FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File Number 1-13116
FRANCHISE FINANCE CORPORATION OF AMERICA
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(Exact name of registrant as specified in its charter)
Delaware 86-0736091
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(State of incorporation) (I.R.S. Employer
Identification No.)
The Perimeter Center
17207 North Perimeter Drive
Scottsdale, Arizona 85255
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 585-4500
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 2, 1998 was $1,124,067,124.
The number of shares of the Registrant's $.01 par value common stock as
of March 2, 1998 was 44,063,526.
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive proxy statement for the Registrant's Annual Meeting of Shareholders
to be held on May 13, 1998, to be filed pursuant to Regulation 14A.
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PART I
Item 1. Business.
Background
Franchise Finance Corporation of America ("FFCA") is a
self-administered real estate investment trust (REIT) which primarily provides
real estate financing to the chain restaurant industry, as well as to the
convenience store and automotive service and parts industries. FFCA was
incorporated in the state of Delaware in 1993 and is successor to Franchise
Finance Corporation of America I ("FFCA I"), a Delaware corporation, and eleven
public limited partnerships which were merged into FFCA on June 1, 1994. FFCA,
together with its predecessors, has been engaged in the financing of chain
restaurant real estate since 1980 and began financing convenience stores and
automotive service and parts stores in 1997. At December 31, 1997, FFCA had
interests in approximately 2,500 properties operated by over 400 operators in
approximately 50 chains located in 47 states. The common stock of FFCA began
trading on the New York Stock Exchange on June 29, 1994 under the symbol "FFA".
In 1997, FFCA completed numerous transactions that have, or are
expected to have, an impact on its results of operations and financial
condition. During 1997, FFCA and its affiliate FFCA Mortgage Corporation
(Mortgage Corp.) originated $504 million in new sale-leaseback and mortgage loan
investments. This exceeded FFCA's 1996 investment level by almost 50%. Eighteen
percent of the 1997 investments ($92 million) resulted from FFCA's expansion
into the convenience store and automotive service and parts industries during
the fourth quarter of 1997.
In June 1997, FFCA completed its second securitization transaction.
Certain mortgage loans originated by FFCA and Mortgage Corp. totaling $261
million were securitized and Secured Franchise Loan Trust Certificates were sold
to investors. The servicing rights on these mortgage loans and any additional
payments based upon a participation in the gross sales of the restaurant or
specified contractual increases were retained by FFCA. FFCA also retained
certain interests in approximately 11% of the aggregate mortgage loan principal
balance through the purchase of subordinated investment securities of the
securitization trust. During 1997, the loan origination process was transferred
to FFCA's wholly-owned subsidiary, FFCA Acquisition Corporation, and at the end
of 1997, Mortgage Corp. was dissolved.
To continue the growth rate achieved in 1997, FFCA increased its
capital by completing various equity transactions and expanded its line of
credit. From September 1997 to February 1998, FFCA sold approximately 3.2
million shares of common stock to three separate unit investment trusts with net
proceeds from the sales aggregating approximately $82 million. On March 13,
1998, FFCA sold approximately 3.8 million shares of common stock for $100
million to a real estate-related investment firm. As an alternative capital
source, FFCA's shareholders voted to authorize the issuance of 10 million shares
of preferred stock at FFCA's annual meeting in May 1997. As of the date of this
report, FFCA has not yet issued any shares. In April 1997, FFCA increased its
acquisition loan facility to $350 million to accommodate its higher mortgage
loan origination
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business and to increase its liquidity. In addition, FFCA entered into a
separate $100 million loan facility in January 1998 expiring in May 1998, by
which time it plans to complete a securitization transaction.
Other events occurring in 1997 include an increase of 4.4% in FFCA's
quarterly dividend to $0.47 from $0.45 for the fourth quarter of 1997 and the
establishment of an employee stock purchase plan ("ESPP"). Under the ESPP,
employees can purchase stock through payroll deductions at a price equal to 85%
of the fair market value of the stock, as defined in the ESPP agreement.
As of December 31, 1997, FFCA had 103 full-time employees and 4
part-time employees.
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995
(the "Act"), became effective in December 1995. The Act provides a "safe harbor"
for companies which make forward-looking statements providing prospective
information. The "safe harbor" under the Act relates to protection for companies
with respect to litigation filed on the basis of such forward-looking
statements.
FFCA wishes to take advantage of the "safe harbor" provisions of the
Act and is therefore including this section in its Annual Report on Form 10-K.
The statements contained in this Annual Report, if not historical, are
forward-looking statements and involve risks and uncertainties which are
described below that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described in such
forward-looking statements. These statements are identified with the words
"anticipated," "expected," "intends," "seeks," or "plans," or words of similar
meaning. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future results or occurrences.
FFCA's future results may be affected by certain risks and
uncertainties including the following:
o Investment in real estate in the chain restaurant industry as
well as the convenience store and automotive service and parts
industries is subject to general economic market conditions
and conditions unique to each industry.
o Industry risks include a decrease in demand for products,
increased labor costs, increased number of competing
properties offering similar products and dependence on local
management for the profitable operation of the properties. The
chain restaurant industry is subject to the risk 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
and, to the extent applicable, the margins available from the
sale of gasoline and availability of gasoline supplies. The
automotive service and parts industry is subject to
technological changes in the
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production and maintenance of automobiles and changing
consumer preferences in transportation options.
o FFCA invests primarily in chain restaurant properties and
convenience and automotive service and parts retail
facilities. FFCA's success is dependent upon the success of
these industries in general and the specific chains and retail
facilities which FFCA finances.
o FFCA intends to continue to originate and securitize mortgage
loans and to have responsibility for mortgage servicing. FFCA
may also own subordinated interests in these securitized
loans. To the extent of such ownership, FFCA is in a "first
loss" position with respect to third parties who purchase
senior securities in the securitization and has a greater risk
with respect to its investment in the nonpayment of the
mortgage loans.
o FFCA invests in derivative financial securities and
instruments for the sole purpose of providing protection
against fluctuations in interest rates. These investments do
not protect FFCA from all risks associated with changing
market conditions; therefore, the financial performance of
FFCA could be adversely affected.
o FFCA has issued senior notes and medium term notes that are
not subject to amortization requirements or periodic
redemption and intends to issue similar debt securities in the
future. FFCA will be subject to risks associated with debt
financing and refinancing, including the ability to sell debt
in the future.
o FFCA is subject to all of the general risks associated with
investment in real estate such as adverse changes in general
or local economic conditions, changes in supply of or demand
for similar or competing properties in an area, changes in
interest rates and operating expenses, changes in market
rental rates, inability to lease properties upon the
termination or expiration of existing leases, the renewal of
existing leases and inability to collect payments from
operators.
o FFCA faces competition from banks, insurance companies,
finance companies, leasing companies and other real estate
investment trusts in the acquisition, financing and leasing of
properties, which could adversely affect its growth.
o Even though the chain store and retail facility operators
financed by FFCA are generally required to carry comprehensive
liability, fire, flood, extended coverage and business
interruption insurance, there are certain losses that are
uninsurable.
o 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.
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o FFCA 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 in any given
year.
o 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, might also affect the ability of FFCA
to realize its investment objectives.
o There can be no assurance that FFCA will be able to raise
sufficient capital through borrowings, or the issuance of debt
and equity securities, to achieve its investment objectives.
o FFCA is dependent on the efforts of its directors, officers
and key personnel and has no employment agreements with such
persons. There can be no assurance that FFCA would be able to
recruit additional personnel with equivalent experience in the
event of their resignation.
Business Strategy
FFCA's primary strategy is to provide real estate financing to the
chain restaurant industry, as well as the convenience store and automotive
service and parts industries, through various financial products, including
sale-leaseback transactions, mortgage loans, equipment loans and construction
financing. FFCA seeks to have the properties which it finances operated by
experienced multi-unit operators conducting business under nationally or
regionally recognized brand names. As a result, FFCA believes it is able to
achieve a better risk-adjusted return for its shareholders. Properties financed
by FFCA are generally operated by multi-unit operators that include both chain
store franchisors and franchisees. Over 80% of the properties financed by FFCA
are fast food restaurants in chains such as Burger King, Hardee's, Arby's, Jack
in the Box, Wendy's, Kentucky Fried Chicken, Pizza Hut, Taco Bell, Mrs. Winners
and Whataburger. Full service restaurant chains comprising over 8% of FFCA's
portfolio include Applebee's, Black Eyed Pea, Denny's, Chili's and Fuddruckers.
Convenience store and automotive service and parts stores account for about 8%
of the portfolio and include E-Z Serve and White Hen Pantry convenience stores
and Econo Lube.
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 have enhanced FFCA's ability to identify, evaluate and
structure new investments. FFCA's experience in the real estate industry results
in efficient in-house performance of virtually every aspect of real estate
acquisition and management and is reflected in FFCA's eight departments, which
include
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Accounting, Asset Management, Corporate Communications, Corporate Finance,
Information Systems, Legal Services, Property Management and Research and
Underwriting.
FFCA's principal business objective is to maximize shareholder wealth.
FFCA intends to increase cash flow per share (i) through continued investment
activity, (ii) by controlling expenses through greater economies of scale, (iii)
through the receipt of contractual lease escalations and (iv) by increasing its
use of internally-generated cash flow for investments. Management seeks to
achieve growth in cash flow, while maintaining low portfolio investment risk,
through diligent adherence to its tested underwriting criteria, investment
diversification and conservative capital structure.
FFCA intends to provide financing to large, multi-unit operating
companies principally through sale-leaseback transaction and mortgage loans.
FFCA also provides financing for equipment located at the chain store properties
for which it provides real estate financing. In addition, FFCA may provide
construction financing for qualified operators. Consistent with its experience
between June 1994 and December 1997, chain store properties financed by FFCA are
anticipated to be primarily existing locations which are either being refinanced
or financed in connection with acquisitions by operating companies. FFCA also
provides financing for new development which is typically in, or adjacent to,
established markets where the chain brand is recognized. FFCA, in the course of
its business, from time to time evaluates other investment opportunities in the
chain restaurant industry. FFCA intends to consider appropriate new investment
opportunities in the future.
FFCA structures its investments to enhance the stability of its cash
flows. FFCA's sale-leaseback transactions are triple-net leases which provide
that the lessees are responsible for the payment of all property operating
expenses, including property taxes, maintenance and insurance costs. Therefore,
FFCA is generally not required to make significant capital expenditures in the
properties which it owns and leases to chain operators. Both FFCA's
sale-leaseback and mortgage financings are generally for twenty-year terms and
mortgage products are generally fully amortizing over the term of the loans. The
sale-leasebacks entered into by FFCA are retained in its portfolio and generally
provide for base rentals plus additional payments based upon a participation in
the gross sales from the properties or specified contractual increases. In
addition, FFCA will purchase existing properties which are subject to leases
already in place. The mortgage loans originated by FFCA will generally be pooled
and sold in securitized offerings, with FFCA generally retaining or acquiring
interests in the pool in the form of subordinated securities, interest-only
securities and mortgage servicing rights.
FFCA continually monitors and administers its investments to enhance
the stability of its cash flows. FFCA's Asset Management, Legal Services and
Property Management departments together serve to monitor all aspects of
portfolio performance. FFCA's properties are regularly inspected by an in-house
appraisal staff to monitor asset condition. Financial data is regularly
collected on the properties financed by FFCA to determine their profitability.
Asset Management staff monitor 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. Underperforming
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and non-performing leases and loans are administered by Property Management and
Legal Services personnel who also supervise the in-house administration of
property dispositions and tenant substitutions. FFCA has an established record
of resolving underperforming and non-performing leased assets, with an average
time of approximately six months to relet such properties.
FFCA's investments are diversified by geographic region, operators and
chain. FFCA's future investments are anticipated to be funded through a
combination of debt and equity issuances, internally-generated cash and the
securitization of mortgage loans.
Information Systems
To enhance its investment evaluation and origination, FFCA has invested
extensively in information systems which are specific to the chain restaurant
industry. FFCA's databases 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 is in the process of
negotiating for competitive databases (similar to the restaurant industry
database) for the convenience store industry and the automotive service and
parts industry. 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. FFCA 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 FFCA 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 service and parts industries.
FFCA has employed its client and collections data from over fifteen years 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.
FFCA 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 technology, FFCA can monitor large
diversified portfolios by exception, including lease and mortgage payments made
through automated bank account debits, property taxes, property insurance
coverage and property financial performance.
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During 1997, FFCA completed the design of its new accounting and
servicing information system that was begun in 1996 and was implemented on
January 1, 1998. The design of FFCA's new property management system is nearing
completion and FFCA plans to deploy this new system during 1998. The design and
implementation of these new systems, including related upgrades in computer
hardware, was necessary to develop a more efficient portfolio servicing system
that would permit a high level of growth in the FFCA portfolio while containing
operating costs. The new systems are also "Year 2000" compliant which means that
the systems will know how to handle any dates that refer to the 21st century.
With the planned installation of the new property management system in 1998, all
of FFCA's significant information systems will be "Year 2000" compliant. FFCA is
in the process of assessing 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), and has developed a plan
for any such systems that are found to be noncompliant.
A five-phase process to address the issues associated with the Year
2000 includes: (1) an inventory and assessment of the systems and electronic
devices that may be at risk; (2) the identification of potential solutions; (3)
the implementation of upgrades or replacements to affected systems or devices;
(4) the verification of compliance and testing of the revised systems; and (5)
the training of users on the new systems. To date, FFCA has completed the
inventory and assessment phase of all critical computer hardware, as well as the
operating system and database software, and has received statements of "Year
2000" compliance from the related vendors. The verification of "Year 2000"
compliance through testing of these systems and training of users is nearly
complete.
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:
o 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.
o Chain Store Investment Amount. FFCA seeks to invest in properties for
amounts which are not in excess of their fair market value.
o Site Considerations. FFCA seeks to invest in high profile, high traffic
real estate which it believes exhibits strong retail property
fundamentals.
o Market Considerations. FFCA seeks to emphasize investments in
properties used by chains having significant area market penetration.
o Operating Experience. FFCA seeks to invest in properties of multi-unit
chain store operators with strong operating and industry backgrounds.
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o Credit Considerations. FFCA's investments generally have full tenant or
borrower recourse. Many of FFCA'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 lease or mortgage payments.
o Physical Condition. FFCA seeks to invest in well-maintained existing
properties or in newly constructed properties. FFCA has a staff of
appraisal professionals who conduct physical site inspections of each
property financed by FFCA.
o Chain Store Suitability. FFCA seeks to primarily invest in real estate
used by large national and regional chain store systems having annual
system-wide sales of more than $250 million.
o Environmental Considerations. For each property in which it invests,
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.
Chain Store Properties
Although an individual chain store's sales may vary by season, FFCA
does not believe that any aspect of its business is significantly seasonal in
nature. FFCA's portfolio is generally diversified by concept; however, FFCA may
be dependent to a certain extent upon one or more of the franchisors or
operating concepts since a failure of any of the franchisors or chain systems to
support their franchisees or chain properties could result in financial
difficulty for such franchisees and affect the ability of the franchisees to
make payments to FFCA. FFCA is not affiliated with any of the franchisors or
franchisees.
The following table sets forth the interests held by FFCA in
restaurant, convenience store and automotive service and parts concepts as of
December 31, 1997. The chain distribution shown below does not represent
concentration of specific operators under lease or mortgage loan agreements.
These agreements are with the operators, not the chains, and there are
approximately 420 operators represented within FFCA's investment portfolio.
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Chain Distribution by Number of Properties as of December 31, 1997
Percentage
Securitized of
Chain FFCA Interests Total Total
(1)
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Burger King 260 116 376 15%
Hardee's 148 226 374 15%
Arby's 210 110 320 13%
Jack in the Box 169 1 170 7%
Wendy's 150 5 155 6%
EZ Serve (2) 149 -- 149 6%
KFC 78 29 107 4%
Pizza Hut 107 -- 107 4%
Taco Bell 80 7 87 4%
Mrs. Winner's 10 66 76 3%
Applebee's 28 13 41 2%
Lee's Chicken 38 -- 38 2%
Black-eyed Pea 34 -- 34 1%
Perkins 23 5 28 1%
Fuddruckers 26 -- 26 1%
White Hen Pantry (2) 26 -- 26 1%
Whataburger 24 1 25 1%
Fazoli's 24 -- 24 1%
Chili's 21 2 23 1%
Popeye's 22 -- 22 1%
Denny's 13 7 20 1%
Ryan's Family Steakhouse -- 17 17 1%
Bojangles 15 -- 15 1%
Non-chain properties 8 -- 8 0%
All other concepts 192 21 213 8%
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Totals 1,855 626 2,481 100%
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(1) Represents securitized mortgage loans in which FFCA holds residual
interests.
(2) Convenience store property.
One restaurant operator, Foodmaker, Inc. ("Foodmaker"), contributed
9.6% of FFCA's total rental and mortgage loan interest revenues (generated from
its investment portfolio) during 1997. Foodmaker accounted for 10.9% and 12.5%
of FFCA's total rental and mortgage loan interest revenues during 1996 and 1995,
respectively. Foodmaker operates and franchises Jack in the Box
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restaurants. The relative decrease in the percentage of FFCA's revenue from
Foodmaker between 1995 and 1997 is due to the fact that FFCA's portfolio is
growing and, as a result, Foodmaker is becoming a relatively smaller portion of
the entire portfolio. This decrease is expected to continue.
Competitive Conditions
The financing of chain store real estate for multi-unit chain store
operating companies is both competitive and fragmented. Competition exists in
every geographic market in which FFCA seeks to invest. Competing participants
include banks, insurance companies, finance companies, leasing companies and
other real estate investment trusts. FFCA believes that it has several
competitive advantages that enable it to be selective with respect to its real
estate investments. The large market capitalization of FFCA permits it to make
both large and small real estate investments and to obtain capital from numerous
sources at competitive rates. FFCA's real estate investments are comprised of
properties that are diversified by chain store operator, chain and geographic
location. Diversification reduces risk and has a favorable impact upon FFCA's
access to, and cost of, capital. FFCA's "Preferred Client Program" is designed
to offer forward financing commitments and a streamlined financing process for
leading chain store operators in order to build on long-term business
relationships instead of the historic industry practice of financing real estate
on an inefficient, transaction-by-transaction basis. FFCA believes it offers
superior client service resulting from continuity of its management and industry
specialization and knowledge. FFCA, with the ability to provide both
sale-leaseback financing and mortgage loans (including a variable-rate loan
product introduced in 1996), improves the chain store operators' financing
flexibility and provides a competitive advantage to FFCA in providing financing
opportunities.
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 ("GDP") of the United States. The food service
industry grew at an estimated inflation-adjusted rate of 1.7% during 1997, as
compared to a 2.5% increase in the GDP for the same year. This year marked the
sixth consecutive year of real sales growth rates for the industry.
FFCA's management anticipates that slowing new restaurant development
will have a minimal impact on its ability to generate new investments. In recent
years, investments in newly-constructed restaurants have been a small percentage
of new business for FFCA. In 1997 and 1996, the percentage of FFCA's new
business related to existing restaurants (as compared to new restaurant
construction) was 93% and 85%, respectively. Although the number of total
restaurants in the U.S. may not expand significantly, the dynamics at each chain
are different. While one chain may close many restaurants, other chains may
expand significantly. For new property investments, FFCA plans to target chains
which are expanding, and plans to limit its investments in property for chains
which are decreasing in size or experiencing low growth rates.
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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 ticket, that influence how individual restaurant chains are
categorized. Research indicates that an average fast food meal ticket
approximates $5, while the median full service meal ticket averages between $7
and $15.
