THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
PRIOR TO THE TIME THIS PROSPECTUS SUPPLEMENT IS DELIVERED IN FINAL FORM. THIS
PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED.
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-26437
SUBJECT TO COMPLETION, DATED JANUARY 8, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 16, 1998)
FFCA
6,000,000 Shares
Franchise Finance Corporation of America
Common Stock
--------------
This is an offering of 6,000,000 shares of common stock of Franchise
Finance Corporation of America. Franchise Finance Corporation of America is
selling all of the shares of common stock offered under this prospectus
supplement.
Our common stock is listed and traded on the New York Stock Exchange under
the symbol "FFA." The last reported sale price of our common stock on January 7,
1999, was $25.25 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE S-13 OF THIS PROSPECTUS SUPPLEMENT.
--------------
Per Share Total
--------- -----
Public Offering Price .................. $ $
Underwriting Discount ..................... $ $
Proceeds, before expenses, to FFCA ...... $ $
The underwriters may also purchase up to an additional 900,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus supplement to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the related prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Merrill Lynch & Co. is acting as book running lead manager for this
offering. Merrill Lynch & Co. and Bear, Stearns & Co. Inc. are acting as joint
lead managers. The shares of common stock will be ready for delivery in New
York, New York on or about , 1999.
--------------
MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC.
JOINT LEAD MANAGERS
--------------
MORGAN STANLEY DEAN WITTER
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
--------------
The date of this prospectus supplement is , 1999.
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
Investment Locations as of December 31, 1998(1)
[MAP OF THE UNITED STATES SHOWING FFCA'S PROPERTIES BY INDUSTRY]
(1) Does not include four properties located in Alaska and Canada.
[TWO PIE CHARTS SHOWING INDUSTRY SECTOR DIVERSIFICATION BASED UPON TOTAL
REVENUES AND TOTAL INVESTMENT MIX, BOTH AS OF SEPTEMBER 30, 1998]
- ------------
(1) Total revenues does not include other miscellaneous income.
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING, AND YOU ARE URGED TO READ BOTH
THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL TO OBTAIN MATERIAL
INFORMATION CONCERNING THE SHARES AND AN INVESTMENT IN THE SHARES.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR INCORPORATED BY REFERENCE IN THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE ACCURATE AS OF ANY DATE OTHER
THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
----------------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary .................................. S-3
Risk Factors ................................................... S-13
Use of Proceeds ................................................ S-16
Price Range of Common Stock and Distribution History ........... S-17
Capitalization ................................................. S-18
Selected Financial Data ........................................ S-19
Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... S-21
Business and Properties ........................................ S-28
Industries ..................................................... S-37
Management ..................................................... S-40
Certain Federal Income Tax Considerations to Holders of
Common Stock .................................................. S-43
Underwriting ................................................... S-47
Legal Matters .................................................. S-48
PROSPECTUS
Available Information .......................................... 2
Incorporation of Certain Documents by Reference ................ 2
The Company .................................................... 3
Use of Proceeds ................................................ 3
Ratios of Earnings to Fixed Charges ............................ 3
Description of Debt Securities ................................. 4
Description of Common Stock .................................... 13
Description of Preferred Stock ................................. 14
Restrictions on Transfers of Capital Stock ..................... 19
Certain Federal Income Tax Considerations ...................... 20
Plan of Distribution ........................................... 25
Legal Matters .................................................. 26
Experts ........................................................ 26
(i)
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary is not complete and does not contain all of the information
that you should consider before investing in the shares. You should read this
entire prospectus supplement, the accompanying prospectus and FFCA's Exchange
Act reports carefully. Unless the context indicates otherwise, the terms "FFCA,"
"our," "we," and "the Company" refer to Franchise Finance Corporation of America
and its subsidiaries.
THE COMPANY
Based in Scottsdale, Arizona, Franchise Finance Corporation of America, or
FFCA, is a leading specialty finance company dedicated to providing real estate
financing to experienced multi-unit operators of established national or
regional chain restaurants, convenience stores and automotive parts and services
outlets. The Company offers a full complement of financing products including
sale-leaseback financing, mortgage and equipment loans, construction financing,
and other custom financing solutions. As of December 31, 1998, FFCA had
investments in more than 3,500 properties (including interests in securitized
loans). FFCA's clients and the properties which it has financed represent some
of the best-known chains in the country, including Applebee's, Arby's, Burger
King, Checker Auto Parts, Chevron, Circle K, Citgo, Hardee's, Jiffy Lube, Midas
Muffler Shops, Pizza Hut, 7-Eleven, Taco Bell, Texaco, Valvoline Instant Oil
Change and Wendy's. FFCA is a self-administered real estate investment trust.
HISTORY AND ORGANIZATION. Morton H. Fleischer, who serves as Chairman of
the Board, President and Chief Executive Officer of FFCA, formed the Company in
1980 to provide real estate sale-leaseback financing to the chain restaurant
industry. The Company expanded its financial services products to include
mortgage and construction financing following its listing on the New York Stock
Exchange in June 1994. In 1997, FFCA began to provide similar financial products
to operators of convenience stores and automotive parts and services facilities.
Considered separately, each of the three retail industries that FFCA finances
are among the largest sectors of the retail industry in terms of the number of
locations and gross retail revenues in the United States, which the Company
believes will provide it with opportunities for continued growth from additional
financings. Within these industries, FFCA focuses primarily on providing
financing to larger, experienced multi-unit operators with established national
and regional brands. As of December 31, 1998, the Company had a staff of
approximately 135 employees dedicated to all aspects of investment origination,
loan origination and portfolio servicing and management. FFCA possesses a very
experienced and highly knowledgeable executive management team with an average
of 20 years of industry experience.
INVESTMENT STRUCTURE. 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. Both FFCA's sale-leaseback and
mortgage financings are generally for twenty-year terms and mortgage products
typically are fully amortizing over the term of the loans. The sale-leasebacks
originated 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. The mortgage loans
originated by FFCA are generally pooled and sold in securitized offerings, with
FFCA generally retaining or acquiring interests in the pool in the form of
subordinated securities and mortgage servicing rights.
S-3
<PAGE>
As of September 30, 1998, FFCA's investments portfolio (at cost) totaled
approximately $1.5 billion and approximately $1.2 billion, or 78%, of FFCA's
investments in properties were fee-owned real estate subject to lease
agreements. In addition, mortgage loans held for sale accounted for
approximately $171 million, or 11%, of the portfolio while subordinated
securities in securitized mortgage loan pools accounted for approximately $95
million, or 6%, of the portfolio. Also as of such date, mortgage loan
investments accounted for approximately $42 million, or 3%, of the portfolio
while other investments accounted for approximately $33 million, or 2%, of the
portfolio.
FFCA's corporate offices are located at 17207 North Perimeter Drive,
Scottsdale, Arizona 85255-5402. The Company's telephone number is (602)
585-4500. FFCA also has an internet website at www.ffca.com.
BUSINESS ACTIVITY
INVESTMENT/FINANCING GROWTH. FFCA provides real estate financing to
experienced multi-unit operators of chain restaurants, convenience stores and
automotive parts and services outlets. Considered separately, each of the three
industries financed by FFCA are among the largest sectors of the retail industry
in terms of number of locations and gross retail revenues in the United States.
Each of these three retail sectors is generally characterized as mature, meaning
that recent new store construction has been limited because most markets have
been extensively developed. Thus, the increased volume of FFCA's financing
activity has not been related to new store construction. FFCA's financing growth
has resulted principally from providing refinancing to existing chain store
locations and the financing of merger and acquisition transactions as these
industries consolidate. Approximately 90% of the stores financed by FFCA since
1994 have been existing locations, rather than newly constructed properties.
FFCA's management believes that future financing activities will continue to be
based upon existing chain store locations with established operating
performance. The Company's compounded annual growth rate in annual investments
and financings was 49.5% for the period 1995 through 1998. The table below sets
forth the growth of FFCA's investment and financing activity by year since 1995,
the first full fiscal year after FFCA became a public company:
INVESTMENT/FINANCING GROWTH
$ in millions
1995 $278
1996 $340
1997 $503
Estimated 1998 $928
S-4
<PAGE>
FUNDS FROM OPERATIONS GROWTH. Since becoming a public company in 1994, the
Company has achieved increased growth in its funds from operations per share
principally as a result of the increased amount of new investments and
financings, as well as an ability to limit the growth of operating and general
and administrative expenses of the Company. The objective of FFCA's management
is to grow funds from operations per share. Management considers funds from
operations to be an appropriate measure of performance of an equity REIT because
it is predicated on cash flow analyses. On an annual basis, the growth rate of
FFCA's funds from operations per share is as follows:
FUNDS FROM OPERATIONS GROWTH
1995(1) 1996 1997 1998(2)
------- ---- ---- -------
FFO per Share Growth ........ 5.6% 7.1% 8.2% 10.9%
- ----------
(1) Six months ended December 31, 1995 compared to six months ended December
31, 1994.
(2) Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997.
SIZE OF THE MARKET
FFCA's objective is to achieve a dominant market share in financing the
chain restaurant, convenience store and automotive parts and services store
industries. The growth of FFCA's investment activity through 1998, mostly as a
result of financing existing stores, has meant that FFCA has increased its
market share in each of the industries which it finances. Company management
believes that, as of December 31, 1998, FFCA had provided real estate financing
for less than 2% of the total market in these three industries.
There are nearly 1 million outlets in the three retail industries which
FFCA finances, consisting of restaurants, convenience stores and automotive
parts and services stores. Collectively, the top 50 chains (as ranked by numbers
of units) in these industries had approximately 210,000 outlets at the end of
1997. The Company estimates that, based upon FFCA's average store financing
amounts of $750,000 per outlet, the overall market of potential financings is
over $700 billion, with the top 50 chains representing over $150 billion in
potential financings, as outlined below:
ESTIMATED MARKET SIZE
(Dollars in thousands)
<TABLE>
<CAPTION>
Convenience Automotive Parts
Restaurants Stores and Services Total
----------- ------ ------------ -----
<S> <C> <C> <C> <C>
Total Number of Outlets ...... 444,531 140,829 372,526 957,886
Top 50 Chains ............... 107,798 71,097 33,236 212,131
Estimated Financing Potential
Total Outlets ............... $333,398,250 $105,621,750 $279,394,500 $718,414,500
Top 50 Chains ............... $ 80,848,500 $ 53,322,750 $ 24,927,000 $159,098,250
</TABLE>
COMPETITIVE ADVANTAGES
FFCA is guided by a philosophy of offering its customers superior resources
and services to add value to their businesses through responsive, innovative and
flexible financing solutions. The Company's resources include a broad array of
financing products, a capacity to offer forward financing commitments, an
ability to provide financing for some of the smallest to some of the largest
capital needs, an ability to provide valuable proprietary research and market
data to its customers and an extensive team of knowledgeable professionals.
