the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
must represent less than 30% of the REIT's gross income (including gross income
from prohibited transactions) for each taxable year.
Rents received by the Company on the lease of its properties will qualify
as "rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
rent must not be based in whole or in part on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code provides
that rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income test if the Company, or an owner of
10% or more of the Company, actually or constructively owns 10% or more of such
tenant (a "Related-Party Tenant"). Third, if rent attributable to personal
property leased in connection with the lease of real property is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." The Company does not anticipate charging rent for any property that
is based in whole or in part on the income or profits of any person (other than
rent based on a fixed percentage or percentages of receipts or sales) and the
Company does not anticipate receiving any rents from Related-Party Tenants.
Furthermore, the Company expects that in substantially all cases the rents
attributable to its leased personal property will be less than 15% of the total
rent payable under such lease.
Finally, for rents to qualify as "rents from real property," the Company
must not operate or manage the property or furnish or render services to
tenants unless the Company furnishes or renders such services through an
independent contractor from whom the Company derives no revenue. The Company
need not utilize an independent contractor to the extent that services provided
by the Company are usually and customarily rendered in connection with the
rental of space for occupancy only and are not otherwise considered "rendered
to the occupant." If the amount received by the Company from impermissible
tenant services does not exceed 1% of the total amounts received by the Company
with respect to such related property, such rents will not as a result be
treated as nonqualifying income. Impermissible tenant services include services
rendered by the Company to tenants, other than the foregoing customary services
and services with regard to managing or operating the property. The Company
does not anticipate that it will provide any services with respect to its
properties.
The Company intends to monitor the percentage of nonqualifying income and
reduce the percentage of nonqualifying income if necessary. Because the income
tests are based on a percentage of total gross income, increases in qualifying
rents will reduce the percentage of nonqualifying income. In addition, the
Company intends to acquire additional real estate assets that would generate
qualifying income, thereby lowering the percentage of total nonqualifying
income. Increases in other nonqualifying income may
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similarly affect these calculations. The Company does not expect to generate
nonqualifying income in quantities which would cause it to fail either at the
foregoing 75% or 95% gross income tests.
If the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's failure to
meet such test was due to reasonable cause and not willful neglect and the
Company attaches a schedule of its income sources to its tax return that does
not fraudulently or intentionally exclude any income sources. As discussed
above, even if these relief provisions apply, a tax would be imposed with
respect to such excess income.
ANNUAL DISTRIBUTION REQUIREMENTS. Each year, the Company must have a
deduction for dividends paid (determined under Section 561 of the Code) to its
stockholders in an amount equal to (a) 95% of the sum of (i) its "REIT taxable
income" as defined below (computed without a deduction for dividends paid and
excluding any net capital gain), (ii) any net income from foreclosure property
less the tax on such income, minus (b) any "excess noncash income," as defined
below. "REIT taxable income" is the taxable income of a REIT subject to certain
adjustments, including, without limitation, an exclusion for net income from
foreclosure property, a deduction for the excise tax on the greater of the
amount by which the REIT fails the 75% or the 95% income test, and an exclusion
for an amount equal to any net income derived from prohibited transactions.
"Excess noncash income" means the excess of certain amounts that the REIT is
required to recognize as income in advance of receiving cash, such as original
issue discount on purchase money debt, over 5% of the REIT taxable income
before deduction for dividends paid and excluding any net capital gain. Such
distributions must be made in the taxable year to which they relate, or in the
following taxable year if declared before the REIT timely files its tax return
for such year and is paid on or before the first regular dividend payment after
such declaration.
It is possible that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (a) the actual receipt of income and the
actual payment of deductible expenses and (b) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company.
Furthermore, principal payments on Company indebtedness, which would have the
effect of lowering the amount of distributable cash without an offsetting
deduction to Company taxable income, may adversely affect the Company's ability
to meet this distribution requirement. In the event that such timing
differences or reduction to distributable cash occurs, in order to meet the 95%
distribution requirement, the Company may find it necessary to arrange for
short-term, or possible long-term, borrowings or to pay dividends in the form
of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year that may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay to the IRS interest
based on the amount of any deduction taken for deficiency dividends.