Restaurant industry growth has exceeded total food service industry
growth during the past ten years, as the percentage of food consumed away from
home, as compared to total food consumption, has increased significantly. Sales
in the restaurant industry have increased by $59 billion during the past ten
years, while total expenditures on food and beverages everywhere have increased
only $55 billion. This means 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 in the past ten
years.
FFCA 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. In comparison to the restaurant industry as a whole, the top 100
chains have shown an increase in their percentage of restaurants since 1980,
from 25% to 32% of total U.S. restaurants in 1996, and their revenues have
increased from 40% to 48% of total U.S. revenues during the same period. Much of
the chains' market share gains in the past, came at the expense of small,
independent 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.
The fast food group generated an estimated 31% of total food service
industry revenues, and 47% of total restaurant industry revenues, during 1997.
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 in-store processes.
Over 80% of FFCA's portfolio is represented by fast food restaurants
which include, but are not limited to, Burger King, Hardee's, Arby's, Jack in
the Box, Wendy's, KFC, Pizza Hut, Taco
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Bell, Mrs. Winners and Whataburger. Full service restaurant chains, which
comprise over 8% of FFCA's portfolio, include Applebee's, Black-eyed Pea,
Denny's, Chili's and Fuddruckers.
Restaurant Chains
In addition to the concentration on real estate for fast food
restaurants, FFCA's investment focus has been on real estate, which is used by
the national and regional restaurant chains. 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.
FFCA 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, FFCA 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, FFCA'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 and Retail Petroleum Industry
The convenience and retail petroleum 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 1996 were $151.9 billion, 46.5% in merchandise sales and 53.5%
in gasoline sales. Convenience store industry average gross profit margin in
1996 was 20.2% of sales, with merchandise at 31.2% and gasoline
13
<PAGE>
at 10.7% of sales. Because of the volatility of gasoline margins and the threat
of pending tobacco legislation, many petroleum marketers have or are adding
convenience stores and other ancillary services such as car washes, lube shops,
and fast food to contribute more consistent margins. However, average
convenience store margins decreased .5% between 1995 and 1996, 20.8% to 20.3%
respectively, because of increasing competition and labor costs. The number of
convenience stores increased 1.1% in 1996 to 94,200, while the number of
gasoline stations declined 1.2% between mid-1996 and mid-1997.
Gasoline prices have decreased in recent months, increasing retail
margins. Retail prices move slower than wholesale prices, causing retail margins
to increase when prices fall and tighten when prices rise, until equilibrium is
reached. The winter 1997/1998 price decrease is attributed to a warm winter,
lower demand in Asia, and increased production from OPEC as well as non-OPEC
entities. Along with lower prices has been an increase in gasoline demand. 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 of
the smaller 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 1,641
convenience stores over 1996 and the top 50 operating 2,060 units more than
1996. Nine of the top 10 chains are petroleum marketers, which also dominate the
top 50, operating 60% of all outlets held by the top 50 companies.
Automotive Aftermarket Industry
The automotive aftermarket industry refers to companies engaged in the
service, repair, maintenance and sale of products for motor vehicles after their
initial sale to the public. Basic categories in the automotive aftermarket
include parts and service. The parts sector is comprised of accessories and
replacement parts, while service 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 1996 automotive aftermarket reached $132.4 billion in sales, a 3.5%
increase over 1995 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 $34.6 billion, or 26.1% of the automotive
aftermarket, a 4.5% increase over 1995. Car products accounted for 31.6%, down
from 1995; truck products exceeded car products for the first year at 34.4% of
the
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<PAGE>
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 $19.2 billion in car and truck
aftermarket products in 1996, a 1% increase over 1995. Sales have been
relatively flat since 1994, and only increased 15.7% between 1986 and 1996. On
the contrary, purchased services has increased 75.6% between 1986 and 1996. 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, increased foreign vehicles, emissions testing requirements,
increased vehicle sophistication, decreasing blue collar jobs, and most
important 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. 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 34%
of all fast lube outlets and an estimated 12.7% of all stores that change oil.
The anticipated 1998 growth rate for the top 10 lube chains is 18.0%.
Specialty repair shop share of the car and light truck service market
grew from 12.6% in 1986 to 19.2% in 1996. Between 1991 and 1996, product sales
growth for specialty repair shops was 49.2%. SRSs captured an 18% share of
service bays in 1996, increasing their number of bays 18.3% between 1986 and
1996, while the number of bays operated by service stations and garages and
vehicle dealers decreased significantly, 20.1% and 12.7% respectively, during
the same period. Service bays are handling more vehicles, approximately 155
vehicles per service bay in 1996 (up from 118 in 1986), and are estimated to
grow to 171 by the year 2001.
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
18.5% between 1990 and 1994, and is expected to increase to 15,120 stores by the
year 2000, a 17.3% increase over the 1996 count. The top 10 parts retailers
accounted for over 14% of the total outlets selling auto parts and experienced a
13.5% increase in outlets between early 1997 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
15
<PAGE>
governments that affects the development and regulation of chain store
properties. FFCA'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, FFCA does not have
primary responsibility for regulatory compliance and any obligation of FFCA
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.
FFCA has performed environmental assessments or obtained environmental
insurance on each property acquired or financed by FFCA since 1994. Properties
acquired from FFCA's predecessors did not have environmental audits performed
either at the time FFCA 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, FFCA 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
FFCA.
No portion of FFCA's business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the United States
Government. FFCA does not manufacture any products and therefore does not
require any raw materials in order to conduct its business.
Recent Legislation
FFCA, as the owner or lender with respect to chain store real estate,
was not materially or directly affected by recent legislation in 1997; however,
chain store operators under lease and loan agreements with FFCA may be affected
by recent legislation. This legislation includes the Minimum Wage Increase Act
of 1996, which increased the federal minimum wage to $4.75 per hour from October
1996 through August 1997, and to $5.15 per hour in September 1997. To the extent
that chain store operators are unable to increase prices to reflect higher labor
costs or to more efficiently use existing labor, the profitability and cash flow
of a chain store may decrease. The effect of the increase in minimum wages may
be minimal for those chain store operators who are required to pay higher wages
because of market conditions.
Expensive equipment upgrades required by the Underground Storage Tank
regulation set forth by the Environmental Protection Agency could force some
smaller convenience store operators out of business, forcing them to sell to
larger, better capitalized companies. The date
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<PAGE>
for underground storage tank compliance is December 31, 1998. Pending tobacco
regulations could change the way convenience stores sell tobacco products.
Convenience store operators would be forced to create a special area to sell
tobacco products that is inaccessible to minors, or stock all tobacco products
behind the counter and remove all related promotional displays out of site of
minors. Convenience store operators are seeking to provide other services to
customers to decrease tobacco's percentage of merchandise sales, as well as the
best methods to comply with the regulations (should they become enacted) and
maintain margins.
Item 2. Properties.
FFCA and its affiliates have provided financing to the chain restaurant
industry as well as the convenience store and automotive service and parts
industries primarily through sale-leaseback and mortgage loan financing
transactions. At December 31, 1997, FFCA had interests in 2,481 properties
consisting of investments in 2,275 chain restaurants, 198 convenience and
automotive stores and 8 other retail properties. FFCA's portfolio included 1,855
properties represented by investments in real estate and mortgage loans
receivable and 626 properties represented by securitized mortgage loans in which
FFCA holds a residual interest. Of the 1,855 properties included in FFCA's
investment portfolio at December 31, 1997, FFCA has an ownership interest in
1,477 properties on a fee-simple basis in which FFCA holds title to the property
(the "owned" properties). FFCA also holds title to the equipment on
approximately one-eighth of these properties. The real estate owned by FFCA
consists of the land and buildings comprising each chain property, except for
approximately 23 properties at December 31, 1997 on which FFCA holds title to
the land only and made mortgage loans for the related buildings (the "hybrid
mortgages"). The remaining properties represent mortgage loan financing
transactions in which FFCA holds a first mortgage on the land and buildings
comprising the properties (the "financed properties"). The properties owned by
FFCA and the land related to the hybrid mortgages are leased to the chain
operators under long-term net leases.
FFCA also owns its corporate headquarters located at The Perimeter
Center in Scottsdale, Arizona, consisting of approximately 60,000 square feet of
building on approximately five acres of land. The land and building comprising
FFCA's corporate headquarters serve as collateral on the related mortgage note
payable.
FFCA's chain store properties are typically located on commercial
corridors with significant automobile traffic and are characterized by high
visibility and easy access required for retail property. Locations generally
fall into five categories, including shopping center and mall pad or outparcel
sites, interstate highway locations, central business district locations,
residential neighborhood locations and retail and commercial corridor locations.
A chain store is located on each of the properties except eight, which were
converted to other uses, such as a bank and an optical retail outlet.
Generally, all properties owned or financed by FFCA are free-standing
and surrounded by paved parking areas. The land size for a typical fast food
restaurant generally ranges from 30,000 to 40,000 square feet, with original
acquisition costs generally ranging from $200,000 to $400,000.
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<PAGE>
Full service restaurant land averages range from 40,000 to 80,000 square feet
and from $500,000 to $900,000 in land acquisition costs. The buildings are
principally of the current design of the restaurant concept and are rectangular
buildings constructed from various combinations of stucco, steel, wood, brick
and tile. 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 varies depending upon the area in which the
fast food restaurant is located and on the size of the building and site.
Building and site preparation costs generally range from $250,000 to $700,000
for each property. Full service restaurant building averages range from 5,000 to
9,000 square feet 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 has 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 1996, the original investment per new
store averaged $950,000 for a rural convenience store (24% land, 35% building
and 41% equipment) and $1.2 million for an urban convenience store (35% land,
33% building 32% equipment).
Automotive chain 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 2 - 6
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.
Management believes that its chain store properties are covered by
adequate comprehensive liability, fire, flood and extended loss insurance
provided by reputable companies, with commercially reasonable and customary
deductibles and limits. Certain types and amounts of insurance are required to
be carried by each chain store operator under the financing agreements with
FFCA. 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. In certain circumstances FFCA may permit a chain store
operator to self-insure for certain types of losses. An uninsured loss could
result in a loss to FFCA of both its capital investment and anticipated revenue
from the affected property.
FFCA's lease and mortgage loan financing documents require each chain
store operator to make any expenditure necessary to comply with applicable laws
and as may be required under any applicable franchise agreement; therefore, FFCA
is generally not required to make significant capital expenditures in connection
with any property it financed. Capital expenditures amounted to approximately
$16,000 in 1996 and $40,000 in 1995. There were no capital expenditures on
properties in 1997.
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<PAGE>
As of March 2, 1998, FFCA and its affiliates owned or had financed
2,640 properties in 47 states and all but 26 of the properties were being leased
or were performing under a mortgage loan agreement. Of these nonperforming
properties, 15 are being actively remarketed and 11 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 one percent of
FFCA's total real estate investment portfolio.
FFCA invests in chain store real estate throughout the United States.
No one property is a principal property of FFCA, because each property
represents less than one percent of FFCA's total assets. Reference is made to
the Schedule of Real Estate and Accumulated Depreciation (Schedule III) filed
with this Report for a summary of the geographic diversity of the properties
owned by FFCA as of December 31, 1997. In addition, FFCA has financed, through
mortgage loans, certain chain store properties located throughout the United
States. Reference is made to the Schedule of Mortgage Loans on Real Estate
(Schedule IV) filed with this Report for a summary of properties financed
through mortgages in FFCA's held to maturity portfolio. In 1997, FFCA also
financed mortgage loans held for sale which total $252 million at December 31,
1997. Generally, these loans are first mortgage loans for restaurant,
convenience store or automotive service and parts store land, buildings and/or
equipment. The properties financed through these mortgage loans are
geographically diverse ranging from 5% located in the West North Central region
of the United States to 23% located in the Southeast region.
During 1997, approximately 75% of FFCA's revenues were derived from
real estate investments leased to restaurant operators. The leases have been
originated by FFCA and its predecessors since 1981. The leases are generally 20
years in length with two or four five-year renewal options. The expiration
schedule of the initial term of FFCA's leases extends through 2017, with a
weighted term of such investments of 11.7 years as of December 31, 1997. During
1997, 17% of FFCA's lease revenues were derived from leases that expire in 2005.
FFCA's lease revenues derived from leases which expire in 2015 were 11%, with
10% in 2016 and 10% in 2007. In all other years, the lease revenues are less
than 10% of total lease revenues. With expected continued investment activity,
FFCA anticipates that its exposure to annual lease expirations will become more
diversified.
Item 3. Legal Proceedings.
FFCA is not presently involved in any material litigation nor, to its
knowledge, is any material litigation threatened against FFCA or its properties,
other than routine litigation arising in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of FFCA's security holders during
the fourth quarter ended December 31, 1997.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
FFCA's common stock is currently traded on the New York Stock Exchange
("NYSE") under the symbol FFA. FFCA began trading on the NYSE on June 29, 1994.
The following table sets forth the high and low sales prices per share as quoted
by the NYSE for the following quarters of the fiscal years indicated:
Sales Prices Dividends
------------ ---------
Fiscal 1997 High Low Declared
----------- ---- --- --------
Fourth Quarter $27.87 $24.25 $ .47
Third Quarter 27.56 24.18 .45
Second Quarter 27.00 22.75 .45
First Quarter 27.50 23.75 .45
------
$ 1.82
======
Fiscal 1996
-----------
Fourth Quarter 27.81 22.50 $ .45
Third Quarter 24.50 22.25 .45
Second Quarter 23.12 18.75 .45
First Quarter $23.50 $19.25 .45
------
$ 1.80
======
Future distributions will be dependent upon cash flow from operations,
financial position and cash requirements of FFCA. Management of FFCA anticipates
that cash generated from operations will be sufficient to meet operating
requirements and provide the level of shareholder distributions required to
maintain its status as a REIT.
Holders
There were 18,430 holders of record of FFCA's shares of common stock as
of March 2, 1998; however, FFCA believes the total number of shareholders of
FFCA to be in excess of 70,000 since certain shares are held by nominees.
Sales of Unregistered Securities
Pursuant to a purchase agreement dated February 13, 1998, Colony SB,
LLC ("Colony"), a Delaware limited liability company and an affiliate of Colony
Capital, Inc., acquired on March 13, 1998, 3,792,112 shares of the Company's
common stock and a warrant to purchase an additional 1,476,908 shares of the
Company's common stock. The warrant is immediately exercisable as to all
1,476,908 shares and the warrant expires on March 13, 2005, except that if the
Company or any subsidiary has not completed, on or before September 13, 1999, an
investment by the Company or any subsidiary in a transaction or series of
related transactions with the amount financed (together with any indebtedness
assumed) of at least $125,000,000, then the warrant expires as to 738,454 shares
on September 13, 2001 and expires as to the remaining 738,454 shares on March
13, 2005. The aggregate offering price was $100,000,000. In connection with the
sale, the shares purchased by Colony are entitled to customary demand and
piggyback registration rights, subject to a general six-month restriction on
sales of its shares without board approval. The sale of such securities was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act").
Pursuant to a purchase agreement dated February 12, 1998, on February
18, 1998, the Company sold 961,610 shares of its common stock to Smith Barney
Inc. ("SB"), a Delaware corporation, which thereafter deposited them with the
Trustee of the Equity Focus Trusts - REIT Portfolio Series, 1998-A (the
"Trust"), a regulated unit investment trust under the Investment Company Act of
1940, to which SB acts as sponsor and depositor, in exchange for units in the
Trust. The aggregate offering price was $25,693,017.19. The sale of such
securities was exempt from registration under Section 4(2) of the Securities
Act.
Dividend Reinvestment Plan
FFCA has a dividend reinvestment plan (the "Plan") which allows
shareholders to acquire additional shares of FFCA common stock by automatically
reinvesting dividends. Shares are acquired pursuant to the Plan at a price equal
to 98% of the market price of such shares on the dividend payment date, without
payment of any brokerage commission or service charge. Shareholders who do not
participate in the Plan continue to receive dividends, as declared. As of March
2, 1998, shareholders owning approximately 7.25% of the outstanding shares
participate in the Plan.
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Item 6. Selected Financial Data.
The selected financial data presented in the table below summarizes
certain consolidated financial information of FFCA and its wholly-owned
subsidiaries, as well as that of its predecessor companies, for the five years
in the period ended December 31, 1997. The merger of FFCA with its predecessors
occurred on June 1, 1994 and was accounted for as a reorganization of affiliated
companies under common control in a manner similar to a pooling of interests.
Under this method, the assets and liabilities of the public limited partnerships
and FFCA I were carried over at their historical book values and their
operations have been recorded on a combined historical basis.
SELECTED FINANCIAL DATA
Operations data presented below for periods prior to June 1, 1994
represent the operations of the 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.
<TABLE>
<CAPTION>
In thousands, except per share data 1997 1996 1995 1994 1993
(restated on a combined basis)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations Data (a)
Total revenues $ 134,988 $ 121,166 $ 102,583 $ 91,062 $ 93,789
Income before gain (loss) on sale of property and
other 65,707 60,036 52,816 51,319 53,867
Gain (loss) on sale of property (c) 5,471 9,899 977 2,784 (156)
Income before extraordinary item (d) 72,897 68,539 53,793 25,905(b) 53,711
Net income (b) 72,897 68,539 51,329 25,905(b) 53,711
Dividends/Distributions declared 75,004 72,846 72,471 75,913 75,200
Earnings Per share, assuming dilution:
Income before gain (loss) on sale of property
and other costs $ 1.59 $ 1.48 $ 1.31 $ 1.27 $ 1.34
Income before extraordinary item (d) $ 1.76 $ 1.69 $ 1.33 $ 0.64 $ 1.33
Net income $ 1.76 $ 1.69 $ 1.27 $ 0.64 $ 1.33
Dividends/Distributions declared $ 1.82 $ 1.80 $ 1.80 $ 1.82 $ 1.86
Weighted average common and common
equivalent shares outstanding 41,333 40,603 40,294 40,251 40,251
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (a)
Real estate owned, at cost $ 951,305 $ 868,215 $ 794,580 $ 681,126 $ 661,576
Mortgage loans receivable 35,184 57,808 199,486 65,980 38,091
Mortgage loans held for sale 251,622 -- -- -- --
Note receivable from affiliate (e) -- 147,616 -- -- --
Other investments 55,185 37,836 -- -- --
Total assets 1,179,198 988,776 843,504 612,228 619,443
Notes payable 309,360 298,956 198,702 -- --
Borrowings under line of credit 302,000 150,500 110,000 59,000 --
Other debt 8,500 8,500 8,500 8,500 10,942
Shareholders' equity $ 522,996 $ 495,370 $ 493,817 $ 514,107 $ 576,775
</TABLE>
- ---------------
(a) The information for periods prior to June 1, 1994 is, in effect, a
restatement of the historical operating results of 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.
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<PAGE>
(b) Net income for the year ended December 31, 1994 was impacted by REIT
transaction costs recognized upon consummation of the merger of FFCA and its
predecessor entities.
(c) 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 1997 and
1996 gain on the sale of property, $430,000 and $7.1 million, respectively,
relates to the securitization transaction completed in that year.
(d) Income before extraordinary item excludes debt extinguishment charges of
$2.5 million in 1995.
(e) Note receivable from FFCA's affiliate, FFCA Mortgage Corporation,
representing mortgage loans held for sale by the affiliate.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
General
Franchise Finance Corporation of America ("FFCA") is a
self-administered real estate investment trust ("REIT") which primarily provides
real estate financing to the chain restaurant industry, as well as the
convenience store and automotive service and parts industries, through various
financial products, including sale-leaseback transactions, mortgage loans,
equipment loans and construction financing. At December 31, 1997, FFCA had
interests in 2,481 properties consisting of investments in 2,275 chain
restaurants, 198 convenience and automotive stores and 8 other retail
properties. FFCA's portfolio included 1,855 chain store properties represented
by investments in real estate and mortgage loans and 626 properties represented
by securitized mortgage loans in which FFCA holds a residual interest.