Among FFCA's competitive advantages are the following:
BRAND NAME RECOGNITION. Like the customers FFCA finances, Company
management has sought to make FFCA a well-known brand name in the industries
addressed by the Company. FFCA has a track record of over 18 years of financing
the chain restaurant industry. During that time, FFCA
S-5
<PAGE>
has invested extensively in advertising and direct mail correspondence with
potential clients. Since 1996, the Company has increasingly been recognized as a
resource for information in articles that have appeared in national publications
and trade journals. In addition, trade journals regularly publish the Company's
operator confidence indices and excerpts from its annual industry studies.
CLIENT RELATIONSHIPS. Each year, a large portion of FFCA's financing
activity is provided to clients the Company has known or successfully financed
in the past. Repeat financing business is attributable to a strong focus on
customer service. In 1994, the Company instituted its Preferred Client Program,
which pre-approves customers for multiple store development or acquisitions for
the coming year. In connection with these Preferred Client commitments,
individual store financing is expedited by FFCA's real estate analysts and
property management professionals. As a means of enhancing client relationships,
FFCA founded the Restaurant Leadership Conference in 1992, which has become a
recognized annual gathering of the larger, multi-unit chain restaurant
operators. The conference provides a means of bringing together some of the
largest restaurant operating companies in the country to hear from various
well-known business and industry professionals, including FFCA representatives.
The Company was also a founding sponsor of a similar annual event geared to the
convenience store industry in 1998.
ONE-STOP SHOPPING. FFCA provides its customers with a full complement of
financing alternatives, including sale-leaseback transactions, mortgage loans,
equipment loans, senior loans and construction loans. FFCA believes that
offering its customers a "one-stop shop" gives FFCA a competitive advantage over
traditional mortgage lenders and other real estate financing companies.
Additionally, FFCA continuously reviews other financing products that it may
offer operators to further improve FFCA's competitive position.
PROPRIETARY INFORMATION SYSTEMS. FFCA has invested extensively in
proprietary, innovative information systems which enhance its investment
evaluation and origination capabilities and make its portfolio management
processes more efficient. The result is that FFCA has created an efficient
financing and servicing organization that is responsive to its customers' needs
and is capable of administering a wide array of financial products. In addition,
FFCA's proprietary information systems technology allows the Company to provide
valuable information to customers. By providing management information to its
clients, such as computerized site evaluations and reports that illustrate how
its customers' stores fare relative to each other and relative to overall
industry performance measures, FFCA differentiates itself from other, more
traditional, finance companies.
COMMITMENT TO RESEARCH. FFCA's commitment to research fosters customer
relationships and enhances its brand recognition and reputation. The Company
annually publishes and widely distributes extensive reports on the convenience
store and chain restaurant industries. FFCA professionals have also published
articles on financial statement analysis, real estate valuation, company
valuation, the decision to lease or own, the most advantageous corporate
capitalization structure for operators and other matters important to both
customers and industry analysts. FFCA has additionally created convenience store
and restaurant operator confidence indices that are published quarterly in
cooperation with major industry publications. FFCA's research is largely derived
from the Company's own databases. These databases include unit-level financial
statements on more than 10,000 chain stores, a geographic database of over
800,000 chain store locations, information on over 7,000 multi-unit operators,
as well as information on national demographic statistics, automobile traffic
counts, store construction costs and management practices. Together with FFCA's
research, these databases have been used to assist customers by enhancing their
ability to make important operational and investment decisions.
GROWTH OPPORTUNITIES THROUGH STRATEGIC ALLIANCES. FFCA pursues key
alliances with selected active investors and operators in its targeted
industries. The alliances are intended to facilitate the refinancing of real
estate assets by experienced consolidators in the Company's targeted industries.
For
S-6
<PAGE>
example, in February 1998, an affiliate of Colony Capital, Inc., made an equity
investment in FFCA of $100 million, making Colony FFCA's largest shareholder
with approximately 8% of FFCA's common stock. Colony, a Los Angeles based
international real estate investment firm, will assist FFCA in identifying
potential strategic investment initiatives.
PORTFOLIO STABILITY
FFCA has maintained an excellent record of portfolio stability through
investment diversification and an adherence to strong underwriting research
standards.
INVESTMENT DIVERSIFICATION. Consistent with the Company's stated
objectives, since 1996 FFCA has principally financed, in terms of investment
dollars, larger multi-unit operators having in excess of 200 stores. FFCA has
sought to finance larger, multi-unit operators having strong market presence,
stable cash flows and diversified sources of revenues. The Company's management
believes that adherence to its underwriting standards will result in enhanced
risk-adjusted returns. As of September 30, 1998, no single tenant or borrower
contributed more than 10% of FFCA's revenues. In total, the Company had over 400
individual obligors, 83% of whom individually contributed less than 5% of
revenues for the nine months ended September 30, 1998. Management believes that,
as the Company continues to grow, further diversification of obligors will
result.
COMPREHENSIVE RESEARCH AND UNDERWRITING CAPABILITIES. FFCA's investment
underwriting standards have been guided by its extensive industry research. The
Company has annually published and distributed research on the restaurant and
convenience store industries. In addition to its extensive proprietary industry
data, FFCA has assembled comprehensive national demographic and traffic count
data to assist in investment decisions. FFCA targets quality investments by
applying conservative, research-driven underwriting criteria designed to
evaluate risk and return indicators. Before underwriting a transaction, FFCA
thoroughly researches various factors, including: (1) chain store profitability:
(2) chain store investment amount; (3) site considerations; (4) market
considerations; (5) operator experience; (6) credit considerations; (7) property
condition; (8) chain store suitability; and (9) environmental considerations.
PROVEN UNDERWRITING STANDARDS. FFCA's professionals have extensive property
management experience, which has helped the Company to maintain extremely low
levels of property vacancy. As of December 31, 1998, the Company had just 18
vacant properties in its possession in which the applicable lease or loan
payments were not being made, representing a vacancy rate of approximately
one-half of one percent of its entire portfolio. FFCA has consistently
maintained property occupancy of greater than 99% since 1996. As of December 31,
1998, the Company reported only one delinquency in its three securitized loan
portfolios, representing a single property out of more than 1,100 mortgage loans
which have been sold in securitized loan transactions.
S-7
<PAGE>
PROPERTIES
FFCA's portfolio has grown an average of approximately 30% annually since
1995, the first full fiscal year after FFCA became a public company, from 1,176
properties at December 31, 1994, to 3,591 properties at December 31, 1998. In
1998, FFCA invested approximately $928 million in more than 1,200 properties,
which represented an increase of approximately 85% over total investment
transactions of approximately $500 million in 1997. As of December 31, 1998,
FFCA had investments in properties located in 48 states, Washington, D.C. and
Canada. FFCA's revenues in the first nine months of 1998 totaled $122.7 million,
an increase of 22% over the same period in 1997. The following chart outlines
the growth of the number of properties in FFCA's portfolio:
PROPERTY PORTFOLIO GROWTH
Dec-94 1,176
Mar-95 1,218
Jun-95 1,332
Sep-95 1,408
Dec-95 1,508
Mar-96 1,550
Jun-96 1,570
Sep-96 1,661
Dec-96 1,869
Mar-97 2,072
Jun-97 2,111
Sep-97 2,215
Dec-97 2,481
Mar-98 2,760
Jun-98 3,129
Sep-98 3,317
Dec-98 3,591
S-8
<PAGE>
FFCA's portfolio is diverse in terms of operators and chains with
investments that were leased to, or owned by, over 400 national and regional
operating companies as of September 30, 1998. The following table sets forth
certain information regarding the fifteen largest chains, in terms of total
revenues and percent of total revenues, in FFCA's portfolio:
FIFTEEN LARGEST CHAINS BY REVENUE
As of and for the Three Months Ended September 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Total Percent of Number of Percent of
Chain(1) Revenues(2) Total Revenues Properties Total Properties
- -------- ----------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
Burger King ................ $ 6,167 14.8% 417 12.6%
Arby's ..................... 4,021 9.7% 343 10.3%
Jack in the Box ............ 3,280 7.9% 171 5.1%
Hardee's ................... 3,033 7.3% 351 10.5%
Wendy's .................... 2,848 6.8% 185 5.6%
Quincy's ................... 2,472 5.9% 97 2.9%
Applebee's ................. 1,670 4.0% 73 2.2%
Pizza Hut .................. 1,562 3.8% 187 5.6%
Taco Bell .................. 1,520 3.7% 93 2.8%
KFC ........................ 1,313 3.2% 113 3.4%
Perkins .................... 1,023 2.5% 37 1.1%
Black-eyed Pea ............. 918 2.2% 34 1.0%
Fuddrucker's ............... 882 2.1% 26 0.8%
Uni-Mart(3) ................ 846 2.0% 123 3.7%
7-Eleven(3) ................ 839 2.0% 82 2.5%
------- ---- ----- ----
Total for Top 15 Chains $32,394 77.9% 2,332 70.1%
</TABLE>
- ------------
(1) Represents restaurant chains unless otherwise indicated. The names of the
concepts are a trademarks or service marks of their respective franchisors.
(2) Total revenues do not include other miscellaneous income.
(3) Represents convenience store chains.
CAPITAL MARKETS STRATEGIES
INVESTMENT GRADE DEBT. The Company's strategy has been to fund its
investments in leased properties through the issuance of equity and senior
unsecured notes. The Company received its first investment-grade debt ratings in
1995 of Baa3, BBB- and BBB- from Moody's Investors Rating Service, Standard and
Poor's and Duff and Phelps Credit Rating Company, respectively. Following the
receipt of these ratings, the Company negotiated improved terms and conditions
under its unsecured credit facility from its bank syndicate, which has been used
to fund acquisitions and mortgage originations. Shortly thereafter, the Company
also issued its first long-term unsecured senior notes. Since 1995, FFCA has
used the issuance of senior notes, together with its equity capital, to provide
long-term funding for its real estate lease investments. FFCA has no secured
borrowings other than an $8.5 million mortgage on its headquarters building. In
September 1998, Duff and Phelps Credit Rating Company elevated its rating of the
Company to BBB.