Congress is currently considering several proposals which, if adopted,
would modify the requirements applicable to REITs. Among such requirements is
one which would preclude a REIT from owning more than 10% of the value of the
stock of any subsidiary, other than a qualified REIT subsidiary. An additional
proposal would prohibit an existing corporation from deferring built-in gains
upon filing an election to be treated as a REIT. If an entity's election to be
treated as a REIT were terminated, such provision, if enacted, would make
requalification as a REIT substantially more difficult. It is not possible to
predict which, if any, of the current proposals will be enacted or the effect
of such proposals on the Company.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company would be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, thereby reducing the amount of cash available for
distribution to its stockholders. Distributions to stockholders in any year in
which the Company fails to
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qualify would not be deductible by the Company nor would they be required to be
made. In such an event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders would be taxable as ordinary income
and, subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends-received deduction. Unless entitled to relief under
specific statutory relief provisions, the Company would also be disqualified
from taxation as a REIT for the four taxable years following the year during
which such qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
STATE AND LOCAL TAXES
The Company may be subject to state or local taxes in other jurisdictions
such as those in which the Company may be deemed to be engaged in activities or
own property or other interests. Such tax treatment of the Company in states
having taxing jurisdiction over it may differ from the federal income tax
treatment described in this summary. Each stockholder should consult his or her
tax advisor as to the status of the Company and the Securities under the
respective state laws applicable to them.
PLAN OF DISTRIBUTION
The terms of any offering of Securities under this Registration Statement
will be set forth in the applicable Prospectus Supplement. The Company may sell
the Securities to one or more underwriters for public offering and sale by them
or may sell the Securities to investors directly or through agents or dealers.
Any such underwriter or agent involved in the offer and sale of the Securities
will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at
prices relating to such prevailing market prices or at negotiated prices. The
Company also may, from time to time, authorize dealers acting as the Company's
agents to offer and sell the Securities upon the terms and conditions as are
set forth in the applicable Prospectus Supplement. In connection with the sale
of Securities, underwriters may receive compensation from the Company in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of Securities for whom they may act as agent. Underwriters may
sell Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent. Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Dealers and agents
participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may
be customers of, engage in transactions with and perform services for the
Company and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock. The Common Stock is currently listed on the NYSE.
Unless otherwise specified in the related Prospectus Supplement, any shares of
Common Stock sold pursuant to a Prospectus Supplement will be listed on the
NYSE, subject to official notice of issuance. The Company may elect to list any
series of Debt Securities or Preferred Stock on the NYSE or other exchange, but
is not obligated to do so. It is possible that one or more underwriters may
make a market in a series of Securities, but will not be obligated to do so and
may discontinue any market making at any time without notice. Therefore, there
can be no assurance as to the liquidity of, or the trading market for, the
Securities.
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If so indicated in the Prospectus Supplement, the Company will authorize
agents and underwriters or dealers to solicit offers by certain purchasers to
purchase Securities from the Company at the public offering price set forth in
the Prospectus Supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. Such contracts will be
subject to only those conditions set forth in the Prospectus Supplement, and
the Prospectus Supplement will set forth the commission payable for
solicitation of such offers.
LEGAL MATTERS
Certain legal matters relating to the Securities to be offered hereby, and
certain REIT matters relating to the Company, will be passed upon for the
Company by the national law firm of Kutak Rock, 717 Seventeenth Street, Suite
2900, Denver, Colorado 80202.
EXPERTS
The financial statements and schedules for the fiscal year ended December
31, 1997 incorporated by reference in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report, with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
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$150,000,000
FRANCHISE FINANCE
CORPORATION OF AMERICA
8.25% SENIOR NOTES DUE 2003
[FFCA LOGO]
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P R O S P E C T U S S U P P L E M E N T
October 27, 1998
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Salomon Smith Barney
Merrill Lynch & Co.
NationsBanc Montgomery
Securities LLC
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