Liquidity and Capital Resources
During 1997, FFCA and its affiliate, FFCA Mortgage Corporation,
originated $504 million in new sale-leaseback and mortgage loan investments.
This surpassed FFCA's 1996 investment level of $340 million by nearly 50%, while
the 1996 investment level represented an increase over 1995's investments of
$278 million. FFCA's rate of investment growth has increased beginning with the
introduction of its mortgage loan financing products in 1995 and 1996. In 1997,
mortgage loans had grown to represent over 70% of new investments as compared to
48% in 1995. Investment growth is also attributable to FFCA's recent expansion
into the convenience store and automotive service and parts industries that
accounted for over $90 million in investments during the fourth quarter of 1997.
These industries meet FFCA's existing investment criteria and are a complement
to FFCA's chain restaurant investments because the real estate they require is
similar in many respects to the locations chosen by chain restaurants. FFCA's
portfolio represents nearly 2,500 locations throughout the United States, over
700 of which were financed during 1997. In addition to this geographic
diversification, the portfolio is also represented by more than 400 different
operators in approximately 50 retail chains.
FFCA's investments in chain store properties are funded initially by
cash generated from operations and draws on FFCA's revolving credit facility.
Net draws on this facility totaled $151 million in 1997, $39 million in 1996 and
$44 million in 1995. The loan facility is used as a warehousing line until a
sufficiently large and diverse pool of mortgage loans is accumulated to warrant
the sale of loans through a securitization transaction. This loan facility is
also used as a
22
<PAGE>
warehousing line for properties pending the issuance of additional debt or
equity securities. Net proceeds from securitization transactions amounted to
$104 million in 1997 and $152 million in 1996, and net proceeds of unsecured
notes issued by FFCA amounted to $10.15 million in 1997, $100 million in 1996
and $200 million in 1995. Cash proceeds from the sale of property, the
collection of mortgage loan principal payments and the receipt of mortgage loan
payoffs, approximating $61 million in 1997, $51 million in 1996 and $18 million
in 1995, were also used to partially fund new investments.
FFCA hedges against fluctuations in interest rates through the use of
derivative financial instruments from the time mortgage loans are originated
until the time they are sold through a securitization transaction. At December
31, 1997, FFCA had outstanding interest rate swap contracts aggregating $152.6
million in notional amount. The notional amount serves solely as a basis for the
calculation of payments to be exchanged and are not a measure of the exposure of
FFCA through its use of derivatives. Under the interest rate swap contracts, two
parties agree to swap payments over a specified period. FFCA agrees to make
payments at a specified fixed rate and the other party to the contract agrees to
make payments based on a variable market index rate. FFCA intends to terminate
the interest rate agreements upon securitization of the fixed-rate mortgage
loans in mid-1998, at which time FFCA 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 fixed rate set at the beginning of the interest rate swap
contract and the variable market index 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 agreements will be measured and
recognized in the statement of operations.
FFCA's primary source of interim funding for new investments continues
to be its $350 million unsecured acquisition loan facility. This loan facility
bears interest at a spread above the one-month LIBOR rate for a weighted average
interest rate of 6.63% in 1997 as compared to a weighted average interest rate
of 7.12% in 1996 and 7.79% in 1995. The loan facility expires in December 2000,
with the possibility of annual extensions. In January 1998, FFCA increased its
capacity for growth by entering into a separate $100 million acquisition loan
facility with a bank on substantially the same terms and conditions as the $350
million acquisition loan facility. The $100 million acquisition loan facility
expires no later than May 30, 1998, as described in the credit agreement.
At December 31, 1997, FFCA had cash and cash equivalents of $7.1
million and had $48 million available on its $350 million revolving credit
facility. FFCA's anticipated investments include commitments totaling
approximately $500 million at December 31, 1997. These commitments were made to
several large operators who operated chain restaurants such as Burger King,
Wendy's and Arby's, and to operators of convenience store and automotive service
and parts businesses such as White Hen Pantry, Circle K, 7-11 and Valvoline, to
acquire or finance (subject to FFCA's customary underwriting procedures)
approximately 575 restaurant properties over the next year. FFCA anticipates
funding these specific commitments, and other investments in chain store
properties, through amounts available on its revolving credit facilities,
issuance of additional unsecured debt, issuance of mortgage-backed securities
through securitization or issuance of additional equity securities of FFCA.
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To continue the growth rate achieved in 1997, FFCA increased its
capital by entering into various equity transactions. In September 1997, FFCA
sold 956,160 shares of common stock to the trustee of a unit investment trust.
Net proceeds to FFCA from this sale were $23.3 million. In addition, FFCA raised
a total of $59 million through the sale of 2.2 million shares of common stock to
two separate unit investment trusts in February 1998. Also in February 1998,
FFCA signed an agreement to sell approximately 3.8 million shares of common
stock to an affiliate of Colony Capital, Inc. (Colony), a Los Angeles based real
estate-related investment firm. In the transaction, Colony made a $100 million
equity investment in newly-issued shares of FFCA common stock, representing an
eight percent interest in the outstanding common stock of FFCA. In addition,
Colony has warrants to purchase an additional 1,476,908 shares of FFCA's common
stock and has the right to designate for nomination a member to FFCA's Board of
Directors. This equity issuance which closed on March 13, 1998, makes Colony the
largest shareholder of FFCA and adds to FFCA's financial flexibility and
capabilities.
FFCA has a dividend reinvestment plan that allows shareholders to
acquire additional shares of FFCA stock by automatically reinvesting their
quarterly dividends. As of March 2, 1998, shareholders owning approximately
7.25% of the outstanding shares of FFCA common stock participate in the dividend
reinvestment plan and dividends reinvested during 1997 totaled $5.8 million as
compared to $4.9 million in 1996 and $852,000 in 1995. For the fourth quarter,
the Board of Directors approved raising FFCA's quarterly dividend to $0.47 from
$0.45, an increase of 4.4%. This dividend is payable on February 20, 1998 to
shareholders of record on February 10, 1998. Management anticipates that cash
generated from operations will be sufficient to meet operating requirements and
provide the level of shareholder dividends required to maintain FFCA's status as
a REIT.
During 1997, FFCA 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 design of FFCA's new property
management system is nearing completion and FFCA plans to deploy this new system
during 1998. The design and implementation of these new systems, including
related upgrades in computer hardware, was necessary to develop a more efficient
portfolio servicing system that would permit a high level of growth in the FFCA
portfolio while containing operating costs. 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 FFCA'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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<PAGE>
FFCA is taking a proactive approach in dealing with the issues
associated with the Year 2000 and a five-phase process to address this challenge
has been approved by FFCA's computer steering committee. This plan includes: (1)
an inventory and assessment of the systems and electronic devices that may be at
risk; (2) the identification of potential solutions; (3) the implementation of
upgrades or replacements to affected systems or devices; (4) the verification of
compliance and testing of the revised systems; and (5) the training of users on
the new systems. To date, FFCA has completed the inventory and assessment phase
of all critical computer hardware, as well as the operating system and database
software, and has received statements of "Year 2000" compliance from the related
vendors. The verification of "Year 2000" compliance through testing of these
systems is nearly complete. FFCA is in the process of assessing 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), and has developed a plan for any such systems that are
found to be noncompliant. Based on current estimates and plans, FFCA believes
the cost of addressing the Year 2000 issue will not be material to FFCA's
operations or financial condition.
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996 and 1995
FFCA 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 FFCA's portfolio,
revenues rose to $135 million in 1997 from $121 million in 1996 and $103 million
in 1995.
FFCA'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 rent related to properties sold and the expiration
of original equipment leases.
Generally, the leases in FFCA's portfolio also 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 million
in 1996 and $4 million in 1995. The increases relate primarily to increases in
individual restaurant-level sales volumes and to lessees whose sales levels
have, for the first time, exceeded the threshold where contingent rentals are
due. FFCA
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<PAGE>
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, FFCA 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. 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, FFCA formed FFCA
Mortgage Corporation (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 accompanying financial statements. During 1997, the loan
origination process was transferred to FFCA's wholly-owned subsidiary, FFCA
Acquisition Corporation, and by the end of 1997 FFCA 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 bank credit
facility 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 during 1996 and 1997, it retains certain interests through the purchase of
subordinated investment securities as discussed below. These securities generate
revenues that are included in "Investment Income and Other" in the accompanying
financial statements and represent the majority of the increase in this income
between years.
Certain mortgage loans originated by FFCA, 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. FFCA 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 certificate. 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 FFCA are
the last of the securities to be repaid from the loan pool, so that if any of
the underlying mortgage loans default, these securities take the first loss. Any
future credit losses in the securitized loan pool would be concentrated in these
subordinated investment securities retained by FFCA; however, FFCA originates
and services mortgage loans and has the infrastructure 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. FFCA 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.
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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.
FFCA, 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 December 31, 1997. At dissolution,
cash dividends were paid to the common stockholder and the remaining assets were
distributed to FFCA in satisfaction of its note receivable from Mortgage Corp.
FFCA 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, FFCA provided Mortgage Corp. with a secured
revolving line of credit at a spread above FFCA'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 accompanying 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. FFCA's average debt balance increased to $470 million in 1997 from
$335 million in 1996 and $175 million in 1995. Although FFCA'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, FFCA 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 FFCA's bank line of credit. In December 1996, FFCA amended its
bank line of credit with participating banks to, among other things, decrease
the interest rate by .5%. During 1997, the bank credit facility provided that
FFCA 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 FFCA's investment origination and servicing
capacity. FFCA's recent investments in computer system technology has increased
the efficiency of its information and portfolio servicing systems, which enables
FFCA to expand its revenue base while containing operating costs.
Approximately three-fourths of FFCA'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,
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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.
FFCA 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,
FFCA sold 55 properties and related equipment (12 of which were through the
lessee's exercise of their purchase options on the properties) 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 FFCA's decision
to sell certain underperforming properties where remarketing efforts had failed
to produce a suitable lessee.
FFCA 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. 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 represent less than 1% of FFCA's total real estate investment portfolio.
Tenant Concentration
One restaurant operator, Foodmaker, Inc. ("Foodmaker"), accounted for
approximately 9.2% of FFCA's total rental and mortgage loan interest revenues
(generated from its investment portfolio) in 1997. Foodmaker accounted for 10.9%
and 12.5% of FFCA's total rental and mortgage loan interest revenues in 1996 and
1995, respectively. Foodmaker operates and franchises Jack in the Box
restaurants. The relative decrease in the percentage of FFCA's revenue from
Foodmaker since 1995 is due to the fact that FFCA's portfolio is growing and, as
a result, Foodmaker is becoming a relatively smaller portion of the entire
portfolio. This decrease is expected to continue.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and related financial information
required to be filed are attached to this Report. Reference is made to page F-1
of this Report for an index to the consolidated financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
This item is incorporated by reference from the Registrant's definitive
proxy statement for the Annual Meeting of Shareholders presently scheduled to be
held on May 13, 1998, to be filed pursuant to Regulation 14A.
Item 11. Executive Compensation.
This item is incorporated by reference from the Registrant's definitive
proxy statement for the Annual Meeting of Shareholders presently scheduled to be
held on May 13, 1998, to be filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This item is incorporated by reference from the Registrant's definitive
proxy statement for the Annual Meeting of Shareholders presently scheduled to be
held on May 13, 1998, to be filed pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions.
This item is incorporated by reference from the Registrant's definitive
proxy statement for the Annual Meeting of Shareholders presently scheduled to be
held on May 13, 1998, to be filed pursuant to Regulation 14A.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. See Index to Financial Statements on
page F-1 of this Report.
2. Financial Statement Schedules. See Index to Financial
Statements on page F-1 of this Report. All other schedules are
omitted since they are not required, are inapplicable, or the
required information is included in the financial statements
or notes thereto.
3. Exhibits.
The following is a complete list of exhibits filed as part of
this Form 10-K. For electronic filing purposes only, this
report contains Exhibits 27.1 through 27.5, the Financial Data
Schedules. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
- ----------- -----------
3.01 Amended and Restated Bylaws of the Company (1)
3.02 Second Amended and Restated Certificate of Incorporation of
Franchise Finance Corporation of America (2)
4.01 Indenture dated as of November 21, 1995 relating to the 7%
Senior Notes due 2000 and the 7 7/8% Senior Notes due 2005 (3)
4.02 Specimen of Common Stock Certificate (1)
10.01 Acquisition, Construction and Term Loan Agreement, dated as of
December 29, 1988, by and between Franchise Finance
Corporation of America and Scottsdale Land Trust Limited
Partnership (1)
10.02 Promissory Note dated December 29, 1988, executed by Franchise
Finance Corporation of America in favor of Scottsdale Land
Trust Limited Partnership in the principal amount of
$8,500,000 (1)
10.03 1995 Stock Option and Incentive Plan of Franchise Finance
Corporation of America (4)
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10.04 Revolving Loan Agreement dated as of September 1, 1996, by and
between Franchise Finance Corporation of America and FFCA
Mortgage Corporation (5)
10.05 Equipment Revolving Loan Agreement dated as of September 1,
1996, by and between Franchise Finance Corporation of America
and FFCA Mortgage Corporation (5)
10.06 Guaranty of Franchise Finance Corporation of America, with
exhibits, dated December 31, 1996 with respect to the ISDA
Master Agreement and Schedule dated December 31, 1996 by and
between Franchise Finance Corporation of America and FFCA
Mortgage Corporation (12)
10.07 Credit Agreement dated January 27, 1998 among Franchise
Finance Corporation of America, Certain Lenders and
NationsBank of Texas, N.A. (11)
10.08 Stock Purchase Agreement between Franchise Finance Corporation
of America and Colony Investors III, L.P. dated February 13,
1998*
21.01 Subsidiaries of the Registrant*
23.01 Consent of Arthur Andersen LLP*
99.01 Credit Agreement dated as of December 27, 1995 among Franchise
Finance Corporation of America, Certain Lenders and
NationsBank of Texas, N.A., providing a credit facility in the
principal amount of $200,000,000 (the "Credit Agreement") (6)
99.02 Guaranty Agreement dated as of December 27, 1995 made by FFCA
Acquisition Corporation and FFCA Institutional Advisors, Inc.,
guaranteeing the obligations of Franchise Finance Corporation
of America under the Credit Agreement (6)
99.03 Promissory Note dated as of December 27, 1995 executed by
Franchise Finance Corporation of America in favor of
NationsBank of Texas, N.A., in connection with the Credit
Agreement (6)
99.04 Subordination Agreement dated as of December 27, 1995, made by
FFCA Acquisition Corporation and Franchise Finance Corporation
of America for the benefit of Certain Lenders and NationsBank
of Texas, N.A., in connection with the Credit Agreement (6)
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<PAGE>
99.05 Subordination Agreement dated as of December 27, 1995, made by
FFCA Institutional Advisors, Inc. and Franchise Finance
Corporation of America for the benefit of Certain Lenders and
NationsBank of Texas, N.A., in connection with the Credit
Agreement (6)
99.06 Purchase Agreement dated June 27, 1996 between FFCA Secured
Assets Corporation, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as the initial purchaser of $156,490,000
aggregate principal amount of Secured Franchise Loan
Pass-Through Certificates, Class A, Class B, Class C and Class
D (7)
99.07 First Amendment to Credit Agreement dated February 23, 1996
among Franchise Finance Corporation of America, Certain
Lenders and NationsBank of Texas, N.A. as Administrative
Lender (8)
99.08 Second Amendment to Credit Agreement dated June 24, 1996 among
Franchise Finance Corporation of America, Certain Lenders and
NationsBank of Texas, N.A. as Administrative Lender (7)
99.09 Third Amendment to Credit Agreement dated December 27, 1996
among Franchise Finance Corporation of America, Certain
Lenders and NationsBank of Texas, N.A. as Administrative
Lender (12)
99.10 Amended and Restated Credit Agreement among Franchise Finance
Corporation of America, Certain Lenders, NationsBank of Texas,
N.A. as Administrative Agent, and Co-Agents, dated April 15,
1997 (2)
99.11 $45,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of NationsBank of
Texas, N.A., dated April 15, 1997 (2)
99.12 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank of
Montreal, Chicago Branch, dated April 15, 1997 (2)
99.13 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Long-Term
Credit Bank of Japan, Ltd., dated April 15, 1997 (2)
99.14 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Commerzbank
Aktiengesellschaft, Los Angeles Branch, dated April 15, 1997
(2)
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99.15 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Union Bank of
Switzerland (New York Branch), dated April 15, 1997 (2)
99.16 $27,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Cooperatieve
Centtale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch, dated April 15, 1997 (2)
99.17 $25,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Dresdner Bank
AG, Los Angeles Branch, dated April 15, 1997 (2)
99.18 $25,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of AmSouth Bank
of Alabama, dated April 15, 1997 (2)
99.19 $20,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Industrial
Bank of Japan, dated April 15, 1997 (2)
99.20 $20,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank Hapoalim
B.M., San Francisco Branch, dated April 15, 1997 (2)
99.21 $15,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Signet Bank,
dated April 15, 1997 (2)
99.22 $13,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Norwest Bank
Arizona, National Association, dated April 15, 1997 (2)
99.23 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of NationsBank of
Texas, N.A., dated April 15, 1997 (2)
99.24 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank of
Montreal, Chicago Branch, dated April 15, 1997 (2)
99.25 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Long-Term
Credit Bank of Japan, Ltd., dated April 15, 1997 (2)
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<PAGE>
99.26 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Commerzbank
Aktiengesellschaft, Los Angeles Branch, dated April 15, 1997
(2)
99.27 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Union Bank of
Switzerland (New York Branch), dated April 15, 1997 (2)
99.28 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch, dated April 15, 1997 (2)
99.29 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Dresdner Bank
AG, Los Angeles Branch, dated April 15, 1997 (2)
99.30 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of AmSouth Bank
of Alabama, dated April 15, 1997 (2)
99.31 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Industrial
Bank of Japan, dated April 15, 1997 (2)
99.32 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank Hapoalim
B.M., San Francisco Branch, dated April 15, 1997 (2)
99.33 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order Signet Bank,
dated April 15, 1997 (2)
99.34 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, a, payable to the order of Norwest
Bank Arizona, National Association, dated April 15, 1997 (2)
99.35 Guaranty Agreement, dated as of April 15, 1997, by FFCA
Acquisition Corporation, FFCA Institutional Advisors, Inc. and
FFCA Mortgage Corporation, guaranteeing the obligations of
Franchise Finance Corporation of America under the Amended and
Restated Credit Agreement among Franchise Finance Corporation
of America,
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Certain Lenders, NationsBank of Texas, N.A. as Administrative
Agent, and Co-Agents, dated April 15, 1997 (2)
99.36 Subordination Agreement, dated as of April 15, 1997, by FFCA
Acquisition Corporation (2)
99.37 Subordination Agreement, dated as of April 15, 1997, by FFCA
Institutional Advisors (2)
99.38 Subordination Agreement, dated as of April 15, 1997, by FFCA
Mortgage Corporation (2)
99.39 Purchase agreement dated June 8, 1997 between FFCA Secured
Lending Corporation, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Smith Barney Inc., as initial purchasers of
$232,071,000 aggregate principal amount of Secured Franchise
Loan Certificates, Series 1997-1, Class IO, Class A-1a, Class
A-1b, Class A-2a, Class A-2b, Class B-1, Class B-2, Class C-1,
Class C-2, Class D-1, Class D-2, Class E-1 and Class E-2 (9)
99.40 Second Amended and Restated Credit Agreement dated December
29, 1997 among Franchise Finance Corporation of America,
Certain Lenders and NationsBank of Texas, N.A. (10)
- ---------------
*Filed herewith.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 and amendments thereto, registration number 33-65302, as filed with the
Securities and Exchange Commission.