SECURITIZATIONS. In 1995, FFCA began to offer its clients traditional
long-term mortgage products to complement its established sale-leaseback
financing in order to become a "one-stop shop" for chain
S-9
<PAGE>
store real estate financing. In 1996, FFCA issued its first mortgage-backed
securities, which effectively match-funded the mortgage loans originated by the
Company. That same year, the Company added variable rate mortgage loans to its
array of financing products. Through 1998, FFCA had originated three
mortgage-backed securities offerings to fund its expanding mortgage business. In
concert with its mortgage-backed securities offerings, which are classified as
sales of mortgage loans for accounting purposes, FFCA has generated mortgage
servicing revenues and has retained securities that are generally rated below
investment grade. Combined with the related servicing revenues, the interest
income earned by the Company on its retained mortgage securities makes these
investments its highest yielding assets. The Company's third mortgage-backed
securities offering in May 1998 was rated by Moody's Investors Rating Service,
Duff and Phelps Credit Rating Company and Fitch Investors Service, Inc. As of
September 30, 1998, FFCA's residual interests in securitized mortgage loans
represented approximately 7% of FFCA's total assets.
LIQUIDITY FACILITIES. As of December 31, 1998, FFCA had two primary
liquidity facilities that enable the Company to position its investments in
leased properties and mortgage loans. The first is a $350 million unsecured
revolving credit facility with a commercial banking syndicate and the second is
a $600 million loan sale facility. Together with FFCA's internally generated
cash flow, this $950 million in liquidity facilities represents a key element of
the Company's strategy to maintain a high level of liquidity in order to take
advantage of increased investment and financing opportunities and to address the
significant growth of its mortgage and real estate investment activity.
CURRENT CAPITAL STRUCTURE. FFCA has sought to maintain a capital structure
which fosters its access to a competitive cost of capital. As of September 30,
1998, FFCA's imbedded fixed charge coverage ratio (which is the number of times
the Company can pay its interest, excluding borrowings related to mortgages held
for sale) was approximately 4:1. For the same period, the Company also had a
ratio of debt to total market capitalization of under 25%. In addition, FFCA has
staggered its lease and corporate debt maturities in order to limit performance
volatility and long-term interest rate sensitivity. Since becoming a public
company in June 1994, FFCA has also pursued a strategy of increasing the amount
of corporate cash flow retained for new investments. FFCA has always benefited
from the fact that it has not been required to expend a significant amount of
funds for real estate maintenance or capital expenditures, which are the
contractual responsibility of the Company's tenants and borrowers. At the end of
1994, the Company's funds from operations were used almost entirely to pay
shareholder dividends. As a result of the growth in funds from operations per
share, the ratio of dividends to funds from operations had fallen to
approximately 78% for the quarter ended September 30, 1998. FFCA raised its
annual shareholder dividend 4.4% to $1.88 per share beginning with the fourth
quarter of 1997. At that time, the Company announced that it would review future
shareholder dividend increases on an annual basis. On January 8, 1999, the
Company declared a second increase in its quarterly dividend to $.49 per share
($1.96 per share on an annual basis). There can be no assurance that FFCA will
continue to increase its dividend.
S-10
<PAGE>
SUMMARY FINANCIAL INFORMATION
FFCA derived the historical financial information set forth below from
FFCA's audited financial statements for 1995 through 1997 and unaudited
financial statements for the nine months ended September 30, 1997 and September
30, 1998. The information is only a summary and you should read it together with
FFCA's historical financial statements (and related notes) contained in the
annual and quarterly reports and other information FFCA has filed with the
Securities and Exchange Commission (see "Incorporation of Certain Documents by
Reference" in the accompanying prospectus), as well as the financial information
included in this prospectus supplement (see "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
September 30, December 31,
--------------------- -----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Rental ........................................ $ 87,350 $ 75,041 $ 101,292 $ 95,612 $ 86,182
Mortgage loan interest ........................ 21,287 7,448 10,987 15,738 14,118
Investment income and other ................... 14,102 9,937 13,672 6,955 2,283
Interest (related party) ...................... -- 7,857 9,037 2,861 --
--------- --------- --------- --------- ---------
Total Revenues ............................... 122,739 100,283 134,988 121,166 102,583
--------- --------- --------- --------- ---------
Expenses:
Depreciation and amortization ................. 17,808 15,478 20,784 20,654 21,201
Operating, general and administrative ......... 9,958 8,418 11,106 11,488 10,283
Property costs ................................ 1,513 1,540 1,641 2,041 2,046
Interest ...................................... 31,221 26,017 34,764 25,974 15,276
Interest (related party) ...................... 750 739 986 973 961
--------- --------- --------- --------- ---------
Total Expenses ............................... 61,250 52,192 69,281 61,130 49,767
--------- --------- --------- --------- ---------
Income before gain on sale of property and other
costs ........................................ 61,489 48,091 65,707 60,036 52,816
Gain on sale of property, net(1) ............... 9,306 7,004 5,471 9,899 977
Equity in net income (loss) of affiliate........ -- 1,147 1,719 (1,396) --
Extraordinary item-loss on early
extinguishment of debt ........................ -- -- -- -- (2,464)
--------- --------- --------- --------- ---------
Net Income ..................................... $ 70,795 $ 56,242 $ 72,897 $ 68,539 $ 51,329
========= ========= ========= ========= =========
Basic earnings per share ....................... $ 1.50 $ 1.38 $ 1.78 $ 1.70 $ 1.28
========= ========= ========= ========= =========
Diluted earnings per share ..................... $ 1.49 $ 1.37 $ 1.76 $ 1.69 $ 1.27
========= ========= ========= ========= =========
Other Data:
FFO(2) $ 81,923 $ 64,074 $ 87,559 $ 79,492 $ 73,539
FFO per share, assuming dilution(2) ............ 1.73 1.56 2.12 1.96 1.83
Adjusted FFO(3) ................................ 81,803 64,074 87,559 79,476 73,499
Adjusted FFO per share, assuming dilution(3) ... 1.72 1.56 2.12 1.96 1.82
Cash flows from operating activities............ 86,324 65,184 86,324 85,949 78,621
Cash flows from investing activities............ (192,973) (25,226) (207,521) (148,629) (259,715)
Cash flows from financing activities............ 114,220 (49,884) 116,977 71,963 171,066
Number of properties owned ..................... 1,811 1,445 1,477 1,371 1,261
Number of properties secured by mortgages ...... 189 143 378 255 247
Number of properties in securitized loans ...... 1,317 627 626 243 --
As of September 30, As of December 31,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
Balance Sheet Data:
Real estate before accumulated depreciation.... $1,171,195 $928,234 $ 951,305 $868,215 $794,580
Mortgage loans held for sale .................. 171,005 71,305 251,622 -- --
Mortgage loans receivable ..................... 41,549 32,972 35,184 57,808 199,486
Real estate investment securities ............. 94,690 55,185 55,185 29,733 --
Note receivable from affiliate(4) ............. -- -- -- 147,616 --
Total assets .................................. 1,374,520 999,302 1,179,198 988,776 843,504
Total debt .................................... 611,551 435,646 619,860 457,956 317,202
Total shareholder's equity .................... 713,143 524,016 522,996 495,370 493,817
</TABLE>
(FOOTNOTES FOR TABLE ARE LOCATED ON NEXT PAGE)
S-11
<PAGE>
- ----------
(1) Results of operations may be largely impacted by gains or losses on the
sale of properties or as a result of securitization transactions. Of the
gain on the sale of property for the years ended December 31, 1997 and
1996, $430,000 and $7.1 million, respectively, related to the
securitization transactions completed in those years.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds From Operations, or FFO, represents net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate-related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. FFCA computes FFO in accordance with
standards established by the Board of Governors of NAREIT in its March 1995
White Paper, which may differ from the methodology for calculating FFO
utilized by other REITs and, accordingly, may not be comparable to such
other REITs. While FFO is a relevant and widely used measure of the
operating performance of REITs, it does not represent cash flow from
operations or net income as defined by GAAP, and it should not be
considered as an alternative to those indicators in evaluating liquidity or
operating performance.
(3) Adjusted FFO, or "AFFO", represents net income (loss) (computed in
accordance with GAAP), excluding extraordinary gains or losses or loss
provisions, plus depreciation and amortization including amortization of
deferred financing costs, less lease commissions and capital expenditures.
Under FFCA's triple-net leases, the lessees are responsible for the payment
of all property operating expenses, meaning FFCA is generally not required
to make significant capital expenditures in the properties which it owns.
Therefore management believes that AFFO is an appropriate additional
measure of its performance as compared to other REITs which do have
significant capital expenditure obligations. AFFO should not be considered
an alternative to net income as a measure of FFCA's financial performance
or to cash flow from operating activities (computed in accordance with
GAAP) as a measure of FFCA's liquidity, nor is it necessarily indicative of
sufficient cash flow to fund all of FFCA's cash needs.
(4) Note receivable from FFCA's former affiliate, FFCA Mortgage Corporation,
which was dissolved in 1997, represents mortgage loans held for sale by the
affiliate.
THE OFFERING
Common Stock Offered(1) .......... 6,000,000 shares
Common Stock Outstanding After the
Offering(2) ..................... 55,064,330 shares
Use of Proceeds .................. FFCA intends to use the net proceeds
from the offering to reduce amounts
outstanding under its unsecured
revolving credit facility, which amounts
were used to make new investments, and
for general corporate purposes.
New York Stock Exchange Symbol.... FFA
- ----------
(1) Excludes a 30-day option granted to the underwriters to purchase up to
900,000 shares.
(2) Does not give effect to the issuance of: (a) 2,768,813 shares of common
stock issuable upon the exercise of currently outstanding stock options
granted to directors, officers and employees, (b) 1,476,908 shares of
common stock issuable upon the exercise of an immediately exercisable
warrant held by an affiliate of Colony Capital, Inc., or (c) shares which
may be issued upon the exercise of the over-allotment option granted to the
underwriters.
S-12
<PAGE>
RISK FACTORS
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS INCLUDE "FORWARD
LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE EXCHANGE ACT INCLUDING IN PARTICULAR THE STATEMENTS ABOUT
FFCA'S PLANS, STRATEGIES AND PROSPECTS UNDER THE HEADINGS "PROSPECTUS SUPPLEMENT
SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS AND PROPERTIES." ALTHOUGH FFCA BELIEVES
THAT ITS PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR SUGGESTED BY SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, FFCA CAN GIVE NO ASSURANCE THAT THESE
PLANS, INTENTIONS OR EXPECTATIONS WILL BE ACHIEVED. FFCA HAS SET FORTH IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD
LOOKING STATEMENTS BELOW AND ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, INCLUDING UNDER THE HEADINGS "BUSINESS -- FACTORS
AFFECTING FUTURE OPERATING RESULTS," "--REGULATION" AND "-- RECENT LEGISLATION"
IN ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
INCORPORATED BY REFERENCE IN THE ACCOMPANYING PROSPECTUS. FFCA QUALIFIES THESE
FORWARD-LOOKING STATEMENTS BY THE CAUTIONARY STATEMENTS SET FORTH BELOW.
You should consider the following risks in deciding whether to purchase the
shares:
DEPENDENCE ON THE SUCCESS OF THE CONCEPTS AND FACILITIES FINANCED BY FFCA
FFCA invests primarily in chain restaurant properties, convenience stores
and automotive parts and services facilities. FFCA's investments in real estate
in these industries are subject to risks which are common to all consumer
industries. Risks associated with consumer industries include decreases in
demand for products, increases in labor costs, and increases in the number of
competitors offering similar products. In addition, each of the restaurant,
convenience store and automotive parts and services store industries are subject
to risks unique to their industry. The chain restaurant industry is subject to
the risks of changing consumer demand and food preferences and contaminated food
products. The convenience store industry is subject to increased regulation of
the sale of tobacco products, and to the extent applicable, the volatility of
gasoline profit margins and the availability of gasoline. The automotive parts
and services stores industry is subject to technological changes in the
production and maintenance of automobiles and changing consumer preferences in
transportation options. FFCA's success is dependent on the success of these
industries in general and the specific chains and retail facilities which the
Company finances.
Furthermore, the chain restaurant, convenience store and automotive parts
and services store industries are highly competitive. The chain store properties
in which FFCA invests compete with other similar facilities located in the same
areas. These properties compete primarily on the basis of segment, concept,
product, price, value, quality, service, convenience and the nature and
condition of the chain store facility. A chain store facility operator competes
with all operators of comparable facilities in the area in which the facility is
located. Other competing facilities could have lower operating costs, more
favorable locations, more effective marketing, more efficient operations or
newer facilities. Increased competition among operators in each of the industry
segments could adversely affect income from a chain store facility, and any
decline in income as a result of such increased competition or otherwise could
have an adverse effect on an operator's ability to make payments to FFCA under a
lease or loan.
The ability of the operators to pay their obligations to FFCA in a timely
manner will also depend on a number of other factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of any operator, may adversely affect the economic viability of the
chain store facility, including but not limited to: (1) national, regional and
local economic conditions (which may be adversely affected by industry
slowdowns, employer relocations, prevailing employment conditions and other
factors), which may reduce consumer demand for the products offered by FFCA's
customers; (2) local real estate conditions; (3) changes or weaknesses in
specific industry segments; (4) perceptions by prospective customers of the
safety, convenience, services and attractiveness of the chain store facility and
of the related concept; (5) changes in demographics, consumer tastes and traffic
patterns; (6) the ability to obtain and retain capable management;
S-13
<PAGE>
(7) changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties; (8) the inability of a
particular operator's computer system, or that of its franchisor or vendors, to
adequately address Year 2000 issues; (9) increases in operating expenses; and
(10) increases in minimum wages, taxes (including income, service, real estate
and other taxes) or mandatory employee benefits.
For the three months ended September 30, 1998, RTM, Inc. and its
affiliates, which together are the largest franchisee of Arby's restaurants and
the owner and franchisor of the Mrs. Winner's and Lee's Famous Recipe concepts,
contributed 8.7% of FFCA's revenues (of which approximately 3% is guaranteed by
Arby's, Inc. and Triarc Companies, Inc.). During the same period, various
operators of Burger King restaurant facilities contributed 14.8% of FFCA's
revenues. Thus, RTM as an operator and Burger King as a concept continue to have
a significant impact on FFCA's revenues.
DEPENDENCE ON FRANCHISORS AND OTHERS
The management practices of the franchisors of the chains, a lack of
support by such franchisors, franchisee organizations or third parties, or the
bankruptcy or business discontinuation of any such franchisor, franchisee
organization or third party, may adversely affect the operating results of the
related chain store facilities. Likewise, the management practices or a lack of
support with respect to the concepts owned by the related operators also may
adversely affect the results of operations at the chain store facilities of such
operators, which could have an adverse effect on an operator's ability to make
payments to FFCA under a lease or loan.
SECURITIZATION RISKS AND CHANGING MARKET CONDITIONS
FFCA currently securitizes the loans it originates and intends to continue
to securitize loans, either through its loan sale facility or direct
securitizations, and to retain responsibility for loan servicing. Several
factors affect FFCA's ability to complete securitizations of its loans,
including conditions in the securities markets generally, conditions in the
asset-backed securities markets specifically, the credit quality of FFCA's
loans, compliance of FFCA's loans with the eligibility requirements established
by the securitization documents and the absence of any material downgrading or
withdrawal of ratings given to certificates issued in FFCA's previous
securitizations. Adverse changes in any of these factors could impair FFCA's
ability to originate and securitize loans on a favorable or timely basis.
Futhermore, the credit markets are subject to volatility, which may impair
FFCA's ability to successfully securitize its loans.
To the extent FFCA sells loans through its loan sale facility or in
connection with a direct securitization, such sales are generally without
recourse to FFCA, except with respect to breaches of representations and
warranties contained in the applicable loan sale agreement. With respect to such
breaches, FFCA will be required to: (1) cure such breach, (2) replace the loan
in question with a loan that conforms to the representations and warranties, or
(3) repurchase the loan. In addition, under the loan sale facility, FFCA may be
required in certain circumstances to make certain payments of up to 10% of the
total consideration received by FFCA for the sale of the loans to the trust.
FFCA also owns subordinated interests in the loans it has sold in
securitization transactions. Such interests are in a "first loss" position
relative to the more senior securities sold to third parties, and accordingly
carry a greater risk as it relates to the nonpayment of the loans. At September
30, 1998, FFCA had approximately $94.7 million invested in such subordinated
interests, which represented approximately 7% of FFCA's total assets. To the
extent FFCA is required to mark to market its subordinated interests, any
material changes in value would impact FFCA's financial statements. Although no
material changes have occurred to date, FFCA may, in the future, recognize
material changes which could result in a reduction in the value of such
subordinated interests on FFCA's financial statements. Such future reductions
could negatively impact FFCA's net income and total assets.
S-14
<PAGE>
FLUCTUATIONS IN THE MARKET PRICE OF THE COMMON STOCK
The trading prices of equity securities issued by REITs have historically
been affected by changes in broader market interest rates. In addition, the
market price of FFCA's common stock could fluctuate in response to various other
factors and events, including (1) differences between FFCA's actual financial or
operating results and those expected by investors and analysts; (2) changes in
analysts' recommendations or projections; (3) changes in general economic or
market conditions; and (4) broad market fluctuations.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this offering, FFCA will have 55,064,330 shares of
common stock outstanding (55,964,330 shares if the underwriters' overallotment
option is exercised in full). Colony Capital has registration rights under the
Securities Act of 1933 with respect to 3,792,112 shares it currently holds and
to 1,476,908 shares it may acquire under certain conditions pursuant to a
warrant. Such shares may also be sold under Rule 144 of the Securities Act of
1933, depending on the holding period of the shares and subject to significant
restrictions on affiliates of FFCA. In addition, FFCA has the authority to issue
additional shares of common stock and shares of one or more series of preferred
stock. The issuance of such shares, or the perception that such shares may be
issued, and any dilutive effect on earnings per share may adversely affect the
market price of FFCA's common stock. No prediction can be made as to the effect,
if any, that future sales of shares, or the availability of shares for future
sale, will have on the market price of the common stock.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, FFCA could be liable for the costs of removal or remediation of
hazardous or toxic substances on, under, in or near a chain store property which
it owns or, under certain circumstances, in which it holds a mortgage.
Additionally, FFCA did not perform environmental investigations on certain
properties acquired from its predecessors. While FFCA has purchased
environmental insurance for some of the properties it owns or has financed, such
insurance may not cover all the costs associated with any environmental
liabilities.
HEDGING TRANSACTIONS
FFCA invests in derivative financial securities and instruments for the
sole purpose of providing FFCA with protection against fluctuations in interest
rates. From the time FFCA's fixed-rate loans are originated until the time they
are sold through a direct securitization transaction. FFCA hedges against
fluctuations in interest rates through the use of derivative financial
instruments. At September 30, 1998, FFCA had outstanding interest rate swap
contracts aggregating $86 million in notional amount. FFCA transfers such hedges
to the trust in the case of loans sold through the loan sale facility, and
otherwise terminates hedge contracts upon the direct securitization of
fixed-rate loans. Based on prevailing interest rates, FFCA would have paid
approximately $3 million if it had terminated the swap contracts at September
30, 1998. 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 and the gain or loss on the hedge will be measured and
recognized.
S-15
<PAGE>
LIMITS ON CHANGES IN CONTROL
Certain provisions of FFCA's Second Amended and Restated Certificate of
Incorporation and bylaws may have the effect of delaying, deferring or
preventing a third party from making an acquisition proposal for FFCA and may
thereby inhibit a change in control of FFCA. For example, such provisions may
(i) deter tender offers for FFCA's common stock, which offers may be attractive
to stockholders, or (ii) deter purchases of large blocks of common stock,
thereby limiting the opportunity for stockholders to receive a premium for their
common stock over then-prevailing market prices. A more detailed discussion of
these provisions can be found in the accompanying prospectus under the heading
"Certain Federal Income Tax Considerations."