(2) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1997, as filed with the Securities
and Exchange Commission.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated November 24, 1995, as filed with the Securities and Exchange Commission.
(4) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission.
(5) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated September 1, 1996, as filed with the Securities and Exchange Commission.
(6) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated January 25, 1996, as flied with the Securities and Exchange Commission.
(7) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996, as filed with the Securities
and Exchange Commission.
(8) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996, as filed with the Securities
and Exchange Commission.
35
<PAGE>
(9) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997, as filed with the Securities
and Exchange Commission.
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated December 29, 1997, as filed with the Securities and Exchange Commission.
(11) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated January 27, 1998, as filed with the Securities and Exchange Commission.
(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, as filed with the Securities and
Exchange Commission.
(b) Reports on Form 8-K.
FFCA did not file any reports on Form 8-K during the fourth quarter of
fiscal year 1997.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FRANCHISE FINANCE CORPORATION OF AMERICA
Date: March 27, 1998 By /s/ M. H. Fleischer
-------------------
M. H. Fleischer, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Date: March 27, 1998 By /s/ M. H. Fleischer
--------------------------------------------
M. H. Fleischer, Chairman of the Board,
President, and Chief Executive Officer
Date: March 27, 1998 By /s/ John Barravecchia
--------------------------------------------
John Barravecchia, Executive Vice President,
Chief Financial Officer and Treasurer
Date: March 27, 1998 By /s/ Catherine F. Long
--------------------------------------------
Catherine F. Long, Senior Vice President-
Finance and Principal Accounting Officer
Date: March 27, 1998 By /s/ Willie R. Barnes
--------------------------------------------
Willie R. Barnes, Director
Date: March 27, 1998 By /s/ Kelvin L. Davis
--------------------------------------------
Kelvin L. Davis, Director
Date: March 27, 1998 By /s/ William C. Foxley
--------------------------------------------
William C. Foxley, Director
<PAGE>
Date: March 27, 1998 By /s/ Robert W. Halliday
--------------------------------------------
Robert W. Halliday, Director
Date: March 27, 1998 By /s/ Donald C. Hannah
--------------------------------------------
Donald C. Hannah, Director
Date: March 27, 1998 By /s/ Dennis E. Mitchem
--------------------------------------------
Dennis E. Mitchem, Director
Date: March 27, 1998 By /s/ Louis P. Neeb
--------------------------------------------
Louis P. Neeb, Director
Date: March 27, 1998 By /s/ Kenneth B. Roath
--------------------------------------------
Kenneth B. Roath, Director
Date: March 27, 1998 By /s/ Wendell J. Smith
--------------------------------------------
Wendell J. Smith, Director
Date: March 27, 1998 By /s/ Casey J. Sylla
--------------------------------------------
Casey J. Sylla, Director
Date: March 27, 1998 By /s/ Shelby Yastrow
--------------------------------------------
Shelby Yastrow, Director
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Income For The Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Shareholders' Equity
For The Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Schedule III - Schedule of Real Estate and Accumulated
Depreciation as of December 31, 1997 F-16
Schedule IV - Schedule of Mortgage Loans on Real Estate
as of December 31, 1997 F-18
F-1
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Franchise Finance Corporation of America:
We have audited the accompanying consolidated balance sheets of FRANCHISE
FINANCE CORPORATION OF AMERICA (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended Decmeber 31, 1997. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Franchise Finance Corporation
of America and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of the
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
January 27, 1998.
F-2
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
--------------------------- --------------------------
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
------
Investments:
Investments in Real Estate, at cost (Note 3):
Land $ 382,637 $ 346,626
Buildings and Improvements 545,629 490,506
Equipment 23,039 31,083
----------- -----------
951,305 868,215
Less-Accumulated Depreciation 175,263 172,941
----------- -----------
Net Real Estate Investments 776,042 695,274
Mortgage Loans Held for Sale (Note 4) 251,622 --
Mortgage Loans Receivable, net of allowances
of $2,600 in 1997 and $1,400 in 1996 (Note 5) 35,184 57,808
Related Party Notes Receivable (Note 6) -- 147,616
Other Investments (Note 6) 55,185 37,836
----------- -----------
Total Investments 1,118,033 938,534
Cash and Cash Equivalents 7,130 11,350
Notes and Accounts Receivable, net of allowances
of $2,300 in 1997 and $1,700 in 1996 (Note 5) 34,699 22,020
Other Assets (Notes 2 and 12) 19,336 16,872
----------- -----------
Total Assets $ 1,179,198 $ 988,776
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Dividends Payable $ 19,640 $ 18,254
Notes Payable (Note 7) 309,360 298,956
Borrowings Under Line of Credit (Note 8) 302,000 150,500
Mortgage Payable to Affiliate (Note 12) 8,500 8,500
Accrued Expenses and Other 16,702 17,196
----------- -----------
Total Liabilities 656,202 493,406
----------- -----------
Commitments (Note 15)
Shareholders' Equity (Notes 10 and 11):
Preferred Stock, par value $.01 per share, 10 million shares
authorized, none issued or outstanding -- --
Common Stock, par value $.01 per share, authorized 200 million
shares, issued and outstanding 41,787,543 shares in 1997
and 40,564,076 shares in 1996 418 406
Capital in Excess of Par Value 583,056 553,335
Cumulative Net Income 202,106 129,209
Cumulative Dividends (262,584) (187,580)
----------- -----------
Total Shareholders' Equity 522,996 495,370
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,179,198 $ 988,776
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-3
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Rental $ 101,292 $ 95,612 $ 86,182
Mortgage Loan Interest 10,987 15,738 14,118
Interest (Related Party) (Note 6) 9,037 2,861 --
Investment Income and Other 13,672 6,955 2,283
--------- --------- ---------
134,988 121,166 102,583
--------- --------- ---------
Expenses:
Depreciation and Amortization 20,784 20,654 21,201
Operating, General and Administrative 11,106 11,488 10,283
Property Costs 1,641 2,041 2,046
Interest 34,764 25,974 15,276
Interest (Related Party) (Note 12) 986 973 961
--------- --------- ---------
69,281 61,130 49,767
--------- --------- ---------
Income Before Gain on Sale of Property
and Other 65,707 60,036 52,816
Gain on Sale of Property (Note 2) 5,471 9,899 977
Equity in Net Income (Loss) of Affiliate (Note 6) 1,719 (1,396) --
--------- --------- ---------
Income Before Extraordinary Item 72,897 68,539 53,793
Extraordinary Item - Loss on Early
Extinguishment of Debt (Note 8) -- -- (2,464)
--------- --------- ---------
Net Income $ 72,897 $ 68,539 $ 51,329
========= ========= =========
Earnings Per Share (Note 2):
Income Before Extraordinary Item $ 1.78 $ 1.70 $ 1.34
Extraordinary Item -- -- (.06)
--------- --------- ---------
Net Income $ 1.78 $ 1.70 $ 1.28
========= ========= =========
Earnings Per Share - Assuming Dilution (Note 2):
Income Before Extraordinary Item $ 1.76 $ 1.69 $ 1.33
Extraordinary Item -- -- (.06)
--------- --------- ---------
Net Income $ 1.76 $ 1.69 $ 1.27
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Capital
Common in Excess of Cumulative Cumulative
Stock Par Value Net Income Dividends Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ 403 $ 546,626 $ 9,341 $ (42,263) $ 514,107
Capital contributions - dividend
reinvestment plan -- 852 -- -- 852
Net income -- -- 51,329 -- 51,329
Dividends declared - $1.80 per share -- -- -- (72,471) (72,471)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 403 547,478 60,670 (114,734) 493,817
Capital contributions - dividend
reinvestment plan 2 4,897 -- -- 4,899
Exercise of stock options 1 960 -- -- 961
Net income -- -- 68,539 -- 68,539
Dividends declared - $1.80 per share -- -- -- (72,846) (72,846)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 406 553,335 129,209 (187,580) 495,370
Capital contributions -
Issuance of common stock 10 23,297 -- -- 23,307
Dividend reinvestment plan 2 5,792 -- -- 5,794
Exercise of stock options -- 632 -- -- 632
Net income -- -- 72,897 -- 72,897
Dividends declared - $1.82 per share -- -- -- (75,004) (75,004)
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 $ 418 $ 583,056 $ 202,106 $ (262,584) $ 522,996
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 72,897 $ 68,539 $ 51,329
Adjustments to net income:
Depreciation and amortization 20,784 20,654 21,201
Gain on sale of property (5,471) (9,899) (977)
Equity in net (income) loss of affiliate (1,719) 1,396 --
Provision for uncollectible mortgages and notes 791 1,400 --
Loss on early extinguishment of debt -- -- 2,464
Other (958) 3,859 4,604
--------- --------- ---------
Net cash provided by operating activities 86,324 85,949 78,621
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property (140,218) (128,713) (143,262)
Investment in mortgage loans (310,811) (49,102) (133,289)
Investment in notes receivable (17,460) (17,280) (1,200)
Collection of (investment in) related party notes receivable 100,706 (147,616) --
Purchase of investment securities (15,946) -- --
Proceeds from securitization transaction 103,975 151,720 --
Dividend received from (investment in) affiliate 9,822 (9,500) --
Proceeds from sale of property 26,425 34,015 12,210
Receipt of mortgage loan and note payoffs 30,198 12,265 489
Collection of mortgage loan principal 4,325 4,867 5,337
Collection of investment security principal 1,463 715 --
--------- --------- ---------
Net cash used in investing activities (207,521) (148,629) (259,715)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (73,618) (72,725) (72,471)
Proceeds from issuance of common stock 29,733 5,860 852
Proceeds from bank borrowings 503,000 254,000 361,412
Proceeds from issuance of notes 60,150 100,000 198,678
Payment of bank borrowings and loan fees (352,288) (215,172) (317,405)
Payment of other unsecured notes (50,000) -- --
--------- --------- ---------
Net cash provided by financing activities 116,977 71,963 171,066
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,220) 9,283 (10,028)
CASH AND CASH EQUIVALENTS, beginning of year 11,350 2,067 12,095
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 7,130 $ 11,350 $ 2,067
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997 AND 1996
--------------------------
(1) ORGANIZATION AND OPERATION:
---------------------------
Franchise Finance Corporation of America ("FFCA") is a
self-administered real estate investment trust ("REIT") which primarily provides
real estate financing to the chain restaurant industry as well as the
convenience store and automotive service and parts industries throughout the
United States. FFCA provides financing to operators with experienced management
in established chains through various financial products, including
sale-leaseback transactions, mortgage loans, equipment loans and construction
financing. FFCA and its predecessor companies have provided financing to the
chain restaurant industry since 1981 and began financing convenience stores and
automotive service and parts stores in 1997. FFCA's portfolio of properties is
diversified by tenant, property concept and geographic location. At December 31,
1997, FFCA had interests in 2,481 properties consisting of investments in 2,275
chain restaurants, 198 convenience and automotive stores and 8 other retail
properties. FFCA's portfolio included 1,855 properties represented by
investments in real estate and mortgage loans receivable and 626 properties
represented by securitized mortgage loans in which FFCA holds a residual
interest. These properties are operated by approximately 420 operators in
approximately 50 chains in 47 states.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Consolidation and Equity Method Investments - The accompanying
consolidated financial statements include the accounts of FFCA and its
wholly-owned subsidiaries, FFCA Acquisition Corporation, FFCA Residual Interest
Corporation, FFCA Secured Assets Corporation, FFCA Secured Lending Corporation
and FFCA Institutional Advisors, Inc. All intercompany transactions have been
eliminated. Investments in companies in which FFCA has significant influence but
less than a controlling voting interest are accounted for using the equity
method. Under the equity method, only FFCA's investment in and amounts due from
the equity investee are included in the consolidated balance sheet, only FFCA's
share of the investee's earnings is included in the consolidated operating
results, and only the cash investment, loans or other cash paid to the investee,
less any dividends, cash distributions, loan repayments or other cash received
from the investee, are included in the consolidated cash flows.
Federal Income Taxes - FFCA has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended, as of June 1, 1994. As a result, FFCA
generally will not be subject to federal income taxation at the corporate level
provided it meets certain tests which, among other things, require that its
assets consist primarily of real estate, its income be derived primarily from
real estate and at least 95% of its taxable income be distributed annually to
its shareholders. The tax basis of the assets and liabilities has been recorded
based upon the value of the consideration exchanged upon the merger of FFCA with
its predecessor companies and, accordingly, the tax basis of the net assets
exceeds the book basis by approximately $227 million at December 31, 1997.
Real Estate - FFCA records the acquisition of real estate at cost,
which includes miscellaneous acquisition and closing costs. Depreciation is
computed using the straight-line method over the estimated useful life of 24 to
30 years for buildings and improvements and 7 to 8 years for equipment. FFCA
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 properties. If an
impairment loss is indicated, the loss is measured as the amount by which the
carrying amount of the asset exceeds the estimated fair value of the asset. Gain
on sale of property in 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 impairment loss related to certain
vacant properties. Vacant properties held for sale represent less than 1% of the
total real estate investment portfolio at December 31, 1997.
F-7
<PAGE>
Lease and Loan Origination Fees and Costs - FFCA generally receives a
fee related to activities performed to process a borrower's request for and
origination of credit. Direct costs associated with these activities are offset
against the related fees received and the balance is deferred and amortized into
revenue over the term of the related lease or loan. Loan origination fees and
costs related to mortgage loans held for sale are deferred until the related
loan is sold.
Cash and Cash Equivalents - Cash and cash equivalents include all cash
and highly liquid investment securities with maturities at acquisition of three
months or less. Such investment securities are carried at cost plus accrued
interest which approximates fair market value.
Debt Financing Costs - Included in Other Assets are costs totaling $4.3
million in 1997 and $5.3 million in 1996 (net of accumulated amortization of
$2.2 million in 1997 and $1.1 million in 1996) associated with the issuance in
1995 of FFCA's Senior Notes and the issuance in 1996 and 1997 of various
unsecured notes, which costs are amortized over the terms of the notes on a
straight-line basis (which approximates effective interest method). Amortization
of these debt issuance costs for the years ended December 31, 1997, 1996 and
1995 amounted to $1.3 million, $994,000 and $90,000, respectively, which is
included in interest expense in the accompanying financial statements.
Derivative Financial Instruments - FFCA's portfolio of fixed-rate
mortgage loans held for sale is funded on an interim basis by a variable rate
bank credit facility until the loans are sold in a securitization transaction.
FFCA hedges against fluctuations in interest rates from the time the loans are
originated until the time they are sold through the use of derivative financial
instruments. FFCA does not hold or issue derivative financial instruments for
speculative trading purposes. The instruments used are interest rate agreements
which are non-leveraged and involve little complexity. FFCA intends to terminate
these agreements upon securitization of the fixed-rate mortgage loans, at which
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
agreements will be measured and recognized in the statement of operations.
Rental Revenue Recognition - FFCA leases its real estate under
long-term net leases which are classified as operating leases. Rental revenue
from operating leases is recognized as it is earned.
Investment Property Sales - FFCA records certain sales of property and
equipment under the installment or cost recovery method. Gains totaling
approximately $592,000 in 1997, $664,000 in 1996 and $3 million in 1995 were
deferred on such sales. For financial reporting purposes, deferred gains on
property sales reduced the related mortgage loans receivable balance and totaled
$1.6 million and $1.5 million at December 31, 1997 and 1996, respectively.
Earnings Per Share - Earnings per share amounts for 1996 and 1995 have
been restated to conform with 1997's presentation as required by Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The
following is a reconciliation of basic earnings per share to diluted earnings
per share for income before extraordinary items (amounts in thousands, except
per share data):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
Per Per Per
Earnings Shares Share Earnings Shares Share Earnings Shares Share
-------- ------ ----- -------- ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share -
Income before extraordinary items $ 72,897 40,968 $ 1.78 $ 68,539 40,423 $ 1.70 $ 53,793 40,256 $ 1.34
Effect of Dilutive Securities-
Common stock options -- 365 -- 180 -- 38
-------- ------- -------- ------- -------- -------
Diluted Earnings Per Share $ 72,897 41,333 $ 1.76 $ 68,539 40,603 $ 1.69 $ 53,793 40,294 $ 1.33
======== ======= ====== ======== ======= ====== ======== ======= ======
</TABLE>
Stock options to purchase 692,336 shares of common stock at $26.375 per
share were outstanding during 1997, but were not included in the computation of
diluted earnings per share, because the options' exercise price was greater than
the average market price of the common shares.
F-8
<PAGE>
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Although management believes
its estimates are reasonable, actual results could differ from those estimates.
New Pronouncements - In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Also in June
1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 131 establishes standards for the way that
public companies report certain information about operating segments of their
business in their financial statements (including interim financial reports).
Both standards are effective for FFCA's fiscal year 1998 at which time FFCA will
adopt them. The adoption of these new accounting standards would not have had a
material effect on FFCA's financial statements for the years ended December 31,
1997, 1996 or 1995.
(3) INVESTMENTS IN REAL ESTATE:
---------------------------
FFCA's real estate portfolio is comprised of property leased to tenants
under long-term net operating leases. The lease agreements generally provide for
monthly rentals equal to the greater of a percentage of the property's cost or a
percentage of its gross sales. The term of the leases is generally 20 years for
land and buildings and seven or eight years for equipment (if any). The initial
terms of FFCA's leases extend through 2017 with a weighted average remaining
term of 11.7 years as of December 31, 1997. Land and building leases generally
provide for two or four five-year renewal options. Generally, the lessee has the
option to purchase equipment at the end of the lease term and land and buildings
anytime after the first ten years of the lease at fair market value (but not
less than original cost in most cases). Leases entered into after 1994 generally
provide for 90-day option windows at various dates during the lease term.
Approximately three-fourths of FFCA's land and building leases provide for
purchase options, two-thirds of which are currently exercisable.
Minimum future rentals under noncancellable operating leases as of
December 31, 1997, are as follows (amounts in thousands):
Year ending December 31,
------------------------
1998 $ 101,400
1999 100,600
2000 98,700
2001 96,600
2002 92,700
Thereafter 668,600
----------
Total minimum future rentals $1,158,600
==========
The above table assumes that all leases which expire are not renewed;
therefore, neither renewal rentals nor rentals from replacement lessees are
included. In addition, minimum future rentals do not include contingent rentals
which may be received under the leases based upon a percentage of the lessee's
gross sales. These percentage rentals totaled approximately $6.4 million in
1997, $5 million in 1996 and $4 million in 1995.
(4) MORTGAGE LOANS HELD FOR SALE:
-----------------------------
At December 31, 1997, FFCA's portfolio included mortgage loans
originated in 1997 which are held for sale. These mortgage loans are stated at
the lower of cost or fair market value, determined in the aggregate. The loans
represent first mortgage loans on the land and/or buildings and/or equipment of
360 properties comprising $167.3 million in fixed-rate loans and $68.1 million
in variable-rate loans. Construction loans totaled $16.2 million at December 31,
1997. The fixed-rate loans carry a weighted average interest rate of 9.6% and
mature 5 to 20 years from the date of origination. The variable-rate loans carry
interest rates which adjust monthly based on 30-day LIBOR plus a margin (average
interest rate was 9.2% at December 31, 1997). Total principal and interest
F-9
<PAGE>
payments aggregate approximately $2.4 million per month. The fixed-rate mortgage
loans generally provide for no prepayment for the first five years of the loan;
prepayments during the next five years of the loan generally require a
prepayment penalty based on a percentage of the loan balance. The variable-rate
mortgage loans generally have no prepayment restrictions.