REIT TAX STATUS
FFCA has elected to be taxed as a REIT under the Internal Revenue Code of
1986, which entitles FFCA to a deduction for dividends paid to its shareholders
when calculating its taxable income. Although FFCA intends to operate so that it
will continue to qualify as a REIT, the complex nature of the rules governing
REITs, the ongoing importance of factual determinations and the possibility of
future changes in FFCA's circumstances preclude any assurance that FFCA will
qualify as a REIT in any given year. FFCA's failure to maintain its REIT status
would have a material adverse effect on FFCA and its stockholders. Income tax
treatment of REITs may be modified, prospectively or retroactively, by
legislative, judicial or administrative action at any time, which, in addition
to the direct effects such changes might have, could also affect the ability of
FFCA to realize its investment objectives.
USE OF PROCEEDS
The net proceeds (after underwriting discounts, and expenses estimated to
be $300,000) to FFCA from this offering are estimated to be approximately
$143,436,000 (approximately $164,996,000 if the underwriters exercise the
over-allotment in full), assuming a public offering price of $25.25 per share.
FFCA will use the net proceeds to reduce amounts outstanding under FFCA's $350
million unsecured revolving credit facility with a bank syndicate (the "Credit
Agreement"), which amounts were used to acquire and finance new investments, and
for general corporate purposes. As of December 31, 1998, the amount outstanding
under the Credit Agreement was approximately $188 million. Interest under the
Credit Agreement is due in periodic installments at a rate equal to the 30-day
London Interbank Offered Rate ("LIBOR") plus 100 basis points. The Credit
Agreement expires in December 2000.
S-16
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
FFCA's common stock has been traded on the NYSE under the symbol "FFA"
since June 29, 1994. On January 7, 1999, the last reported sale price of the
common stock on the NYSE was $25.25 per share. The following table sets forth
the quarterly high and low sales prices per share reported on the NYSE and the
distributions paid by FFCA with respect to the periods indicated.
Price
--------------------
Quarter Ended High Low Distribution
------------- ---- --- ------------
1998
Fourth Quarter ........ $27.813 $21.750 $ .49*
Third Quarter ......... $28.000 $22.500 $ .47
Second Quarter ........ $28.250 $24.813 $ .47
First Quarter ......... $28.625 $26.188 $ .47
1997
Fourth Quarter ........ $27.875 $24.250 $ .47
Third Quarter ......... $27.563 $24.188 $ .45
Second Quarter ........ $27.000 $22.750 $ .45
First Quarter ......... $27.500 $23.750 $ .45
- ------------
* On January 8, 1999, the Board of Directors declared a distribution of $.49
per share for the quarter ended December 31, 1998, payable on February 19,
1999 to stockholders of record at the close of business on February 10,
1999.
DISTRIBUTION POLICY
FFCA has paid regular quarterly distributions on its common stock since its
inception. FFCA increased the distributions paid per share from $.45 per share
($1.80 on an annualized basis) to $.47 per share ($1.88 per share on an
annualized basis) for the quarter ended December 31, 1997, and declared an
increase from $.47 per share to $.49 per share ($1.96 per share on an annualized
basis) for the quarter ended December 31, 1998. The distribution for the quarter
ended December 31, 1998 will be paid on February 19, 1999 to stockholders of
record at the close of business on February 10, 1999. To maintain its status as
a REIT, FFCA must make annual distributions (other than capital gain
distributions) to its stockholders in amounts at least equal to (i) the sum of
(A) 95% of its "REIT taxable income" (computed without regard to the
distributions paid deduction and its net capital gain), and (B) 95% of any
after-tax net income from foreclosure property, minus (ii) excess noncash
income. Distributions by FFCA to the extent of its current or accumulated
earnings and profits generally will be taxable to stockholders as ordinary
distribution income for federal income tax purposes and will not be eligible for
the dividends-received deductions for corporations. Distributions in excess of
current and accumulated earnings and profits will constitute a nontaxable return
of capital to a stockholder to the extent that such distributions do not exceed
the adjusted basis of the stockholder's shares, and will result in a
corresponding reduction in the stockholder's basis in the shares. Approximately
6.7% of FFCA's distributions for the year ended December 31, 1997 represented a
return of capital. Any portion of such distributions that exceed both current
and accumulated earnings and profits and the adjusted basis of a stockholder's
shares will be taxed as a capital gain from the disposition of shares provided
that the shares are held as capital assets. The payment of future distributions
by FFCA will be at the discretion of the Board of Directors and will depend on
numerous factors, including actual cash flow of FFCA, its financial condition,
contractual restrictions, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code of 1986 and
such other factors as the Board of Directors deems relevant.
S-17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of FFCA as of September
30, 1998, and the capitalization of FFCA as of September 30, 1998 as adjusted to
give effect to the issuance and sale of the shares offered hereby at an assumed
offering price of $25.25 per share and the application of the net proceeds from
this offering. See "Use of Proceeds." This information should be read together
with the information set forth under "Prospectus Supplement Summary," "Selected
Financial Data" and FFCA's consolidated financial statements and the notes
thereto incorporated by reference into the accompanying prospectus. This
information does not reflect FFCA's October 30, 1998 $150 million senior note
offering.
Unaudited
-----------------------------
As of September 30, 1998
-----------------------------
Actual As Adjusted
------ -----------
(in thousands)
Liabilities:
Notes Payable .................................. $ 357,051 $ 357,051
Credit Agreement(1) ............................ 246,000 102,564
Mortgage Payable to Affiliate .................. 8,500 8,500
---------- -----------
Total Debt ................................... 611,551 468,115
---------- -----------
Shareholders' Equity:
Common stock, par value $.01 per share, 200
million shares authorized; 48,953,247 shares
issued and outstanding; 54,953,247 shares
issued and outstanding as adjusted ............ 490 550
Preferred Stock, par value $.01 per share,
10 million shares authorized, none issued
or outstanding................................. -- --
Capital in excess of par value ................. 771,277 914,653
Cumulative net income .......................... 272,901 272,901
Cumulative dividends ........................... (331,525) (331,525)
---------- -----------
Total Shareholders' Equity ................... 713,143 856,579
---------- -----------
Total Capitalization ........................ $1,324,694 $ 1,324,694
========== ===========
- ----------
(1) As of December 31, 1998, the amount outstanding under the Credit Agreement
was approximately $188 million.
S-18
<PAGE>
SELECTED FINANCIAL DATA
FFCA derived the historical financial information set forth below from
FFCA's audited financial statements for 1994 through 1997 and unaudited
financial statements for the nine months ended September 30, 1997 and September
30, 1998. Financial data presented below for periods prior to June 1, 1994
represent the operations of FFCA's predecessor companies. This data has been
restated on a combined basis to provide comparative information; however, it
does not necessarily represent results of operations as they would have been had
FFCA operated as a REIT for all periods presented. The predecessor companies
were primarily public real estate limited partnerships with a declining number
of properties in their investment portfolios and no opportunity for growth
through acquisitions; therefore, the investment objectives of FFCA are different
than the objectives of its predecessor companies. The information set forth
below is only a summary and you should read it together with FFCA's historical
financial statements (and related notes) contained in the annual and quarterly
reports and other information FFCA has filed with the Securities and Exchange
Commission, as well "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
-------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)
---- ---- ---- ---- ---- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Rental .................................... $ 87,350 $ 75,041 $ 101,292 $ 95,612 $ 86,182 $ 81,760 $ 83,095
Mortgage loan interest .................... 21,287 7,448 10,987 15,738 14,118 5,596 4,889
Investment income and other ............... 14,102 9,937 13,672 6,955 2,283 3,706 5,805
Interest (related party) .................. -- 7,857 9,037 2,861 -- -- --
--------- --------- --------- --------- --------- -------- --------
Total Revenues ........................... 122,739 100,283 134,988 121,166 102,583 91,062 93,789
--------- --------- --------- --------- --------- -------- --------
Expenses:
Depreciation and amortization ............. 17,808 15,478 20,784 20,654 21,201 22,810 22,704
Operating, general and
administrative ........................... 9,958 8,418 11,106 11,488 10,283 11,195 13,111
Property costs ............................ 1,513 1,540 1,641 2,041 2,046 2,310 2,850
Interest .................................. 31,221 26,017 34,764 25,974 15,276 2,477 316
Interest (related party) .................. 750 739 986 973 961 951 941
--------- --------- --------- --------- --------- -------- --------
Total Expenses ........................... 61,250 52,192 69,281 61,130 49,767 39,743 39,922
--------- --------- --------- --------- --------- -------- --------
Income before gain on sale of
property and other costs .................. 61,489 48,091 65,707 60,036 52,816 51,319 53,867
Gain on sale of property, net(2) ........... 9,306 7,004 5,471 9,899 977 2,784 (156)
Equity in net income (loss) of affiliate ... -- 1,147 1,719 (1,396) -- -- --
REIT transaction related costs ............. -- -- -- -- -- (28,198) --
Extraordinary item-loss on early
extinguishment of debt .................... -- -- -- -- (2,464) -- --
--------- --------- --------- --------- --------- -------- --------
Net Income(3) .............................. $ 70,795 $ 56,242 $ 72,897 $ 68,539 $ 51,329 $ 25,905 $ 53,711
========= ========= ========= ========= ========= ======== ========
Basic earnings per share ................... $ 1.50 $ 1.38 $ 1.78 $ 1.70 $ 1.28 $ 0.64 $ 1.33
========= ========= ========= ========= ========= ======== ========
Diluted earnings per share ................. $ 1.49 $ 1.37 $ 1.76 $ 1.69 $ 1.27 $ 0.64 $ 1.33
========= ========= ========= ========= ========= ======== ========
Other Data:
FFO(4) ..................................... $ 81,923 $ 64,074 $ 87,559 $ 79,492 $ 73,539 $ 73,720 $ 76,571
FFO per share, assuming dilution(4) ........ 1.73 1.56 2.12 1.96 1.83 1.83 1.90
Adjusted FFO(5) ............................ 81,803 64,074 87,559 79,476 73,499 73,680 * (6)
Adjusted FFO per share, assuming
dilution(5) ............................... 1.72 1.56 2.12 1.96 1.82 1.83 * (6)
Cash flows from operating activities ....... 86,324 65,184 86,324 85,949 78,621 75,983 78,068
Cash flows from investing activities ....... (192,973) (25,226) (207,521) (148,629) (259,715) (55,683) 15,452
Cash flows from financing activities ....... 114,220 (49,884) 116,977 71,963 171,066 (60,053) (82,115)
Number of properties owned ................. 1,811 1,445 1,477 1,371 1,261 1,087 1,072
Number of properties secured by
mortgages ................................. 189 143 378 255 247 89 13
Number of properties in securitized
loans ..................................... 1,317 627 626 243 -- -- --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
As of September 30, As of December 31,
--------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994(1) 1993(1)
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Real estate before accumulated
depreciation ....................... $1,171,195 $ 928,234 $ 951,305 $ 868,215 $ 794,580 $ 681,126 $ 661,576
Mortgage loans held for sale ........ 171,005 71,305 251,622 -- -- -- --
Mortgage loans receivable ........... 41,549 32,972 35,184 57,808 199,486 65,980 38,091
Real estate investment securities ... 94,690 55,185 55,185 29,733 -- -- --
Note receivable from affiliate(7) ... -- -- -- 147,616 -- -- --
Total assets ........................ 1,374,520 999,302 1,179,198 988,776 843,504 612,228 619,443
Total debt .......................... 611,551 435,646 619,860 457,956 317,202 67,500 10,942
Total shareholder's equity .......... 713,143 524,016 522,996 495,370 493,817 514,107 576,775
</TABLE>
- ------------
(1) The information for periods prior to June 1, 1994 is, in effect, a
restatement of the historical operating results of Franchise Finance
Corporation of America I ("FFCA I") and the public limited partnerships as
if they had been consolidated since January 1, 1993. The per share amounts
for the same periods were computed as if 40.251 million shares of FFCA stock
were outstanding each year.
(2) Results of operations may be largely impacted by gains or losses on the sale
of properties or as a result of securitization transactions. Of the gain on
the sale of property for the years ended December 31, 1997 and 1996,
$430,000 and $7.1 million, respectively, related to the securitization
transaction completed in those years.
(3) Net income for the year ended December 31, 1994 was impacted by REIT
transaction costs of approximately $28.2 million recognized upon
consummation of the merger of FFCA and its predecessor entities.
(4) As defined by NAREIT, FFO represents net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate-related depreciation and
amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. FFCA computes FFO in accordance with
standards established by the Board of Governors of NAREIT in its March 1995
White Paper, which may differ from the methodology for calculating FFO
utilized by other REITs and, accordingly, may not be comparable to such
other REITs. While FFO is a relevant and widely used measure of the
operating performance of REITs, it does not represent cash flow from
operations or net income as defined by GAAP, and it should not be considered
as an alternative to those indicators in evaluating liquidity or operating
performance.
(5) Adjusted FFO ("AFFO") represents net income (loss) (computed in accordance
with GAAP), excluding extraordinary gains or losses or loss provisions, plus
depreciation and amortization including amortization of deferred financing
costs, less lease commissions and capital expenditures. Under FFCA's
triple-net leases, the lessees are responsible for the payment of all
property operating expenses, meaning FFCA is generally not required to make
significant capital expenditures in the properties which it owns. Therefore
management believes that AFFO is an appropriate additional measure of its
performance as compared to other REITs which do have significant capital
expenditure obligations. AFFO should not be considered an alternative to net
income as a measure of FFCA's financial performance or to cash flow from
operating activities (computed in accordance with GAAP) as a measure of
FFCA's liquidity, nor is it necessarily indicative of sufficient cash flow
to fund all of FFCA's cash needs.
(6) Information not available.
(7) Note receivable from FFCA's former affiliate, FFCA Mortgage Corporation,
which was dissolved in 1997, represents mortgage loans held for sale by the
affiliate.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FFCA is a fully integrated and self-administered REIT which provides real
estate financing to the chain restaurant, convenience store and automotive parts
and services store industries through various financial products, including
sale-leaseback transactions, mortgage loans, equipment loans, senior loans and
construction financing. At September 30, 1998, FFCA had interests in 3,317
properties consisting of investments in 2,645 chain restaurant properties, 552
convenience stores, 110 automotive parts and services stores and 10 other retail
properties. FFCA's portfolio included 2,000 chain store properties represented
by investments in real estate and mortgage loans and 1,317 properties
represented by securitized mortgage loans in which FFCA holds a residual
interest.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1997. The Company's operations for the third
quarter of 1998 resulted in net income of $24 million ($.48 per share diluted)
as compared to net income of $16 million ($.40 per share diluted) in the
comparable quarter of 1997. For the nine-months ended September 30, 1998, the
Company reported net income of $71 million ($1.49 per share diluted) as compared
to net income of $56 million ($1.37 per share diluted). The increase in net
income between 1997 and 1998 resulted from an increase in the size of the
Company's real estate investment portfolio and from an increase in interest rate
spreads (the difference between interest rates earned on the Company's real
estate assets and interest rates paid on the related debt).
Total revenues rose 31% to $43 million during the quarter from $32.9
million in the comparable quarter of 1997 primarily due to the growth of FFCA's
investment portfolio. Revenues for the related nine month periods showed similar
growth between years. FFCA's primary source of revenue growth is rental revenues
generated by new investments in chain store properties. As a result of FFCA's
1997 expansion into the financing of convenience stores and the automotive parts
and services store industry, new investments during 1998 reflected 61% of the
investment dollars were made in the restaurant industry, 27% in convenience
stores and 12% in the automotive parts and services industry. FFCA management
believes that such investment diversity is likely to continue. Since the third
quarter of 1997, FFCA made new investments in property subject to operating
leases of approximately $290 million, including $77 million in the third quarter
of 1998. Weighted average base lease rates on new investments in 1998 rose to
10.1%, compared to 9.6% for the comparable nine month period in 1997. Decreases
in rent related to properties sold partially offset the rental revenue increases
generated by new investments.
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 $1.5 million in the third quarter of 1998 as
compared to $1.9 million in the comparable quarter of 1997. Contingent rentals
for each of the related nine month periods were $4.7 million. As of May 1998, a
new accounting pronouncement requires that a lessor defer recognition of
contingent rental revenue in interim periods until the specified target that
triggers the contingent rental revenue is achieved. This change in the timing of
revenue recognition resulted in approximately $900,000 less contingent rental
revenue reported in the quarter ended September 30, 1998 as compared to what
would have been reported under the old method.
Mortgage interest income generated by FFCA's loan portfolio totaled $5.7
million for the quarter ended September 30, 1998 and $21.3 million year-to-date.
The majority of the mortgage interest income is generated by mortgage loans that
are held for sale. In 1997, mortgage investment activity was split between FFCA
and an unconsolidated affiliate, FFCA Mortgage Corporation ("Mortgage Corp.").
When considered together, the mortgage interest income from FFCA's direct
investments in mortgage loans and related party interest income from indirect
investments in mortgage loans (through Mortgage Corp.), totaled $3 million and
$15.3 million for the quarter and nine months ended September 30, 1997,
respectively. Rates achieved on the loans originated during the first nine
months of 1998 averaged 8.8% as
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<PAGE>
compared to 9.2% during the first nine months of 1997. Increases and decreases
in mortgage interest income between quarters has been, and will continue to be,
impacted by the amount of loans held for sale and the timing of the sale of
these loans through securitization transactions. Although FFCA no longer
receives mortgage interest income from the mortgages it sold during 1997 and
1998, it retains certain interests through the purchase of subordinated
investment securities. These securities generate revenues that are included in
"Real Estate Investment Securities Income" under "Selected Financial Data."
Expenses increased to $21.4 million and $61.3 million during the quarter
and nine months ended September 30, 1998, respectively, from $16.7 million and
$52.2 million in the comparable quarter and nine months of 1997, respectively.
This increase was primarily due to higher interest expense and depreciation and
amortization expense related to property purchases and due to an increase in
operating, general and administrative expenses. For the nine-month periods,
interest expense rose $5.2 million due to the use of borrowings for investment
in chain store properties. FFCA's outstanding borrowings averaged $569 million
during the first nine months of 1998 as compared to $462 million during the
first nine months of 1997. Operating, general and administrative expenses in the
first nine months of 1998 increased by $1.5 million as compared to the same
period in 1997. The increase is primarily attributable to the addition of
personnel and other resources devoted to the expansion of FFCA's line of
financial products.
During the quarter, FFCA sold 35 properties (as compared to 9 properties
sold in the third quarter of 1997, in addition to a $20 million mortgage payoff
representing 60 restaurant properties) and recorded net gains totaling $2.2
million on these sales, as compared to net gains of $64,000 recorded in the
third quarter of 1997. Of the 35 properties sold, four were due to lessee's
exercising their purchase options, ten were sales of underperforming properties,
13 were payoffs of securitized mortgage loans in which FFCA holds a residual
interest, and the remaining eight were sold for other reasons. Cash proceeds
from the sale of property and from mortgage loan and note payoffs during the
quarter, totaling $27 million, were used to fund new investments. Year-to-date,
such sales totaled 57 properties, representing $46 million in cash proceeds.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEARS 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.
The Company's primary source of revenues continues to be rental revenues
generated by its portfolio of restaurant properties leased to restaurant
operators on a triple-net basis. Half of the increase in total revenues during
1996 and 1997 related to increases in rental revenues due to new investments.
New investments in property subject to operating leases totaled $140.2 million
in 1997, $128.7 million in 1996 and $143.3 million in 1995. Generally, property
purchases occur throughout the year, resulting in weighted average balances for
these new investments of $43 million in 1997 and $60 million in both 1996 and
1995. Weighted average base lease rates on the new investments were 9.3% in 1997
as compared to 10.5% in 1996 and 10.9% in 1995. While the average base lease
rates were down in 1997 from prior years, FFCA's cost of borrowings was also
lower. Decreases in rental revenue related to properties sold and the expiration
of original equipment leases partially offset the revenue increases generated by
the new investments.