(5) OTHER MORTGAGE LOANS AND NOTES RECEIVABLE:
------------------------------------------
At December 31, 1997, FFCA held first mortgage loans on the land and/or
buildings and/or equipment of approximately 160 properties represented by $35.2
million in participating fixed-rate loans (net of reserve of $2.6 million in
1997). These loans are held for long-term investment and carry interest rates
ranging from 10% to 13.5% per annum and mature 5 to 20 years from the date of
origination. In addition, these loans generally provide for additional interest
payments based on a percentage of the mortgagor's gross sales. Principal and
interest payments on the mortgage loans are due in level amounts with payments
aggregating approximately $7.4 million per year to maturity.
FFCA also held various secured and unsecured notes totaling $27.1
million at December 31, 1997 and $18.8 million at December 31, 1996 (net of
allowances of $460,000 in 1997 and $875,000 in 1996). Generally, the notes carry
interest rates ranging from 10% to 12% per annum and mature 5 to 10 years from
the date of origination.
(6) OTHER INVESTMENTS:
------------------
Investment Securities - Certain mortgage loans originated by FFCA , its
predecessors and its affiliate, FFCA Mortgage Corporation, totaling $261 million
in 1997 and $178.8 million in 1996 were securitized and Secured Franchise Loan
Pass-Through and Trust Certificates (the "Certificates") were sold to investors.
Upon sale, the mortgage loans receivable were removed from the balance sheet and
a gain on the sale was recognized for the difference between the carrying amount
of the mortgage loans and the adjusted sales price. The servicing rights on
these mortgage loans have been retained by FFCA and are not significant. FFCA
also retained certain interests, approximating 11% in 1997 and 12.5% in 1996, in
the aggregate mortgage loan principal balance through the purchase of
subordinated investment securities of the securitization trust and, in 1996,
also purchased the interest-only certificate. These investment securities,
totaling $55.2 million and $29.7 million at December 31, 1997 and 1996,
respectively, were recorded by allocating the previous carrying amount of the
mortgages between the assets sold and the retained interests, based on their
relative fair values and are included in Other Investments in the accompanying
consolidated balance sheets. The investment securities retained in 1997,
totaling $26.6 million, related to the sale of mortgage loans from FFCA's
held-for-sale portfolio, and are accounted for as trading securities. The
investment securities retained in 1996, totaling $28.6 million, related to the
sale of mortgage loans from FFCA's original loan portfolio are accounted for as
available-for-sale securities. At December 31, 1997, the estimated fair market
value of FFCA's investment securities is not materially different than the
carrying amount. In 1997, the securitization transaction resulted in unrelated
business taxable income of $.005 per share for FFCA's tax-exempt investors.
Investment in Affiliate - FFCA Mortgage Corporation (Mortgage Corp.)
was formed in 1996 to originate mortgage loans to be held for future
securitization transactions. FFCA, 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 the dissolution of Mortgage Corp. on
December 31, 1997. At dissolution, cash dividends were paid to the common
stockholder and the remaining assets were distributed to FFCA in satisfaction of
its note receivable from Mortgage Corp. FFCA 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.
Prior to Mortgage Corp.'s dissolution, FFCA provided funding to
Mortgage Corp. for the origination of mortgage loans. Under revolving loan
agreements with Mortgage Corp., FFCA was entitled to receive a draw fee of 1%
and interest at a rate equal to LIBOR or a Base rate (as defined in the
agreement), plus a margin ranging from 2.5% to 3%. FFCA also provided temporary
working capital advances to Mortgage Corp. bearing an interest rate of LIBOR
plus 3%.
F-10
<PAGE>
A summary of selected financial information as reported by Mortgage
Corp. as of, and for the years ended December 31, 1997 and 1996, is set forth
below (amounts in thousands):
1997 1996
------ --------
Revenues $9,632 $ 2,336
Interest expense 9,037 2,861
Net income (loss) 1,809 (1,470)
Mortgage loans held for sale - 140,967
Total Assets - 156,928
Notes payable to FFCA - 147,616
Total Liabilities - 148,398
Total Shareholders' Equity - 8,530
(7) NOTES PAYABLE:
--------------
A summary of FFCA's unsecured notes payable follows (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
7% Senior Notes due 2000, net of unamortized
discount of $709 in 1997 and $952 in 1996 $149,291 $149,048
7.875% Senior Notes due 2005, net of unamortized
discount of $81 in 1997 and $92 in 1996 49,919 49,908
6.78% Notes due 2002 30,000 30,000
7.02% Notes due 2003 30,000 30,000
7.1% Notes due 2026, callable by holder in 2004 40,000 40,000
6.95% Notes due 2007 10,150 -
-------- --------
$309,360 $298,956
======== ========
</TABLE>
Interest on all of the notes is payable semi-annually in arrears on
each May 30 and November 30 with principal due at maturity. With the exception
of the $40 million notes due 2026, the notes may not be redeemed prior to their
respective maturities. The note agreements contain certain covenants which,
among other restrictions, limit the incurrence of additional debt if FFCA's debt
exceeds 60% of total assets (as defined in the note agreements), or if FFCA's
debt service coverage is less than 1.5 to 1. As of December 31, 1997, FFCA was
in compliance with its note covenants.
In January 1997, FFCA issued $50 million in variable-rate unsecured
notes due 1998 bearing interest at a weighted average rate of 3-month LIBOR plus
.33% (interest reset quarterly). The notes were redeemed by FFCA on July 14,
1997 at a redemption price of 100% of the principal amount of the notes.
Subsequent to December 31, 1997, FFCA issued $17 million in unsecured
notes due 2007 bearing interest at a rate of 6.86%. Interest on these notes is
payable semi-annually in arrears on each May 30 and November 30 with principal
due at maturity.
(8) BORROWINGS UNDER LINE OF CREDIT:
--------------------------------
The following is a summary of borrowings under FFCA's line of credit (amounts in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Borrowings at LIBOR Bid Rate, weighted average
interest rate of 6.69% at December 31, 1997 $ 56,000 $ -
Borrowings at 30-day LIBOR plus 1%, weighted
average interest rate of 6.96% and 6.71% at
December 31, 1997 and 1996, respectively 210,000 85,500
Borrowings at Base rate, 8.50% and 8.25% at
December 31, 1997 and 1996, respectively,
subsequently converted to LIBOR loans 36,000 65,000
-------- --------
$302,000 $150,500
======== ========
</TABLE>
F-11
<PAGE>
At December 31, 1997, FFCA had outstanding $302 million on a $350
million acquisition loan facility with participating banks used to provide funds
for the acquisition or financing of chain store properties. Interest on this
unsecured revolving credit facility is due in periodic installments (weighted
average rate of 6.63% in 1997 and 7.12% in 1996). Effective December 27, 1996,
FFCA also has the option under this loan facility to borrow at rates that are
competitively bid among the participating banks. The loan facility provides for
a fee on the unused commitment amount of .20% per annum, payable quarterly in
arrears. The acquisition loan facility expires in December 2000, with the
possibility of annual extensions. The credit agreement contains covenants which,
among other restrictions, require FFCA to maintain a fixed charge coverage ratio
of 2 to 1 and a minimum net worth of $425 million, as defined. As of December
31, 1997, FFCA was in compliance with its debt covenants.
Amortization of loan fees related to these facilities for the years
ended December 31, 1997, 1996 and 1995 amounted to $1.2 million and $1.4 million
and $2.1 million, respectively, which is included in interest expense in the
accompanying consolidated financial statements. In 1995, FFCA initiated an early
termination of its then existing credit facility which enabled it to reduce its
cost of borrowings while also removing the bank's security interest in the stock
of FFCA's wholly-owned subsidiary, FFCA Acquisition Corporation. As a result of
the early extinguishment of this debt, FFCA expensed approximately $2.5 million
in unamortized loan costs in 1995 which is reported as an extraordinary item on
the consolidated statement of income.
Subsequent to December 31, 1997, FFCA entered into a $100 million
acquisition loan facility with a bank with substantially the same terms and
conditions as the $350 million acquisition loan facility. The $100 million
acquisition loan facility expires no later than May 30, 1998, as described in
the credit agreement.
(9) DERIVATIVE FINANCIAL INSTRUMENTS:
---------------------------------
At December 31, 1997, FFCA had outstanding interest rate swap contracts
aggregating $152.6 million in notional amount. The notional amount serves solely
as a basis for the calculation of payments to be exchanged and are not a measure
of the exposure of FFCA through its use of derivatives. Under the interest rate
swap contracts, two parties agree to swap payments over a specified period. FFCA
agrees to make payments at a specified fixed rate and the other party to the
contract agrees to make payments based on a variable market index rate. FFCA
intends to terminate the interest rate agreements upon securitization of the
fixed-rate mortgage loans in mid-1998, at which time FFCA 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 fixed rate set at the beginning of the
interest rate swap contract and the variable market index rate. Under the
contracts, no cash payments would be required until the earlier of the
securitization transaction or November 2, 1998. At December 31, 1997, there were
no hedging gains or losses explicitly deferred under these contracts.
(10) DIVIDENDS:
----------
FFCA declared a fourth quarter 1997 dividend of $.47 per share, payable
on February 20, 1998, to shareholders of record on February 10, 1998. The
dividend payments made by FFCA to its shareholders for 1997 are characterized as
ordinary income of $1.68 per share and return of capital of $.12 per share.
Dividend payments made by FFCA to its shareholders for 1996 are characterized as
ordinary income of $1.58 per share and capital gain of $.22 per share. Dividend
payments made by FFCA to its shareholders for 1995 are characterized as ordinary
income of $1.35 per share.
(11) STOCK OPTIONS:
--------------
On May 10, 1995, FFCA shareholders approved a stock option and
incentive plan which permits the issuance of options, restricted stock and other
stock-based awards to key employees, the Board of Directors and certain
independent contractors of FFCA. The plan reserves 3,018,804 shares of common
stock for grant and provides that the term of each award be determined by the
compensation committee of the Board of Directors. Under the terms of the plan,
options granted may be either non-qualified or incentive stock options and the
exercise price, determined by the committee, may not be less than the fair
market value of a share of common stock on the grant date. Options granted to
FFCA's non-employee directors are immediately exercisable, while
F-12
<PAGE>
the remaining options vest over a three-year period from the date of grant. The
options expire ten years after the date of grant.
FFCA measures the compensation cost of its stock option and incentive
plan using the intrinsic value based method of accounting prescribed in APB
Opinion 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation cost has been recognized for its stock option and incentive plan.
Had FFCA's compensation cost been determined using the fair value based method
of accounting prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", FFCA's net income and earnings per
share would have been changed to the following pro forma amounts (in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported $72,897 $68,539 $51,329
Pro forma $70,718 $67,605 $48,812
Earnings per share of common stock:
As reported:
Basic $1.78 $1.70 $1.28
Assuming dilution $1.76 $1.69 $1.27
Pro forma:
Basic $1.73 $1.67 $1.21
Assuming dilution $1.71 $1.67 $1.21
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
of 6.4%, 8.2% and 8%; expected stock price volatility of 18.47%, 20.13% and
21.36%; risk-free interest rates of 5.65%, 5.59% and 6.52%; and an expected
option term of seven years.
A summary of the status of FFCA's stock option and incentive plan as of
December 31, 1997, 1996 and 1995, and changes during the years then ended, is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,705,181 $ 20.23 1,227,989 $ 19.50 -- --
Granted 774,730 $ 26.32 526,091 $ 21.87 1,227,989 $ 19.50
Exercised (32,166) $ 19.62 (48,899) $ 19.63 -- --
Cancellations (22,500) $ 24.38 -- -- -- --
--------- --------- ---------
Outstanding, end of year 2,425,245 $ 22.14 1,705,181 $ 20.23 1,227,989 $ 19.50
========= ========= =========
Options exercisable, end of year 956,071 $ 20.07 400,181 $ 19.64 20,489 $ 19.75
Weighted average fair value of
each option granted during year $ 2.88 $ 2.05 $ 1.78
</TABLE>
As of December 31, 1997, options outstanding under the plan had
exercise prices ranging from $19.50 to $26.375 with a weighted average price of
$22.06, and expiration dates ranging from May 2005 to May 2007 with a weighted
average remaining term of 8 years.
(12) RELATED PARTY TRANSACTIONS:
---------------------------
In 1988, a partnership managed by an affiliate of FFCA provided
financing for land purchased by FFCA from the partnership and for the
construction of the corporate headquarters of FFCA (together, the FFCA
Premises). The term of the mortgage loan on the FFCA Premises is ten years and
provides for payments of interest only, at the rate of 10% per year, until May
2000, at which time the entire principal amount must be repaid to the
partnership. The loan also provides for the payment of additional interest upon
maturity based upon
F-13
<PAGE>
the increase, if any, in the value of the FFCA Premises, as defined in the loan
agreement. Under certain circumstances, FFCA may be required to prepay the loan.
The loan is secured by land and land improvements, the FFCA Premises and the
guaranty of an affiliate. The FFCA Premises, including equipment, amounted to
$10.5 million in 1997 and $9 million in 1996 (net of accumulated depreciation of
$3.2 million in 1997 and $2.6 million in 1996) and is included in Other Assets
in the accompanying financial statements.
FFCA provides certain accounting, computer, investor and other
administrative services to its affiliates under service agreements which provide
for a monthly fee based upon the amount of services used by each affiliate. Fees
for such services aggregated approximately $1.4 million in 1997, $1.6 million in
1996 and $760,000 in 1995.
(13) FINANCIAL INSTRUMENTS:
----------------------
The carrying value of FFCA's financial instruments approximates fair
value, except for differences with respect to mortgage loans receivable,
investment securities and long-term, fixed-rate debt (Notes Payable and Mortgage
Payable to Affiliate). The fair value of a financial instrument is generally
determined by reference to its quoted market price or, if quoted market prices
are not available, to the market price of a financial instrument with similar
characteristics.
The fair value of FFCA's mortgage loans is estimated by discounting the
future cash flows using the current interest rates for similar loans with
similar maturities at December 31, 1997. The estimated fair values of the
mortgage loans held for long-term investment and the mortgage loans held for
sale exceeded their carrying amounts by $2.9 million and $5 million,
respectively. Based on market prices of similar investments at December 31,
1997, the fair value of FFCA's long-term investment securities exceeded the
carrying amount by $2.3 million. The fair value of FFCA's long-term, fixed rate
debt exceeded the carrying amount by $9 million based on the level of interest
rates prevailing at December 31, 1997.
The fair value of FFCA's interest rate swap contracts is based on the
theoretical cost to unwind or terminate the swap transactions. FFCA would have
paid approximately $3.7 million if it had terminated its interest rate swap
contracts at December 31, 1997.
The combined fair value differences of these financial instruments, is
equivalent to an unrealized loss of $2.5 million; however, changes in the
unrealized gains or losses on mortgage loans, the long-term investment
securities, fixed-rate debt and the interest rate swap contracts do not result
in the realization or expenditure of cash unless the investments are actually
sold or the debt is retired.
(14) EMPLOYEE SAVINGS PLANS:
-----------------------
The FFCA 401K Plan (the Plan) was established as a savings plan for
FFCA's employees who have been employed by FFCA for a minimum of six months. The
Plan allows employees to make their own contributions through payroll
deductions. FFCA matches participating employees' contributions up to six
percent of the participating employees' salaries. Employer matching
contributions are made in FFCA stock, which is purchased by the Plan on the open
market, and are subject to years-of-service vesting requirements. Employer
contributions totaled $256,000 in 1997, $213,000 in 1996 and $169,000 in 1995.
In 1997, FFCA established an employee stock purchase plan. Under the
plan, employees can purchase stock through payroll deductions at a price equal
to 85% of the fair market value of the stock, as defined in the agreement.
Employee purchases are limited to 10% of their salary each year and were not
significant in 1997.
(15) COMMITMENTS:
------------
In the normal course of business, FFCA makes commitments to extend
credit to meet the financing needs of its clients in the chain restaurant
industry as well as the convenience store and automotive service and parts
industries. FFCA evaluates each client's credit and, based on management's
evaluation of the client and the proposed property site, determines the amount
of credit to be extended and collateral obtained. The commitments
F-14
<PAGE>
generally have fixed expiration dates or other termination clauses and require
payment of a fee by the client. At December 31, 1997, FFCA's outstanding
commitments to extend credit aggregated approximately $500 million.
(16) ADDITIONAL FINANCIAL INFORMATION:
---------------------------------
Additional information with respect to cash flows follows (amounts in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Mortgage loans obtained as part of property sale
proceeds, net of deferred gain $ 997 $ 825 $ 5,542
Acquisition of property and equipment through
foreclosure - 1,245 -
Investment in securities resulting from securitization 11,303 30,763 -
Mortgage loans received from affiliate 46,910 - -
Interest paid 32,296 23,692 12,802
Taxes paid/(refunds received) 119 27 (816)
</TABLE>
(17) QUARTERLY FINANCIAL INFORMATION (Unaudited):
--------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
1997
- ----
Revenues $32,775 $34,648 $32,861 $34,704
Net income 18,215 21,570 16,457 16,655
Net income per share,
assuming dilution 0.44 0.53 0.40 0.40
Dividends per share $ 0.45 $ 0.45 $ 0.45 $ .47
Weighted average shares 40,977 40,973 41,247 42,121
1996
- ----
Revenues $29,667 $31,208 $29,061 $31,230
Net income 13,777 21,894 15,831 17,037
Net income per share,
assuming dilution 0.34 0.54 0.39 0.42
Dividends per share $ 0.45 $ 0.45 $ 0.45 $ 0.45
Weighted average shares 40,425 40,486 40,683 40,865
</TABLE>
F-15
<PAGE>
SCHEDULE III
Page 1 of 2
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------------------
AS OF DECEMBER 31, 1997
-----------------------
<TABLE>
<CAPTION>
Initial Cost to Company and
Gross Amount at December 31, 1997 Accumulated Depreciation
-------------------------------------------- --------------------------------
No. of
U.S. Region Properties Land Buildings Equipment Total Buildings Equipment Total
- ----------- ---------- -------- --------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mideast 183 $ 53,094 $ 81,407 $ 912 $135,413 $ 15,389 $ 912 $ 16,301
Northeast 102 27,247 42,591 765 70,603 7,152 763 7,915
E.N. Central 208 46,471 88,956 4,771 140,198 26,289 4,680 30,969
W.N. Central 149 28,055 47,860 3,418 79,333 15,738 3,324 19,062
Southeast 379 92,930 133,566 5,402 231,898 43,299 5,389 48,688
Southwest 231 62,312 82,472 5,445 150,229 22,924 5,436 28,360
Mountain 94 30,048 37,967 1,886 69,901 10,085 1,887 11,972
Pacific 131 42,480 30,810 440 73,730 11,556 440 11,996
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL 1,477 $382,637 $545,629 $ 23,039 $951,305 $152,432 $ 22,831 $175,263
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-16
<PAGE>
SCHEDULE III
Page 2 of 2
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------------------
AS OF DECEMBER 31, 1997
-----------------------
(Amounts in thousands)
NOTES:
(1) The properties consist of restaurant properties.
(2) There are no encumbrances on properties.
(3) The aggregate cost for Federal income tax purposes is approximately
$990 million.
(4) Depreciation is computed over the estimated useful life of 24 to 30
years for the buildings and improvements and 7 to 8 years for the
equipment.