Certain leases in FFCA's portfolio provide for contingent rentals based on
a percentage of the gross sales of the related restaurants. Such contingent
rentals totaled $6.4 million in 1997 as compared to $5 million in 1996 and $4
million in 1995. The increases relate primarily to increases in individual
restaurant-level sales volume and to lessees whose sales levels have, for the
first time, exceeded the threshold where contingent rentals are due. The Company
anticipates that, based on historical restaurant sales growth, the contingent
rental provision of the leases will continue to provide increases in revenues in
the near future.
During 1997, 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 which FFCA had
under all rent guaranty policies still in effect. Over the last three years,
rent guaranty insurance revenue has dropped steadily from $3.3 million in 1995
to $1 million in 1997 due to expiring rent insurance policies.
S-22
<PAGE>
A portion of FFCA's revenues relates to the origination and subsequent sale
of mortgage loans through securitization transactions. To facilitate the loan
origination and securitization process, FFCA formed Mortgage Corp. in 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 FFCA's financial statements. During 1997, the loan origination
process was transferred to the Company's wholly-owned subsidiary, FFCA
Acquisition Corporation, and by the end of 1997 Mortgage Corp.
was dissolved.
Mortgage interest income generated by FFCA's loan portfolio totaled $11
million in 1997, $15.7 million in 1996 and $14.1 million in 1995. Rates achieved
on the loans originated during 1997 averaged 9.2% as compared to 9.4% in 1996
and 10.9% in 1995. The average interest rates on the Credit Agreement used to
fund these new loans also reflected a decrease during these periods. Increases
and decreases in mortgage interest income between years has been, and will
continue to be, impacted by the amount of loans held for sale and the timing of
the sale of these loans through securitization transactions. Although FFCA no
longer receives mortgage interest income from the mortgages it sold, it retains
certain interests through the purchase of subordinated investment securities as
discussed below. These securities generate revenues that are include in
"Investment Income and Other" under "Selected Financial Data" and represent the
majority of the increase in this income between years.
Certain mortgage loans originated by the Company, its predecessors and
affiliate totaling $261 million in 1997 and $179 million in 1996 were
securitized and Secured Franchise Loan Pass-Through and Trust Certificates were
sold to investors through a trust. Approximately 89% of the $261 million
securitized loan pool was sold to third parties in 1997. 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 certificates. These
certificates, totaling $55.2 million and $29.7 million at December 31, 1997 and
1996, respectively, generated $7.7 million and $2.7 million of revenue in 1997
and 1996, respectively. The subordinated investment securities held by the
Company are the last of the securities to be repaid from the loan pool, so that
if any of the underlying mortgage loans default, these securities take the first
loss. Any future credit losses in the securitized loan pool would be
concentrated in these subordinated investment securities retained by the
Company; however, FFCA originates and services mortgage loans and has the
infrastructure in place to deal with potential defaults on the securitized
portfolio, as it does with the mortgage loans it holds for investment. To date,
there have been no defaults on the mortgage loans held in either securitized
loan pool. The Company also retained the servicing rights on the mortgage loans
it sold and the right to receive any participations based on the gross sales of
the related restaurant properties. Approximately $430,000 and $7.1 million of
gain in 1997 and 1996, respectively, was generated by the sale of mortgages in
these securitization transactions. The gains recognized represent the difference
between the carrying amount of the mortgage loans sold and their adjusted sales
price. It also includes deferred gains recognized on certain of the mortgages
sold. The gains on the sale of the mortgage loans were reduced by establishing
reserves for estimated probable losses under the subordination provisions of the
securitization transactions.
The Company, as owner of all of the issued and outstanding nonvoting
preferred stock of Mortgage Corp., was entitled to receive 95% of all dividends
paid by Mortgage Corp. prior to its dissolution on December 31, 1997. At
dissolution, cash dividends were paid to the common stockholder and the
remaining assets were distributed to the Company in satisfaction of its note
receivable from Mortgage Corp. The Company recorded 95% of Mortgage Corp.'s net
income (loss) for 1997 and 1996 as "Equity in Net Income (Loss) of Affiliate"
under "Selected Financial Data." During 1996 and 1997, the Company provided
Mortgage Corp. with a secured revolving line of credit at a spread above the
Company's borrowing rate. Interest income generated on this line of credit
totaled $9 million in 1997 and $2.9 million in 1996 and is reflected in revenues
as "Interest (Related Party)" under "Selected Financial Data."
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
S-23
<PAGE>
$10.7 million in 1996 due to the use of borrowings for investments in chain
store properties. The Company's average debt balance increased to $470 million
in 1997 from $335 million in 1996 and $175 million in 1995. Although the
Company's average debt balance has increased over the past two years, its
overall cost of borrowings has decreased. In February 1996, FFCA broadened its
sources of capital by issuing its first unsecured medium-term notes, which were
six- and seven-year obligations, totaling $60 million. In November 1996, the
Company issued an additional $40 million in unsecured notes due 2026, but
callable by the holder in the year 2004. The unsecured notes issued during 1996
carry a weighted average interest rate of 6.98%. In October 1997, FFCA issued
$10.15 million in unsecured notes due 2007 at a rate of 6.86%. Proceeds from
unsecured notes in both years were used to pay down the Company's Credit
Agreement. In December 1996, the Company amended its Credit Agreement with
participating banks to, among other things, decrease the interest rate by .5%.
During 1997, the Credit Agreement provided that the Company could borrow at
rates that are competitively bid among the participating banks. The changes in
FFCA's debt structure, together with an overall decrease in the interest rate
environment, reduced its effective borrowing rate from 7.82% during 1995 to
7.15% during 1996 and 6.93% during 1997.
Despite the growth in revenues of 32% from 1995 to 1997, operating, general
and administrative expense increased only 8% during this same period. The
slightly higher operating expenses in 1996 as compared to 1995 primarily related
to a $1.4 million provision for loan loss created in 1996. The overall increase
in operating expenses resulted primarily from the addition of personnel needed
to increase the Company's investment origination and servicing capacity. The
Company's recent investments in computer system technology has increased the
efficiency of its information and portfolio servicing systems, which enables
FFCA to expend its revenue base while containing operating costs.
At December 31, 1997, approximately three-fourths of the Company's land and
building leases provide for purchase options and approximately two-thirds of
these options are currently exercisable; however, only 12 properties were sold
through purchase options in 1997 and only 15 and 10 such properties were sold in
1996 and 1995, respectively. Where applicable, the lessee also has the option to
purchase equipment at the end of the related equipment lease term, although few
of these options remain unexercised as of December 31, 1997. Generally, the
purchase options are exercisable at fair market value (but not less than
original cost in most cases). FFCA expects that the exercise of purchase options
will continue to be insignificant.
The Company recorded net gains of $5.5 million on the sale of property
during 1997 as compared to $9.9 million during 1996 and $977,000 in 1995.
Approximately $430,000 and $7.1 million of the total gains in 1997 and 1996,
respectively, were generated by the sale of mortgages in securitization
transactions. The remaining gains represent the net effect of gains and losses
from sales of property, which occur primarily through the lessee's exercise of
purchase options and through the disposition of underperforming properties.
During 1997, the Company sold 55 properties and related equipment as compared to
79 properties sold in 1996 and 22 sold in 1995. In addition, during 1997, FFCA
had a $20 million mortgage payoff representing 60 restaurant properties. There
were more property sales in 1997 and 1996 as compared to 1995 due to the
Company's decision to sell certain underperforming properties where remarketing
efforts had failed to produce a suitable lessee.
The Company periodically reviews its real estate portfolio for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the property may not be recoverable, such as may be the case with vacant
restaurant properties. If an impairment loss is indicated, the loss is measured
as the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Gain on the sale of property on the consolidated statements of
income for the years ended December 31, 1997, 1996 and 1995 is net of
approximately $1.9 million, $3.3 million and $3.4 million, respectively, of loss
related to vacant and underperforming properties. Vacant properties held for
sale represented less than 1% of FFCA's total real estate investment portfolio
as of September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
FFCA's investment activities are funded initially by cash generated from
operations and draws under the Credit Agreement. This loan facility is used as a
warehousing line until a sufficiently large pool of
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<PAGE>
portfolio investments is accumulated to warrant the sale of loans through a
securitization transaction, or the issuance of additional debt or equity
securities of FFCA. In addition, the Company has entered into a $600 million
loan sale facility. As of September 30, 1998, FFCA had received proceeds of
$99.5 million in connection with this facility and retained certificates
evidencing ownership in the trust. During the third quarter of 1998, the Company
funded $212 million in new sale-leaseback and mortgage loan investments,
representing $103 million in chain restaurant properties, $57.5 million in
convenience stores and $51.3 million in automotive parts and services stores.
Total investments for the first nine months of 1998 were $656 million, up 110%
from $313 million in the first nine months of 1997. At September 30, 1998, the
Company's portfolio represented 3,317 locations in 48 states, Washington, D.C.
and Canada, approximately 220 of which were financed in the third quarter of
1998.
FFCA intends to continue to originate and securitize mortgage loans and to
retain the loan servicing rights. Several factors affect FFCA's ability to
complete securitizations of its mortgage loans, including conditions in the
securities markets, specifically the asset-backed securities markets. Current
market conditions are less favorable than they have been in the recent past and
these changes in market conditions could impact FFCA's ability to originate and
sell mortgage loans on an advantageous or timely basis. At September 30, 1998,
FFCA had forward commitments totaling over $500 million with several large
operators to acquire or finance (subject to FFCA's customary underwriting
procedures) approximately 500 chain store properties over the next year. FFCA
renegotiated nearly all of these commitments at more favorable rates. FFCA
attributes its success in re-pricing the investments to its solid relationships
with its clients and to its ability to provide various financing alternatives
when competitors were unable to do so. FFCA's strong balance sheet and market
knowledge enable it to take advantage of the investment opportunities that exist
in various economic and interest rate environments.
At September 30, 1998, the Company held approximately $94.7 million in
subordinated securities related to its three securitization transactions. The
value of these subordinated securities is marked to market each calendar quarter
with material changes in value impacting FFCA's financial statements. Although
no material changes have occurred to date, FFCA may, in the future, recognize
material changes which could result in a reduction in their value on FFCA's
financial statements in the future. Such reductions could negatively impact
FFCA's net income and total assets in the future. At September 30, 1998,
investments in subordinated securities represented approximately 7% of FFCA's
total assets.