(5) Transactions in real estate and equipment and accumulated depreciation
during 1997, 1996, and 1995 are summarized as follows:
Accumulated
Cost Depreciation
--------- ------------
Balance, December 31, 1994 $ 681,125 $ 169,569
Acquisitions 143,262 --
Cost of real estate sold (17,992) (4,952)
Cost of equipment sold (8,400) (7,851)
Impairment loss (3,415) --
Depreciation expense -- 19,466
--------- ---------
Balance, December 31, 1995 794,580 176,232
Acquisitions 128,713 --
Cost of real estate sold (42,447) (12,705)
Cost of equipment sold (10,591) (10,122)
Foreclosed property 1,245 --
Impairment loss (3,285) --
Depreciation expense -- 19,536
--------- ---------
Balance, December 31, 1996 868,215 172,941
Acquisitions 140,218 --
Cost of real estate sold (31,321) (9,531)
Cost of equipment sold (8,059) (8,016)
Construction in progress transferred to
mortgage loans held for sale (15,819) --
Impairment loss (1,929) --
Depreciation expense -- 19,869
--------- ---------
Balance, December 31, 1997 $ 951,305 $ 175,263
========= =========
F-17
<PAGE>
SCHEDULE IV
Page 1 of 2
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE
-----------------------------------------
AS OF DECEMBER 31, 1997
-----------------------
<TABLE>
<CAPTION>
No. of
Financed Interest Maturity Date
U.S. Region Original Loan Amount Properties Rate Range Range
- ----------- -------------------- ---------- --------------- ---------------------
<S> <C> <C> <C> <C>
Southeast under $500,000 28 10.25% - 13.5% Jun. 2001 - Jan. 2005
$501,000-$1,000,000 2 10.0% - 10.5% Jul. 2002 - Aug. 2014
over $1,000,000 1 9.95% Jan. 2010
Mideast under $500,000 5 11.0% - 12.5% Aug. 1999 - Mar. 2003
$501,000-$1,000,000 1 10.5% Jan. 2006
over $1,000,000 1 10.0% Oct. 1999
Northeast under $500,000 23 11.25% - 11.5% Apr. 2003 - Apr. 2004
over $1,000,000 3 11.5% Sep. 2015 - Nov. 2015
E.N. Central under $500,000 4 11.0% - 12.5% Sep. 1999 - Oct. 2002
$501,000-$1,000,000 10 11.25% - 15.0% Dec. 2001 - May 2015
over $1,000,000 1 10.5% Sep. 2015
W.N. Central under $500,000 17 10.0% - 11.25% Oct. 1999 - Oct. 2002
$501,000-$1,000,000 7 10.5% - 13.5% Jul. 2002 - Dec. 2008
Southwest under $500,000 19 10.25% - 12.5% Jun. 1999 - Jun. 2016
$501,000-$1,000,000 1 11.5% Apr. 2015
Mountain under $500,000 10 10.25% - 11.29% Feb. 2000 - Jan. 2004
$501,000-$1,000,000 4 10.75% - 14.5% Mar. 2001 - Feb. 2011
Pacific under $500,000 1 11.0% Jan. 2004
$501,000-$1,000,000 1 11.5% Oct. 2002
<PAGE>
<CAPTION>
Face Carrying Principal Amount
Amount of Amount of of Loans Subject to
U.S. Region Mortgages Mortgages Delinquent Principal or Interest
- ----------- --------- --------- --------------------------------
<S> <C> <C> <C>
Southeast $ 4,918 $ 3,314 $ -
936 835 -
4,000 4,000 -
-------- -------- -------
9,854 8,149 -
-------- -------- -------
Mideast 1,112 480 -
750 395 -
1,290 640 -
-------- -------- -------
3,152 1,515 -
-------- -------- -------
Northeast 4,392 2,171 1,980
4,126 2,334 2,334
-------- -------- -------
8,518 4,505 4,314
-------- -------- -------
E.N. Central 1,175 526 -
7,152 6,442 -
1,600 1,475 -
-------- -------- -------
9,927 8,443 -
-------- -------- -------
W.N. Central 1,523 703 -
4,711 3,567 -
-------- -------- -------
6,234 4,270 -
-------- -------- -------
Southwest 3,803 3,038 -
500 480 -
-------- -------- -------
4,303 3,518 -
-------- -------- -------
Mountain 3,305 2,500 206
2,484 1,605 -
-------- -------- -------
5,789 4,105 206
-------- -------- -------
Pacific 214 214 -
549 465 -
-------- -------- -------
763 679 -
-------- -------- -------
TOTAL $ 48,540 $ 35,184 $ 4,520
======== ======== =======
</TABLE>
F-18
<PAGE>
SCHEDULE IV
Page 2 of 2
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------------------
SCHEDULE OF MORTGAGE LOANS ON REAL ESTATE
-----------------------------------------
AS OF DECEMBER 31, 1997
-----------------------
(Amounts in thousands)
NOTES:
(1) Generally, loans are first mortgages for restaurant land, buildings
and/or equipment.
(2) Principal and interest are payable at level amounts to maturity.
(3) For mortgages where the land is under a ground lease, there are
generally no provisions for prepayment of the mortgage loans in whole
or in part, except upon sale of the related property.
(4) There are no prior liens.
(5) The aggregate cost for Federal income tax purposes is approximately
$40 million.
(6) Transactions in mortgage loans on real estate during 1997, 1996 and
1995 are summarized as follows:
Balance, December 31, 1994 $ 65,980
Additions during period:
New mortgage loans 141,789
Deferred gain, net of gain recognized (2,715)
Unamortized loan fees, net of amortization (1,229)
Deductions during period:
Collections of principal (3,382)
Mortgage loan payoffs (957)
---------
Balance, December 31, 1995 199,486
Additions during period:
New mortgage loans 50,592
Recognition of deferred gain, net of additional
deferred gains in 1996 5,145
Net loan fees recognized 1,490
Deductions during period:
Collections of principal (4,867)
Mortgage loan payoffs (190,769)
Reserve for mortgage loan losses (1,400)
Foreclosures (1,869)
---------
Balance, December 31, 1996 57,808
Additions during period:
New mortgage loans 6,760
Deferred gain, net of gain recognized (192)
Unamortized loan fees, net of amortization (496)
Deductions during period:
Collections of principal (3,217)
Mortgage loan payoffs (24,265)
Reserve for mortgage loan losses (1,214)
---------
Balance, December 31, 1997 $ 35,184
=========
F-19
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
----------------------------
Exhibit Index
----------------------------
The following is a complete list of exhibits filed as part of this Form 10-K.
For electronic filing purposes only, this report contains Exhibits 27.1 through
27.5, the Financial Data Schedules. Exhibit numbers correspond to the numbers in
the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description
- ----------- -----------
3.01 Amended and Restated Bylaws of the Company (1)
3.02 Second Amended and Restated Certificate of Incorporation of
Franchise Finance Corporation of America (2)
4.01 Indenture dated as of November 21, 1995 relating to the 7%
Senior Notes due 2000 and the 7 7/8% Senior Notes due 2005 (3)
4.02 Specimen of Common Stock Certificate (1)
10.01 Acquisition, Construction and Term Loan Agreement, dated as of
December 29, 1988, by and between Franchise Finance
Corporation of America and Scottsdale Land Trust Limited
Partnership (1)
10.02 Promissory Note dated December 29, 1988, executed by Franchise
Finance Corporation of America in favor of Scottsdale Land
Trust Limited Partnership in the principal amount of
$8,500,000 (1)
10.03 1995 Stock Option and Incentive Plan of Franchise Finance
Corporation of America (4)
10.04 Revolving Loan Agreement dated as of September 1, 1996, by and
between Franchise Finance Corporation of America and FFCA
Mortgage Corporation (5)
10.05 Equipment Revolving Loan Agreement dated as of September 1,
1996, by and between Franchise Finance Corporation of America
and FFCA Mortgage Corporation (5)
10.06 Guaranty of Franchise Finance Corporation of America, with
exhibits, dated December 31, 1996 with respect to the ISDA
Master Agreement and Schedule dated December 31, 1996 by and
between Franchise Finance Corporation of America and FFCA
Mortgage Corporation (12)
<PAGE>
10.07 Credit Agreement dated January 27, 1998 among Franchise
Finance Corporation of America, Certain Lenders and
NationsBank of Texas, N.A. (11)
10.08 Stock Purchase Agreement between Franchise Finance Corporation
of America and Colony Investors III, L.P. dated February 13,
1998*
21.01 Subsidiaries of the Registrant*
23.01 Consent of Arthur Andersen LLP*
99.01 Credit Agreement dated as of December 27, 1995 among Franchise
Finance Corporation of America, Certain Lenders and
NationsBank of Texas, N.A., providing a credit facility in the
principal amount of $200,000,000 (the "Credit Agreement") (6)
99.02 Guaranty Agreement dated as of December 27, 1995 made by FFCA
Acquisition Corporation and FFCA Institutional Advisors, Inc.,
guaranteeing the obligations of Franchise Finance Corporation
of America under the Credit Agreement (6)
99.03 Promissory Note dated as of December 27, 1995 executed by
Franchise Finance Corporation of America in favor of
NationsBank of Texas, N.A., in connection with the Credit
Agreement (6)
99.04 Subordination Agreement dated as of December 27, 1995, made by
FFCA Acquisition Corporation and Franchise Finance Corporation
of America for the benefit of Certain Lenders and NationsBank
of Texas, N.A., in connection with the Credit Agreement (6)
99.05 Subordination Agreement dated as of December 27, 1995, made by
FFCA Institutional Advisors, Inc. and Franchise Finance
Corporation of America for the benefit of Certain Lenders and
NationsBank of Texas, N.A., in connection with the Credit
Agreement (6)
99.06 Purchase agreement dated June 27, 1996 between FFCA Secured
Assets Corporation, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as the initial purchaser of $156,490,000
aggregate principal amount of Secured Franchise Loan
Pass-Through Certificates, Class A, Class B, Class C and Class
D (7)
<PAGE>
99.07 First Amendment to Credit Agreement dated February 23, 1996
among Franchise Finance Corporation of America, Certain
Lenders and NationsBank of Texas, N.A. as Administrative
Lender (8)
99.08 Second Amendment to Credit Agreement dated June 24, 1996 among
Franchise Finance Corporation of America, Certain Lenders and
NationsBank of Texas, N.A. as Administrative Lender (7)
99.09 Third Amendment to Credit Agreement dated December 27, 1996
among Franchise Finance Corporation of America, Certain
Lenders and NationsBank of Texas, N.A. as Administrative
Lender (12)
99.10 Amended and Restated Credit Agreement among Franchise Finance
Corporation of America, Certain Lenders, NationsBank of Texas,
N.A. as Administrative Agent, and Co-Agents, dated April 15,
1997 (2)
99.11 $45,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of NationsBank of
Texas, N.A., dated April 15, 1997 (2)
99.12 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank of
Montreal, Chicago Branch, dated April 15, 1997 (2)
99.13 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Long-Term
Credit Bank of Japan, Ltd., dated April 15, 1997 (2)
99.14 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Commerzbank
Aktiengesellschaft, Los Angeles Branch, dated April 15, 1997
(2)
99.15 $40,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Union Bank of
Switzerland (New York Branch), dated April 15, 1997 (2)
99.16 $27,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Cooperatieve
Centtale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch, dated April 15, 1997 (2)
<PAGE>
99.17 $25,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Dresdner Bank
AG, Los Angeles Branch, dated April 15, 1997 (2)
99.18 $25,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of AmSouth Bank
of Alabama, dated April 15, 1997 (2)
99.19 $20,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Industrial
Bank of Japan, dated April 15, 1997 (2)
99.20 $20,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank Hapoalim
B.M., San Francisco Branch, dated April 15, 1997 (2)
99.21 $15,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Signet Bank,
dated April 15, 1997 (2)
99.22 $13,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Norwest Bank
Arizona, National Association, dated April 15, 1997 (2)
99.23 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of NationsBank of
Texas, N.A., dated April 15, 1997 (2)
99.24 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank of
Montreal, Chicago Branch, dated April 15, 1997 (2)
99.25 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Long-Term
Credit Bank of Japan, Ltd., dated April 15, 1997 (2)
99.26 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Commerzbank
Aktiengesellschaft, Los Angeles Branch, dated April 15, 1997
(2)
99.27 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Union Bank of
Switzerland (New York Branch), dated April 15, 1997 (2)
<PAGE>
99.28 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland,"
New York Branch, dated April 15, 1997 (2)
99.29 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Dresdner Bank
AG, Los Angeles Branch, dated April 15, 1997 (2)
99.30 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of AmSouth Bank
of Alabama, dated April 15, 1997 (2)
99.31 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of The Industrial
Bank of Japan, dated April 15, 1997 (2)
99.32 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order of Bank Hapoalim
B.M., San Francisco Branch, dated April 15, 1997 (2)
99.33 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, payable to the order Signet Bank,
dated April 15, 1997 (2)
99.34 $175,000,000 Promissory Note, executed by Franchise Finance
Corporation of America, a, payable to the order of Norwest
Bank Arizona, National Association, dated April 15, 1997 (2)
99.35 Guaranty Agreement, dated as of April 15, 1997, by FFCA
Acquisition Corporation, FFCA Institutional Advisors, Inc. and
FFCA Mortgage Corporation, guaranteeing the obligations of
Franchise Finance Corporation of America under the Amended and
Restated Credit Agreement among Franchise Finance Corporation
of America, Certain Lenders, NationsBank of Texas, N.A. as
Administrative Agent, and Co-Agents, dated April 15, 1997 (2)
99.36 Subordination Agreement, dated as of April 15, 1997, by FFCA
Acquisition Corporation (2)
99.37 Subordination Agreement, dated as of April 15, 1997, by FFCA
Institutional Advisors (2)
99.38 Subordination Agreement, dated as of April 15, 1997, by FFCA
Mortgage Corporation (2)
<PAGE>
99.39 Purchase agreement dated June 8, 1997 between FFCA Secured
Lending Corporation, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Smith Barney Inc., as initial purchasers of
$232,071,000 aggregate principal amount of Secured Franchise
Loan Certificates, Series 1997-1, Class IO, Class A-1a, Class
A-1b, Class A-2a, Class A-2b, Class B-1, Class B-2, Class C-1,
Class C-2, Class D-1, Class D-2, Class E-1 and Class E-2 (9)
99.40 Second Amended and Restated Credit Agreement dated December
29, 1997 among Franchise Finance Corporation of America,
Certain Lenders and NationsBank of Texas, N.A. (10)
- ---------------
*Filed herewith.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 and amendments thereto, registration number 33-65302, as filed with the
Securities and Exchange Commission.
(2) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1997, as filed with the Securities
and Exchange Commission.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated November 24, 1995, as filed with the Securities and Exchange Commission.
(4) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission.
(5) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated September 1, 1996, as filed with the Securities and Exchange Commission.
(6) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated January 25, 1996, as flied with the Securities and Exchange Commission.
(7) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996, as filed with the Securities
and Exchange Commission.
(8) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996, as filed with the Securities
and Exchange Commission.
(9) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997, as filed with the Securities
and Exchange Commission.
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated December 29, 1997, as filed with the Securities and Exchange Commission.
(11) Incorporated by reference from the Registrant's Current Report on Form 8-K,
dated January 27, 1998, as filed with the Securities and Exchange Commission.
(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996, as filed with the Securities and
Exchange Commission.
STOCK PURCHASE AGREEMENT
------------------------
This Stock Purchase Agreement (the "Agreement"), dated
February 13, 1998, is by and between Franchise Finance Corporation of America, a
real estate investment trust and a Delaware corporation (the "Company"), and
Colony Investors III, L.P., a Delaware limited partnership ("Purchaser").
W I T N E S S E T H:
WHEREAS, the Company wishes to issue and sell to Purchaser (i)
certain shares of the Company's common stock, $.01 par value per share (the
"Common Stock"), and warrants (the "Warrants") to acquire additional shares of
Common Stock for an aggregate purchase price of $100,000,000 (the "Purchase
Price") on the terms and subject to the conditions set forth herein and in the
Other Documents (as defined herein); and
WHEREAS, Purchaser wishes to purchase such securities on the
terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained in this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
SECTION 1. THE SECURITIES
Section 1.1 Issuance, Sale and Purchase of the Securities. In reliance
upon the representations and warranties made herein and subject to the
satisfaction or waiver of the conditions set forth herein, the Company agrees to
issue and sell to Purchaser, and Purchaser agrees to purchase from the Company,
for the Purchase Price, (i) 3,792,112 shares (the "Common Shares" and,
collectively with the Warrants, the "Securities") of Common Stock and (ii) the
Warrants, exercisable for seven years (except as provided in a customary Warrant
Agreement relating thereto to be entered into between the Company and Purchaser
(the "Warrant Agreement")), to acquire an additional 1,476,908 shares (the
"Warrant Shares") of Common Stock at an initial exercise price of $31.64 per
share, subject to adjustment as provided in the Warrant Agreement.
<PAGE>
Section 1.2 Other Agreements. Concurrently with the Closing (as
hereinafter defined), the Company will enter into (a) the Warrant Agreement in
form and substance reasonably satisfactory to the parties, (b) the Investor's
Agreement with Purchaser in substantially the form attached as Exhibit A hereto
(the "Investor's Agreement") and (c) a Registration Rights Agreement in favor of
Purchaser and its permitted assignees (the "Holders") in form and substance
reasonably satisfactory to the parties providing for (i) three "demand"
registrations in favor of the Holders (one of which may, at the election of the
Holders, be a "resale shelf registration" having a duration of four years, (ii)
customary "piggyback" registrations in favor of the Holders and (iii) such other
reasonable provisions as the parties negotiate in good faith (the "Registration
Rights Agreement" and, collectively with the Warrant Agreement and the
Investor's Agreement, the "Other Documents").
Section 1.3 Closing. The closing (the "Closing") shall take place at
the offices of the Company, The Perimeter Center, 17207 North Perimeter Drive,
Scottsdale, Arizona 85255, on the tenth business day after the satisfaction or
waiver of the conditions set forth in Section 3 below, or at such other
location, date and time as may be agreed upon between Purchaser and the Company
(such date and time being called the "Closing Date"). At the Closing, the
Company shall issue and deliver to Purchaser stock and warrant certificates in
definitive form, registered in the name of Purchaser or its designee,
representing the Securities. As payment in full for the Securities, and against
delivery of the certificates therefor at the Closing, Purchaser shall initiate a
wire transfer in immediately available United States funds in accordance with
the Company's instructions in the amount of the Purchase Price. Each certificate
representing the Securities shall bear the following legend in addition to any
other legend that may be required from time to time under applicable law or
pursuant to any other contractual obligation:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF (A "TRANSFER") EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
AN INVESTOR'S AGREEMENT DATED THE CLOSING DATE. SUCH SECURITIES ARE
ALSO SUBJECT TO A REGISTRATION RIGHTS AGREEMENT DATED THE CLOSING DATE.
ANY TRANSFEREE OF THESE SECURITIES TAKES SUBJECT TO THE TERMS OF SUCH
AGREEMENTS, A COPY OF EACH OF WHICH IS ON FILE WITH THE COMPANY.
2
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR
STATE SECURITIES LAWS AND NO TRANSFER OF THESE SECURITIES MAY BE MADE
EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
ACT, OR (B) PURSUANT TO AN EXEMPTION THEREFROM WITH RESPECT TO WHICH
THE COMPANY MAY, UPON REQUEST, REQUIRE A SATISFACTORY OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH TRANSFER IS EXEMPT FROM THE
REQUIREMENTS OF THE ACT.
Section 1.4 Further Action. During the period from the date hereof to
the Closing Date, each of the Company and Purchaser shall use their best efforts
to take all action necessary or appropriate to satisfy the closing conditions
contained in Section 3 hereof (including without limitation using all reasonable
efforts to finalize the Warrant Agreement and the Registration Rights Agreement
in the most expeditious manner practicable) and to cause its respective
representations and warranties contained in Section 2 to be complete and correct
as of the Closing Date, after giving effect to the transactions contemplated by
this Agreement, as if made on and as of such date.
SECTION 2. REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of the Company. The Company
represents and warrants to Purchaser as follows:
3
<PAGE>
(a) Each of the Company and its subsidiaries
(collectively, the "Subsidiaries") has been duly organized and is validly
existing as a corporation, trust or partnership, as the case may be, in good
standing under the laws of the jurisdiction in which it is organized, with full
power and authority to own or lease and occupy its properties and conduct its
business, and is duly qualified to do business, and is in good standing, in each
jurisdiction which requires such qualification, except where the failure to so
qualify would not, individually or in the aggregate, have or be reasonably
likely to result in a material adverse effect on the business, operations,
business prospects, earnings, assets, liabilities or condition (financial or
otherwise) (a "Material Adverse Effect") of the Company. All of the outstanding
shares of capital stock or other equivalent interests of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and, except as disclosed in the Company's reports, proxy
statements, forms, and other documents with the SEC filed and publicly available
during the twelve months ended February 13, 1998 (the "Current SEC Documents"),
are owned by the Company, directly, or indirectly through another Subsidiary,
free and clear of any lien, adverse claim, security interest, mortgage, pledge,
equity or other encumbrance. None of the outstanding shares of capital stock or
other equivalent interests of the Subsidiaries was issued in violation of the
preemptive or similar rights of any stockholder or other holder of interests of
such Subsidiary arising by operation of law, under the charter, by-laws or other
organizational document of any Subsidiary or under any agreement to which the
Company or any Subsidiary is a party. The Company does not own, directly or
indirectly through a "qualified REIT subsidiary" (within the meaning of section
856(i) of the Internal Revenue Code of 1986, as amended (the "Code")),
partnership, limited liability company, association or other entity, any shares
of stock or any other debt or equity securities of, or other interests in, any
corporation, firm, partnership, limited liability company, association or other
entity, other than (1) stock of a corporation or equity of an entity that the
Company has been advised by its legal counsel qualifies as a "qualified REIT
subsidiary" within the meaning of section 856(i) of the Code, (2) stock or other
debt (excluding for this purpose any debt obligation that constitutes a real
estate asset within the meaning of section 856(c)(5)(B) of the Code) or equity
securities of any issuer (other than a partnership or limited liability company,
the ownership of which is governed by (3) below) where (i) the Company has been
advised by legal counsel that such ownership would not constitute ownership of
more than 9.8% of the voting securities of such issuer (within the meaning of
section 856(c) (5) of the Code) and (ii) the Company has determined in good
faith that the fair market value of the stock and securities of any one such
issuer does not exceed 4.8% of the value of the total assets of the Company
(within the meaning of section 856(c)(5) of the Code), or (3) interests in a
partnership or limited liability company where (i) the Company has received a
written opinion of its legal counsel that such partnership or limited liability
company is subject to tax as a partnership, and not an association subject to
tax as a corporation or a publicly traded partnership subject to tax as a
corporation, for United States federal income tax purposes and (ii) such
partnership or limited liability company does not itself own debt or equity
securities of any issuer that could cause the Company to violate the
representation contained in clause (2) above.
4
<PAGE>
(b) The Company and each of the Subsidiaries have all
requisite power and authority, and all necessary material authorizations,
approvals, orders, licenses, certificates and permits (collectively,
"Governmental Licenses"), of and from the appropriate Federal, state, local or
foreign regulatory or governmental agencies, officials, bodies and tribunals,
necessary to own or lease their respective properties and to conduct their
respective businesses as now being conducted, except where the failure to
possess any such Government Licenses would not have a Material Adverse Effect on
the Company or such Subsidiary, as the case may be; all such Governmental
Licenses are in full force and effect, except where the failure to be in full
force and effect would not have a Material Adverse Effect on the Company or such
Subsidiary, as the case may be; and the Company and each of the Subsidiaries are
in compliance with all applicable laws and Governmental Licenses, except where
the failure to comply would not have a Material Adverse Effect on the Company or
such Subsidiary, as the case may be.
(c) Except as otherwise disclosed in the Current SEC
Documents or as would not have a Material Adverse Effect on the Company or such
Subsidiary, as the case may be, (i) the Company and the Subsidiaries have good
and marketable title to all properties and assets described in the Current SEC
Documents as being owned by them, or reflected in the Base Balance Sheet (as
hereinafter defined), other than properties and assets conveyed or pledged in
customary asset securitization transactions (as to which no representation is
made); (ii) all liens, charges, claims, restrictions or encumbrances on or
affecting the properties and assets of the Company or any of the Subsidiaries
which are required to be disclosed in the Current SEC Documents are disclosed
therein; (iii) each of the properties of the Company and the Subsidiaries, at
the time such property was acquired or at the time the loan by the Company with
respect to such property was made, had access to public rights of way, either
directly or through insured easements; (iv) each of such properties, at the time
such property was acquired or at the time the loan by the Company with respect
to such property was made, was served by all public utilities necessary for the
current operations on such property in sufficient quantities for such
operations; (v) each of such properties complies with all applicable codes and
zoning and subdivision laws and regulations; (vi) the real property leases and
equipment leases, if any, relating to each of such properties are in full force
and effect; and (vii) there is no pending or threatened condemnation, eminent
domain, zoning change, or other proceeding or action that will in any manner
affect the size of, use of, improvements on, construction on or access to the
properties of the Company and the Subsidiaries.
5
<PAGE>
(d) Except as would not have a Material Adverse
Effect on the Company or any of the Subsidiaries, each of the mortgage loans
held by the Company or the Subsidiaries (the "Mortgage Loans") is (i) secured by
a valid lien on the property pledged as security for each such Mortgage Loan,
(ii) insured by a nationally recognized title insurance company for the amount
of each such applicable Mortgage Loan, (iii) evidenced by loan documents which
are valid and enforceable against the borrower under each such Mortgage Loan,
(iv) in good standing, without defaults or, to the Company's knowledge, offsets
or counterclaims which could be validly asserted by any borrower under any of
the Mortgage Loans, (v) is documented by loan documents substantially in the
form of the Company's standard loan documents, and (vi) except in the case of
loans which have been sold, assigned or conveyed in connection with an asset
securitization thereof, is currently owned and held by the Company and/or the
Subsidiaries and has not been assigned or pledged to any third party.
(e) The Company and the Subsidiaries have title
insurance on all real property described in the Current SEC Documents as being
owned (or held under a ground lease) or financed by any of them in an amount at
least equal to the cost of acquisition of such property or the original
principal amount of the loan provided by any of them, as the case may be, and
there are in effect for such properties and assets insurance policies covering
risks and in amounts that are commercially reasonable for such types of
properties and assets and that are consistent with the types and amounts of
insurance typically maintained by prudent owners of similar properties or assets
or required by commercial lenders with respect to similar properties or assets
and all such insurance is in full force and effect.
(f) To the extent applicable, the Company and the
Subsidiaries own or possess, or can acquire on reasonable terms, the patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade names
(collectively, "patent and proprietary rights") presently employed by them in
connection with the business now operated by them, and neither the Company nor
any of the Subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to any
patent or proprietary rights or of any facts or circumstances which would render
any patent and proprietary rights invalid or inadequate to protect the interest
of the Company or any of Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, either singly or in the aggregate, would result in any
Material Adverse Change (as defined herein).
(g) The Company's authorized and outstanding
capitalization (including all securities exercisable for, or convertible or
exchangeable into, Common Stock) is as set forth in Schedule 2.1(g) hereto. The
outstanding shares of Common Stock have been duly and validly authorized and
issued in compliance with all Federal and state securities laws, and are fully
paid and nonassessable; the Common Shares have been duly and validly authorized
and, when issued and delivered pursuant to this Agreement, will be fully paid
and nonassessable; and the holders of outstanding shares of capital stock of the
Company are not entitled to preemptive or other rights to subscribe for the
Common Shares.
6
<PAGE>
(h) There is no action, suit, proceeding, inquiry or
investigation before or by any court or governmental agency or body, domestic or
foreign, now pending, or, to the knowledge of the Company, threatened, against
or affecting the Company or any of the Subsidiaries, which is required to be
disclosed in the Current SEC Documents, or which might reasonably be expected to
result in any Material Adverse Change in the condition, financial or otherwise,
or in the earnings, business affairs or business prospects of the Company or the
Subsidiaries, whether or not arising in the ordinary course of business
("Material Adverse Change"), or which might reasonably be expected to have a
Material Adverse Effect on the Company or such Subsidiary or materially and
adversely affect the consummation of this Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any Subsidiary is a party or of
which any of their respective property or assets is the subject which are not
described in the Current SEC Documents, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result in a
Material Adverse Change.
(i) The Company has full corporate power and
authority to enter into and perform its obligations under this Agreement and the
Other Documents and to issue, sell and deliver the Securities; this Agreement
and the Other Documents have been or will, at or prior to the Closing, be duly
authorized, executed and delivered by the Company and, when so executed, will
each constitute a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except to the extent that
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereinafter in effect
relating to creditors' rights generally and (ii) general principles of equity
(regardless of whether a proceeding is considered at law or in equity).
(j) No consent, approval, authorization or order of
any court or governmental agency, authority or body is required (and has not
been received) for the execution by the Company of this Agreement and the Other
Documents, the performance by the Company or its obligations hereunder and
thereunder or the consummation by the Company of the transactions contemplated
herein and therein.
7
<PAGE>
(k) Neither the Company nor any or the Subsidiaries
is in violation of, in conflict with, in breach of or in default under (and none
of them know of an event which with the giving of notice or the lapse of time or
both would be reasonably likely to constitute a default under) its charter or
by-laws (and none of them know of an event which with the giving of notice or
the lapse of time or both would be reasonably likely to constitute a violation),
and neither the Company nor any Subsidiary is in default in the performance of
any obligation, agreement or condition contained in any loan, note or other
evidence of indebtedness or in any indenture, mortgage, deed of trust or any
other material agreement by which it or its properties are bound, except for
such defaults as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company or such Subsidiary, as the case may be.
(l) Except as described in the Current SEC Documents,
(A) neither the Company nor the Subsidiaries is in violation of any Federal,
state, local or foreign laws or regulations relating to pollution or protection
of human health, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products (collectively,
"Hazardous Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials
(collectively, "Environmental Laws"), except where the Company or the
Subsidiaries has obtained one or more policies of environmental insurance to
cover such risks, with deductible amounts, loss limits and aggregate liability
limitations which were deemed reasonably appropriate by the Company under the
circumstances, and except for such violations as would not have a Material
Adverse Effect on the Company or such Subsidiary, as the case may be, and (B)
there are no events or circumstances that could form the basis of an order for
clean-up or remediation, or an action, suit or proceeding by any private party
or governmental body or agency, against or affecting the Company or any of the
Subsidiaries relating to any Hazardous Materials or the violation of any
Environmental Laws, which, either individually or in the aggregate, would have a
Material Adverse Effect on the Company or such Subsidiary, as the case may be.
8
<PAGE>
(m) Neither the issuance and sale of the Securities
nor the consummation of any of the other transactions contemplated herein or in
the Other Documents nor the fulfillment of the terms hereof and thereof will
conflict with, result in a breach or violation of or constitute a default under
any law or the charter or bylaws of the Company or any of the Subsidiaries or
the terms of any indenture or other agreement or instrument to which the Company
or any of the Subsidiaries is a party or is bound or any judgment, order or
decree applicable to the Company or any of the Subsidiaries of any court,
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over the Company or any of the Subsidiaries. To enable Purchaser to
purchase the Securities without violating Article IV of the Company's
Certificate of Incorporation, the Board of Directors of the Company will have
adjusted the ownership limitations contained therein to the extent necessary to
permit Purchaser's purchase of the Securities (including, without limitation,
the exercise from time to time of the Warrants) and the transactions
contemplated hereby and by the Other Documents at or prior to the Closing.
(n) Each employee benefit or compensation plan,
program, policy, agreement or arrangement of any type sponsored, maintained,
contributed to or required to be contributed by the Company or any ERISA
Affiliate for the benefit of any current or former employee or director of the
Company or any of the Subsidiaries (the "Company Plans") has been operated and
administered in all material respects in accordance with its terms and all
applicable law, including without limitation ERISA (as defined below) and the
Code. There are no actions, suits or claims pending, other than routine claims
for benefits, with respect to the Company Plans or their operation,
administration or maintenance. Neither the Company nor any ERISA Affiliate has
at any time sponsored, maintained, contributed to or been required to contribute
to any "pension plan" (within the meaning of Section 3(2) of ERISA) subject to
Title IV of ERISA, including without limitation any multiemployer plan, and
neither the Company nor any ERISA Affiliate has at any time incurred or can
expect to incur any liability under Title IV of ERISA. Each Company Plan
intended to qualify under section 401(a) of the Code is so qualified, and the
Company has timely applied for and received a currently effective determination
letter from the Internal Revenue Service with respect to each such Company Plan.
The consummation of the transactions contemplated hereunder will not result in
the payment, vesting, acceleration or enhancement of any benefit under any
Company Plan. Except as required under Sections 601-609 of ERISA, no Company
Plan provides medical benefits to participants following retirement or other
termination of employment or service. For purposes of this Agreement, "ERISA"
means the Employee Retirement Income Security Act of 1974, as amended; and
"ERISA Affiliate" means any entity that, together with the Company or any
subsidiary would be deemed a "single employer" for purposes of section
4001(b)(1) of ERISA.
(o) Except as disclosed in the Current SEC Documents,
other than the Warrants and grants of options to purchase an aggregate of
740,000, 22,230 and 233,000 shares of Common Stock issued in January 1997, May
1997 and January 1998, respectively, and restricted stock awards representing
29,887 shares of Common Stock issued in January 1998, there are no outstanding
warrants or options to purchase any shares of capital stock of the Company and
there are no restrictions upon the voting or transfer of, or the declaration or
payment of any dividend or distribution on, any shares of capital stock of the
Company pursuant to the certificate of incorporation or by-laws of the Company,
any agreement or other instrument to which the Company is a party or by which
the Company is bound, or any order, law, rule, regulation or determination of
any court, governmental agency or body (including, without limitation, any
banking or insurance regulatory agency or body), or arbitrator having
jurisdiction over the Company.
9
<PAGE>
(p) There are no registration or other rights
entitling any person to registration by the Company under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the issued capital
stock of the Company (other than pursuant to the Registration Rights Agreement),
or to purchase or subscribe for capital stock of the Company (other than
pursuant to understandings to issue Common Stock representing an aggregate
purchase price of up to $70 million in two separate underwritten transactions to
one or more unit investment trusts and the Investor's Agreement).
(q) The Company has qualified as a "real estate
investment trust" ("REIT") under section 856 of the Code from its inception and
it has operated and intends to continue to operate in a manner so as to qualify
as a REIT. The Company has not taken any action or omitted to take any action
that would reasonably be expected to result in a challenge to its status as a
REIT, and no such challenge is pending or, to the Company's knowledge,
threatened.
(r) Each of FFCA Acquisition Corporation, FFCA
Institutional Advisors, Inc., FFCA Secured Assets Corporation, FFCA Residual
Interest Corporation and FFCA Secured Lending Corporation has been (at all times
during the period each such corporation has been in existence) and is subject to
tax as a corporation for United States federal income tax purposes and the
Company has owned 100% of the stock of each such corporation at all times during
the period each such corporation has been in existence. Each such entity is a
qualified REIT subsidiary, as described in section 856(i) of the Code.
(s) FFCA Co-Investment Limited Partnership has been
(at all times on and after June 1, 1994) and is subject to tax as a partnership,
and not as an association taxable as a corporation or a publicly traded
partnership subject to tax as a corporation, for United States federal income
tax purposes.
10
<PAGE>
(t) The Company files and has filed all required
reports, proxy statements, forms, and other documents with the SEC since January
1, 1995 (including all information incorporated therein by reference, the "SEC
Documents"). True and complete copies of all such SEC Documents have been made
available to Purchaser. As of their respective dates, (i) the SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Securities Exchange Act of 1934, as amended, as the case may be, and the
rules and regulations of the SEC promulgated thereunder applicable to such SEC
Documents, and (ii) except to the extent that information contained in any SEC
Document has been revised or superseded by a later filed SEC Document filed and
publicly available prior to the date of this Agreement, none of the SEC
Documents contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved and fairly
present the consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Except for
liabilities and obligations incurred in the ordinary course of business,
consistent with past practices, since the date of the most recent consolidated
balance sheet included in the SEC Documents filed and publicly available prior
to the date of this Agreement (the "Base Balance Sheet"), neither the Company
nor any of the Subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) required by generally
accepted accounting principles to be set forth on a consolidated balance sheet
of the Company and its consolidated Subsidiaries or in the notes thereto.
(u) Except as disclosed in Current SEC Documents,
since the date of the Base Balance Sheet, the Company and the Subsidiaries have
conducted their respective businesses only in the ordinary course of business in
accordance with past practices, and there has not been (i) any Material Adverse
Change in the Company, (ii) any split, combination or reclassification of any of
its capital stock or any issuance or the authorization of any issuance of any
other securities in respect of, in lieu of or in substitution for shares of the
capital stock of the Company, (iii) any damage, destruction or loss, whether or
not covered by insurance, that has or reasonably could be expected to have a
Material Adverse Effect on the Company or any Subsidiary, as the case may be, or
(iv) any change in accounting methods, principles or practices by the Company
materially affecting its assets or liabilities or that otherwise has or
reasonably could be expected to have a Material Adverse Effect on the Company or
any Subsidiary, as the case may be and (v) except for regular quarterly
dividends (including a quarterly dividend increase of $.02 declared January 30,
1998) on the Common Stock, there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital stock.
11
<PAGE>
(v) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that in all
material respects (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(w) To the Company's knowledge, neither the Company
nor any of the Subsidiaries nor any employee or agent of the Company or any
Subsidiary has made any payment of funds of the Company or any Subsidiary or
received or retained any funds in violation of any law, rule or regulation.
(x) The Company and each of the Subsidiaries have (i)
duly filed with the appropriate tax authorities all tax returns required to be
filed by them, and such tax returns are true, correct and complete in all
material respects, and (ii) duly paid in full or made provision in accordance
with generally accepted accounting principles for the payment of all material
taxes ending through the date hereof.
(y) No labor disturbance by the employees of the
Company or the Subsidiaries exists or (to the best of the Company's knowledge)
is imminent that would, individually or in the aggregate, have a Material
Adverse Effect. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(z) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the future
to conduct, its affairs in such a manner as to ensure that it will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
(aa) The Company agrees that neither it, nor anyone
acting on its behalf, will offer any of the Securities so as to bring the
issuance and sale of the Securities within the provisions of Section 5 of the
Securities Act, or offer any similar securities for issuance or sale to, or
solicit any offer to acquire any of the same from, or otherwise approach or
negotiate with respect thereto with, anyone if the sale of any of the Securities
or any such similar securities would be integrated as a single offering for the
purposes of the Securities Act, including, without limitation, Regulation D
thereunder.
12
<PAGE>
(bb) The Company has not retained, directly or
indirectly, any broker or finder or incurred any liability or obligation for any
brokerage fees or finder's fees with respect to this Agreement or the
transactions contemplated hereby.
(cc) All the Company's representations and warranties
herein shall survive until ninety (90) days following the delivery to the
Company of its signed, audited financial statements for the year ending December
31, 1998.
Section 2.2 Representations and Warranties of Purchaser. Purchaser
represents and warrants to the Company that:
(a) Purchaser has been duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
all requisite power and authority under such laws to own or lease and operate
its properties and to carry on its business as now conducted.
(b) Purchaser has the power and authority to execute,
deliver and perform this Agreement and the Other Documents. All action on the
part of Purchaser necessary for the authorization, execution and delivery of
this Agreement and the Other Documents and the performance of all obligations of
Purchaser hereunder and thereunder have been taken or will be taken prior to the
Closing. This Agreement and the Other Documents have been duly authorized,
executed and delivered by Purchaser and each constitutes a valid and legally
binding obligation of Purchaser, enforceable in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (whether
enforcement is sought by proceedings in equity or at law).
(c) The execution and delivery by Purchaser of this
Agreement and the Other Documents and the performance by Purchaser of its
obligations hereunder and thereunder will not violate any provision of law, the
organizational documents governing Purchaser or any order of any court or other
agency of government, or conflict with, result in a breach of or constitute
(with notice or lapse of time or both) a default under any indenture, agreement
or other instrument by which Purchaser or any of its properties or assets is
bound, or result in the creation or imposition of any lien, charge, restriction,
claim or encumbrance of any nature whatsoever known to Purchaser upon any of the
properties or assets of Purchaser.
(d) The Securities will be acquired for investment
13
<PAGE>
for Purchaser's own account, not as a nominee or agent, and not with a view to
the resale or distribution of any part thereof, and Purchaser has no present
intention of selling, granting any participation in, or otherwise distributing
the same. Purchaser further represents that it does not presently have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities. Purchaser (i) has such knowledge and
experience in financial and business matters, including investments of the type
represented by the Securities, as to be capable of evaluating the merits of
investment in the Company; (ii) has not been furnished with or relied upon any
oral representation, warranty or information in connection with the offering of
the Securities; and (iii) is an "Accredited Investor" as such term is defined in
Rule 501 of the rules and regulations promulgated under the Securities Act.
Purchaser and its agents, attorneys and advisors have been provided full and
complete access to all of the books, records, financial statements, accounts,
places of business, and any other information reasonably related to the conduct
of the business of Company, and has been afforded the opportunity to conduct an
independent investigation of all of those matters and has satisfied itself as to
all of the risks of the business of the Company, and has satisfied itself that
it has obtained, or been offered access to all of the information and
descriptions of reasonable risks associated with the transaction contemplated
hereby that a reasonably prudent investor would wish to obtain.
(e) The Company will not have any liability or
obligation for any brokerage fees or finder's fees with respect to this
Agreement or the transactions contemplated hereby as a result of any action
taken by Purchaser in connection herewith and therewith.
(f) After giving effect to the constructive ownership
rules of section 544 of the Code (as modified by section 856(h) of the Code), no
member of Purchaser (each a "Member") (i) owns more than 9.8% of the Common
Stock or (ii) owns directly or indirectly 25% or more of Purchaser.
(g) After giving effect to the constructive ownership
rules under section 318 of the Code (as modified by section 856(d)(5) of the
Code), Purchaser does not directly or indirectly own the stock of any person
that is a tenant under any lease with the Company and will not directly or
indirectly acquire stock in any such tenant if, upon and as a direct consequence
of such acquisition, the rents to be derived by the Company under such lease
would fail to qualify as rent from real property pursuant to section 856(d)(2)
of the Code.
14
<PAGE>
(h) Purchaser is a newly formed fund that is its own
ultimate parent as that term is defined in the rules and regulations promulgated
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), does not have and will not have a regularly prepared balance sheet
at the Closing Date, and at the Closing Date will not have assets or net sales
of $10 million or more other than the cash that will be used as consideration
for the acquisition and expenses incidental to the transactions contemplated
hereunder and as a result such transactions are not subject to the notification
and waiting period requirements of the HSR Act pursuant to 16 C.F.R. Section
801.11(e).
SECTION 3. CLOSING CONDITIONS
Section 3.1 Conditions to Obligation of Purchaser. The obligation of
Purchaser to purchase the Securities shall be subject to satisfaction or waiver
by it of the following conditions on or before the Closing Date:
(a) The representations and warranties of the Company
contained in Section 2.1 hereof that are qualified as to materiality shall be
true and accurate, and those not so qualified shall be true and accurate in all
material respects at and as of the Closing Date as if made on the date hereof.
(b) The Company shall have performed and complied in
all material respects with all agreements, covenants and conditions contained
herein that are required to be performed or complied with by it on or before the
Closing Date.
(c) The Company shall have received all consents,
permits, approvals and other authorizations that may be required from, and made
all such filings and declarations that may be required with, any person pursuant
to any law, statute, regulation or rule (federal, state, local and foreign), or
pursuant to any agreement, order or decree by which the Company or any of its
assets is bound, in connection with the transactions contemplated by this
Agreement, except for (i) notice requirements which may be fulfilled subsequent
to the Closing Date and (ii) consents, permits, approvals, authorizations,
filings and declarations the failure to obtain or to undertake which will not
adversely affect the Company's ability to perform its obligations under this
Agreement or any agreement executed in accordance herewith.
15
<PAGE>
(d) Purchaser shall have received a certificate,
dated the Closing Date and signed by the President and the Chief Financial
Officer of the Company, certifying that the conditions in Sections 3.1(a), (b)
and (c) are satisfied on and as of such date.
(e) The Company shall have entered into the Other
Documents, and Purchaser's designee shall have been appointed to the Board of
Directors of the Company pursuant to the Investor's Agreement.
(f) Purchaser and its counsel shall have received
copies of the following documents:
(i) the Certificate of
Incorporation, certified as of a recent date by the Secretary of State
of the State of Delaware, and a certificate of such authority dated as
of a recent date as to the due incorporation and good standing of the
Company and listing all documents of the Company on file with said
authority;
(ii) a certificate of the Secretary
or an Assistant Secretary of the Company dated the Closing Date
certifying: (A) that attached thereto is a true and complete copy of
the Bylaws of the Company as in effect on the date of such
certification; (B) that attached thereto is a true and complete copy of
all resolutions adopted by the Board of Directors authorizing the
execution, delivery and performance of this Agreement and the Other
Documents and the issuance, sale and delivery of the Securities, and
that all such resolutions are in full force and effect and are all the
resolutions adopted in connection with the transactions contemplated by
this Agreement; (C) that the Certificate of Incorporation of the
Company has not been amended since the date of the last amendment
referred to in the certificate delivered pursuant to clause (i) above;
(D) that the Bylaws have not been amended since the date of the last
amendment referred to in such certificate pursuant to subclause (ii)(A)
above; and (E) that each officer of the Company executing this
Agreement and the Other Documents, the certificates representing the
Securities and any agreement, certificate or instrument furnished
pursuant hereto, was, at the respective times of such execution and
delivery of such documents, duly elected or appointed, qualified and
acting as such officer, and the signatures of such persons appearing on
such documents are their genuine signatures or true facsimiles thereof;
and
16
<PAGE>
(iii) such additional supporting
documents as Purchaser may reasonably request.
(g) Purchaser shall have received an opinion
(satisfactory to Purchaser and its counsel), dated the Closing Date, from Kutak
Rock in substantially the form of Exhibit B hereto.
(h) The Board of Directors of the Company shall have
adjusted the ownership limitations contained in the Company's certificate of
incorporation to the extent necessary to permit Purchaser's purchase of the
Securities (including, without limitation, the exercise from time to time of the
Warrants) and the transactions contemplated hereby and the Other Documents.
Section 3.2 Conditions to the Obligations of the Company. The Company's
obligation to sell the Securities shall be subject to the satisfaction or waiver
by it of the following conditions on or before the Closing:
(a) The representations and warranties of Purchaser
contained in Section 2.2 of this Agreement that are qualified as to materiality
shall be true and accurate, and those not so qualified shall be true and
accurate in all material respects at and as of the Closing Date as if made on
the date hereof.
(b) Purchaser shall have performed and complied in
all material respects with all agreements and conditions contained herein that
are required to be performed or complied with by it on or before the Closing
Date, including without limitation, payment of the Purchase Price.
(c) Purchaser shall have received all consents,
permits, approvals and other authorizations that may be required from, and made
all such filings and declarations that may be required with, any person pursuant
to any law, statute, regulation or rule (federal, state, local and foreign), or
pursuant to any agreement, order or decree by which Purchaser or any of its
assets is bound, in connection with the transactions contemplated by this
Agreement, except for (i) notice requirements which may be fulfilled subsequent
to the Closing Date and (ii) consents, permits, approvals, authorizations,
filings and declarations the failure to obtain or to undertake which will not
adversely affect Purchaser's ability to perform its obligations under this
Agreement or any agreement executed in accordance herewith.
17
<PAGE>
(d) The Company shall have received a certificate,
dated the Closing Date and signed by the President of the general partner of
Purchaser, certifying that the conditions in Sections 3.2(a), (b) and (c) are
satisfied on and as of such date.
(e) The Company shall have received an opinion
(reasonably satisfactory to the Company and its counsel), dated the Closing
Date, from outside counsel to Purchaser in substantially the form of Exhibit C
hereto.
SECTION 4. MISCELLANEOUS
(a) Each party hereto shall pay its own expenses
(including, without limitation, counsel fees) in connection with the
transactions contemplated hereby, whether or not such transactions shall be
consummated. The Company and the Purchaser shall share all joint filing fees and
related expenses equally.
(b) Except as otherwise provided herein, covenants,
agreements, representations and warranties made in this Agreement, or any
certificate or instrument delivered pursuant to or in connection therewith shall
survive the execution and delivery of this Agreement.
(c) All representations, covenants and agreements
contained in this Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not; provided that Purchaser shall not
assign its rights in this Agreement to any unrelated third party without first
obtaining the prior written consent of the Company, and provided further that,
notwithstanding the above provision, Purchaser may assign its rights in this
Agreement to any 50% or greater controlled Affiliate of Colony Capital, Inc.
(d) All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered in person,
sent by facsimile or mailed by certified or registered mail; return receipt
requested, addressed as follows:
If to Purchaser, to: Colony Investors III, L.P.
c/o Colony Capital, Inc.
1999 Avenue of the Stars, Suite 1200
Los Angeles, California 90067
Telecopier No.: (310) 282-8813
Attention: Mr. Kelvin L. Davis
18
<PAGE>
with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
Telecopier No.: (213) 687-5600
Attention: Jonathan H. Grunzweig, Esq.
If to the Company, to: Franchise Finance Corporation of America
The Perimeter Center
17207 North Perimeter Drive
Scottsdale, Arizona 85255
Telecopier No.: (602) 585-2225
Attention: Mr. M.H. Fleischer
with a copy to: Franchise Finance Corporation of America
The Perimeter Center
17207 North Perimeter Drive
Scottsdale, Arizona 85255
Telecopier No.: (602) 585-2226
Attention: Dennis L. Ruben, Esq.
with a copy to: Kutak Rock
717 Seventeenth Street, Suite 2900
Denver, Colorado 80202
Telecopier No.: (303) 292-7799
Attention: Paul E. Belitz , Esq.
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others. All notices, requests,
consents and other communications hereunder shall be deemed to have been duly
given or served on the date on which personally delivered or on the date
actually received, with receipt acknowledged.
(e) This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to the
conflict of laws provisions thereof.
(f) This Agreement and the Other Documents constitute
the sole and entire agreement of the parties with respect to the subject matter
hereof and supersedes any and all prior or contemporaneous agreements,
discussions, representations, warranties or other communications. All Schedules
and Exhibits hereto are hereby incorporated herein by reference.
19
<PAGE>
(g) This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(h) As used in this Agreement, knowledge shall mean,
with respect to any person, actual knowledge of such person (without imputing
any knowledge to such person), if an individual, or of any executive officer of
such Person, if not an individual.
(i) This Agreement may not be amended or modified
without the written consent of the Company and Purchaser, nor shall any waiver
be effective against any party unless in a writing executed on behalf of such
party.
(j) If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms to the fullest extent permitted by law.
(k) The titles and subtitles used in this Agreement
are for convenience only and are not to be considered in construing or
interpreting any term or provisions of this Agreement.
20
<PAGE>
IN WITNESS WHEREOF, the Company and Purchaser have caused this
Agreement to be executed and delivered by the undersigned duly authorized
officers as of the day and year first above written.
FRANCHISE FINANCE CORPORATION OF AMERICA
By: /s/ MORTON H. FLEISCHER
-------------------
Name: Morton H. Fleischer
Title: President and Chief
Executive Officer
COLONY INVESTORS III, L.P.
By: Colony Capital III, L.P.
By: ColonyGP III, Inc.
By: /s/ KELVIN L. DAVIS
---------------
Name: Kelvin L. Davis
Title: President and Chief
Executive Officer
EXHIBIT 21.01
SUBSIDIARIES OF REGISTRANT
State of Incorporation
Name of Subsidiary or Organization
- ------------------ ----------------------
FFCA Acquisition Corporation Delaware
FFCA Institutional Advisors, Inc. Delaware
FFCA Secured Assets Corporation Delaware
FFCA Residual Interest Corporation Delaware
FFCA Secured Lending Corporation Delaware
FFCA Loan Warehouse Corporation Delaware
FFCA Capital Holding Corporation Delaware
FFCA Secured Franchise Loan Trust 1997-1 Delaware
FFCA Franchise Loan Owner Trust 1998-1 Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into Franchise Finance Corporation of
America's previously filed Registration Statements No. 33-627-69, 33-626-29 and
333-001-23.
Arthur Andersen LLP
Phoenix, Arizona,
March 27, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,130
<SECURITIES> 0
<RECEIVABLES> 36,999
<ALLOWANCES> 2,300
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 951,305
<DEPRECIATION> 175,263
<TOTAL-ASSETS> 1,179,198
<CURRENT-LIABILITIES> 0
<BONDS> 619,860
0
0
<COMMON> 418
<OTHER-SE> 522,578
<TOTAL-LIABILITY-AND-EQUITY> 1,179,198
<SALES> 0
<TOTAL-REVENUES> 134,988
<CGS> 0
<TOTAL-COSTS> 1,641
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,750
<INCOME-PRETAX> 72,897
<INCOME-TAX> 0
<INCOME-CONTINUING> 72,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,897
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.76
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AS RESTATED PURSUANT TO
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 128, EARNINGS PER SHARE ("SFAS
NO. 128"). IN ADDITION, AN ENTRY ON THIS SCHEDULE HAS BEEN AMENDED FROM THE
PREVIOUS FINANCIAL DATA SCHEDULE FILED FOR THIS PERIOD. THIS SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS
EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE
SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR
OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A
PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS
SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,350
<SECURITIES> 0
<RECEIVABLES> 23,720
<ALLOWANCES> 1,700
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 868,215
<DEPRECIATION> 172,941
<TOTAL-ASSETS> 988,776
<CURRENT-LIABILITIES> 0
<BONDS> 457,956
0
0
<COMMON> 406
<OTHER-SE> 494,964
<TOTAL-LIABILITY-AND-EQUITY> 988,776
<SALES> 0
<TOTAL-REVENUES> 121,166
<CGS> 0
<TOTAL-COSTS> 2,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,947
<INCOME-PRETAX> 68,539
<INCOME-TAX> 0
<INCOME-CONTINUING> 68,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,539
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.69
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AS RESTATED PURSUANT TO
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 128, EARNINGS PER SHARE ("SFAS
NO. 128"). IN ADDITION, AN ENTRY ON THIS SCHEDULE HAS BEEN AMENDED FROM THE
PREVIOUS FINANCIAL DATA SCHEDULE FILED FOR THIS PERIOD. THIS SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS
EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE
SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR
OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A
PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS
SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,067
<SECURITIES> 0
<RECEIVABLES> 8,820
<ALLOWANCES> 2,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 794,580
<DEPRECIATION> 176,232
<TOTAL-ASSETS> 843,504
<CURRENT-LIABILITIES> 0
<BONDS> 317,202
0
0
<COMMON> 403
<OTHER-SE> 493,414
<TOTAL-LIABILITY-AND-EQUITY> 843,504
<SALES> 0
<TOTAL-REVENUES> 102,583
<CGS> 0
<TOTAL-COSTS> 2,046
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,237
<INCOME-PRETAX> 53,793
<INCOME-TAX> 0
<INCOME-CONTINUING> 53,793
<DISCONTINUED> 0
<EXTRAORDINARY> (2,464)
<CHANGES> 0
<NET-INCOME> 51,329
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997, JUNE 30, 1997, AND SEPTEMBER
30, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE INFORMATION PROVIDED
FOR THE THREE MONTHS ENDED MARCH 31,1997, THE SIX MONTHS ENDED JUNE 30, 1997 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 HAS BEEN RESTATED PURSUANT TO STATEMENT
OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS N0. 128").
THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11
OF THE SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF
1934, OR OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE
DEEMED A PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE,
UNLESS SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 5,660 3,330 1,424
<SECURITIES> 0 0 0
<RECEIVABLES> 25,076 24,902 25,679
<ALLOWANCES> 1,200 1,700 2,200
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 860,681 873,555 928,234
<DEPRECIATION> 172,016 171,174 173,981
<TOTAL-ASSETS> 1,105,361 917,397 999,302
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 569,519 382,083 435,646
0 0 0
0 0 0
<COMMON> 406 407 417
<OTHER-SE> 496,707 501,227 523,599
<TOTAL-LIABILITY-AND-EQUITY> 1,105,361 917,397 999,302
<SALES> 0 0 0
<TOTAL-REVENUES> 32,775 67,422 100,283
<CGS> 0 0 0
<TOTAL-COSTS> 521 1,055 1,540
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 8,609 18,659 26,756
<INCOME-PRETAX> 18,215 39,785 56,242
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 18,215 39,785 56,242
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 18,215 39,785 56,242
<EPS-PRIMARY> .45 .98 1.38
<EPS-DILUTED> .44 .97 1.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1996, JUNE 30, 1996, AND SEPTEMBER
30, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE INFORMATION PROVIDED
FOR THE THREE MONTHS ENDED MARCH 31, 1996, THE SIX MONTHS ENDED JUNE 30, 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 HAS BEEN RESTATED PURSUANT TO
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE ("SFAS
N0. 128"). IN ADDITION, CERTAIN ENTRIES ON THESE SCHEDULES HAVE BEEN AMENDED
FROM THE PREVIOUS FINANCIAL DATA SCHEDULES FILED FOR THESE PERIODS. THIS
SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR THE PURPOSE OF SECTION 11 OF THE
SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR
OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A
PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS
SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 1,758 69,078 15,189
<SECURITIES> 0 0 0
<RECEIVABLES> 13,252 11,975 25,870
<ALLOWANCES> 2,300 2,200 2,300
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 816,381 815,592 858,040
<DEPRECIATION> 176,344 175,467 176,785
<TOTAL-ASSETS> 887,164 825,604 865,153
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 361,926 296,503 330,580
0 0 0
0 0 0
<COMMON> 404 404 405
<OTHER-SE> 490,134 495,048 494,810
<TOTAL-LIABILITY-AND-EQUITY> 887,164 825,604 865,153
<SALES> 0 0 0
<TOTAL-REVENUES> 29,667 60,875 89,936
<CGS> 0 0 0
<TOTAL-COSTS> 550 1,219 1,646
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 6,752 13,970 19,929
<INCOME-PRETAX> 13,777 35,671 51,502
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 13,777 35,671 51,502
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 13,777 35,671 51,502
<EPS-PRIMARY> .34 .88 1.28
<EPS-DILUTED> .34 .88 1.27
</TABLE>