In September 1998, Duff & Phelps Credit Rating Co. upgraded the senior
unsecured debt of FFCA from BBB- to BBB. The rating upgrade was based on FFCA's
continued strong financial performance, general reduction in operator and
concept concentrations and improved financial flexibility. This financial
flexibility gives FFCA the ability to access a large amount of capital at a time
when some of its competitors are unable to do so. For instance, in August 1998,
FFCA entered into a $600 million loan sale facility with a Morgan Stanley
affiliate which permits FFCA to sell loans on a regular basis to a trust for an
agreed upon advance rate. Upon the sale of such loans, FFCA acts as servicer for
the loans.
As of September 30, 1998, FFCA sold to the trust 234 loans with an
aggregate principal balance of $119 million, resulting in no material gain.
Approximately 84% of the mortgage loan balance was sold while FFCA holds the
remaining (subordinated) 16%. The retained subordinated investment securities,
totaling $19.8 million, were accounted for as the sale of mortgage loans and the
purchase of trust certificates. The net cash proceeds of approximately $99.5
million were used to reduce FFCA's revolving line of credit and to fund
subsequent investments. Since September 30, 1998, FFCA sold 227 loans with an
aggregate principal balance of $145 million to the trusts. The net cash proceeds
approximated $125 million and FFCA retained a total of $17 million in
subordinated trust certificates. At September 30, 1998, there were no losses in
any of FFCA's securitized mortgage loan pools.
From the time fixed-rate mortgage loans are originated until the time they
are sold through a securitization transaction, the Company hedges against
fluctuations in interest rates through the use of derivative financial
instruments. At September 30, 1998, FFCA had outstanding interest rate swap
contracts aggregating $86 million in notional amount. The Company intends to
terminate these contracts upon securitization of the related fixed-rate mortgage
loans, at which time the Company would generally expect to receive (if rates
rise) or pay (if rates fall) an amount equal to the present value of the
difference
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<PAGE>
between the LIBOR rate set at the beginning of the interest rate agreement and
the then existing LIBOR rate. At that time, both the gain or loss on the
securitization of the fixed-rate mortgage loans and the gain or loss on the
termination of the interest rate swap contracts will be measured and recognized
in the statement of operations. Based on the level of interest rates prevailing,
FFCA would have paid approximately $3 million if it had terminated the swap
contracts at September 30, 1998. In addition, the Company entered into a
treasury lock agreement with a notional amount of $100 million to hedge exposure
to fluctuations in interest rates on anticipated debt. Subsequent to September
30, 1998, the Company issued $150 million in senior unsecured notes due 2003,
bearing interest at a rate of 8.25%. The Company deferred and will amortize into
interest expense over the term of the corresponding notes the $7 million payment
made in October 1998 in settlement of this agreement.
Rental and mortgage interest revenue generated by FFCA's portfolio
investments has, and will continue to, comprise the majority of the cash
generated from operations. Operations during the nine-month period ended
September 30, 1998 provided net cash of $86 million as compared to $65 million
in 1997. The increase in cash provided by operations is primarily due to
increased revenues from the growth in the size of the portfolio. Cash generated
from operations provides distributions to the shareholders in the form of
quarterly dividends. This cash also may be used on an interim basis to fund new
investments in properties or to pay down debt.
The Company's primary source of interim funding for new investments
continues to be the Credit Agreement. The Company also uses the loan sale
facility whenever possible for the loans which it originates. At September 30,
1998, the Company had cash and cash equivalents of $14.7 million and $104
million available under its Credit Agreement. The Company anticipates funding
any forward commitments, and other investments in chain store properties,
through amounts available under its Credit Agreement, the loan sale facility,
issuance of additional unsecured debt, issuance of asset-backed securities
through securitization, or issuance of additional equity securities of FFCA.
The Company has a dividend reinvestment plan that allows shareholders to
acquire additional shares of the Company's stock by automatically reinvesting
their quarterly dividends. As of September 30, 1998, shareholders owning
approximately 6.4% of the outstanding shares of the Company's common stock
participated in the dividend reinvestment plan and dividends reinvested during
the quarter ended September 30, 1998 totaled approximately $1.5 million. The
Company declared a third quarter 1998 dividend of $0.47 per share, or $1.88 per
share on an annualized basis, payable on November 20, 1998 to shareholders of
record on November 10, 1998. Management anticipates that cash generated from
operations will be sufficient to meet operating requirements and provide the
level of shareholder dividends required to maintain the Company's status as a
REIT.
YEAR 2000 COMPLIANCE
FFCA'S STATE OF READINESS. FFCA successfully implemented its new accounting
and servicing information system in January 1998 and its new property management
system was deployed in July 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
appropriately address any dates that refer to the 21st century. 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. The 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 a review of its software and hardware and
determined, through a combination of internal testing and vendor representations
that their products have been tested and are complaint, that all
mission-critical systems (those systems that are necessary to conduct FFCA's
business activities) are Year 2000 compliant. Non-mission critical software
S-26
<PAGE>
and hardware have also been reviewed and FFCA has identified a few third-party
products that are scheduled for upgrades or replacement in the first half of
1999 as part of FFCA's ongoing maintenance of its information system technology.
THE COSTS TO ADDRESS FFCA'S YEAR 2000 ISSUES. Based on current estimates
and plans, FFCA believes the costs of addressing Year 2000 issues will not be
material.
THE RISKS OF FFCA'S YEAR 2000 ISSUES. FFCA believes the most reasonably
likely worse case scenario will be indirect in nature involving third-parties
such as clients, vendors and suppliers which may not have successfully dealt
with their Year 2000 issues. FFCA continues to assess the key third parties that
it relies upon; however, FFCA has not yet been assured that all of the computer
systems of its clients, vendors and suppliers will be Year 2000 compliant. For
example, if suppliers of FFCA's energy or telecommunications fail to become Year
2000 compliant, such failure possibly could have an adverse effect on FFCA's
ability to conduct daily operations or to communicate with its clients and
vendors. While FFCA continues to analyze these risks, it is possible that
information relevant to such analysis will not be made available to FFCA, or
that potential solutions will not be within FFCA's control.
FFCA'S CONTINGENCY PLANS. FFCA will continue to monitor and evaluate its
key clients, vendors and suppliers to determine the extent to which FFCA is
vulnerable to those third parties' possible failure to become Year 2000
compliant. FFCA expects to develop contingency plans throughout 1999, on an as
needed basis to address these concerns, where reasonable to do so.
S-27
<PAGE>
BUSINESS AND PROPERTIES
OVERVIEW
Based in Scottsdale, Arizona, Franchise Finance Corporation of America, or
FFCA, is the country's premier specialty finance company dedicated to providing
real estate financing to successful multi-unit operators of chain restaurants,
convenience stores and automotive parts and service outlets. The Company's
diverse financing products include mortgage and equipment loans, sale-leaseback
financing, construction financing, and other custom financing solutions. As of
December 31, 1998, FFCA had investments in more than 3,500 properties (including
interests in securitized loans). Its properties represent some of the best-known
chains in the country, including Applebee's, Arby's, Burger King, Checker Auto
Parts, Chevron, Circle K, Citgo, Hardee's, Jiffy Lube, Midas Muffler Shops,
Pizza Hut, 7-Eleven, Taco Bell, Texaco, Valvoline Instant Oil Change and
Wendy's. FFCA is a self-administered real estate investment trust.
The Company is divided into seven major departments, including Accounting,
Asset Management, Corporate Finance, Information Systems, Legal Services,
Property Management and Research and Underwriting.
RECENT DEVELOPMENTS
The following is a summary of certain information and transactions
affecting FFCA since January 1, 1998:
EQUITY OFFERINGS
* In February 1998, FFCA sold 3,792,112 shares of common stock and an
immediately exercisable warrant for an additional 1,476,908 shares, to an
affiliate of Colony Capital, Inc.
DEBT OFFERINGS
* In October 1998, FFCA received approximately $148.7 million in net proceeds
from an offering of 8.25% senior notes due 2003.
LOAN SECURITIZATIONS
* FFCA has and intends to continue to utilize loan securitizations to leverage
its capital base and to enhance yields on its investment portfolio. In May
1998, FFCA completed a securitization transaction which was backed by a total
of 558 loans with an outstanding aggregate principal balance of $335 million.
Approximately 91% of the principal balance of the securitized loan pool was
sold to third parties and FFCA retained subordinated securities representing
the remaining 9%.
LOAN SALE FACILITY
* In August 1998, FFCA entered into a $600 million loan sale facility. This
facility permits a subsidiary of FFCA to sell loans on a regular basis to a
trust for an agreed upon advance rate. Upon the sale of such loans, FFCA will
act as servicer for the loans. As of September 30, 1998, FFCA had sold 234
loans with an outstanding balance of $118.8 million to the trust for proceeds
of $99.5 million and retained certificates evidencing ownership in the trust.
ACQUISITIONS AND FINANCINGS
In 1998, FFCA invested approximately $928 million in more than 1,200
properties, which represented an increase of appoximately 85% over total
investment transactions of approximately $500 million in 1997. As of December
31, 1998, FFCA had investments in properties located in 48 states, Washington,
D.C. and Canada.
STRONG EARNINGS AND DISTRIBUTIONS GROWTH
* For the first nine months of 1998, Funds From Operations increased 11% on a
per share basis to $81.9 million, or $1.73 per diluted share, compared to
$64.1 million, or $1.56 per diluted share for the same period a year ago.
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<PAGE>
* Because FFCA enters into triple net leases which require minimal capital
expenditures by FFCA, its adjusted funds from operations is substantially the
same as its funds from operations. For the first nine months of 1998,
adjusted funds from operations increased 10% on a per share basis to $81.8
million, or $1.72 per diluted share, compared to $64.1 million, or $1.56 per
diluted share for the same period a year ago.
* Since its inception, FFCA has paid regular quarterly dividends on its common
stock. For the quarter ended December 31, 1998, FFCA increased the dividend
to $.49 per share, or $1.96 per share annually, from $.47 per share, or $1.88
per share annually.
* FFCA's revenues for the first nine months of 1998 totaled $122.7 million, an
increase of 22% over the same period in 1997. Net income for the first nine
months of 1998 was $70.8 million, or $1.49 per diluted share, up 26% from
$56.2 million, or $1.37 per diluted share for the same period a year ago.
INFORMATION SYSTEMS
To enhance its investment evaluation and origination, the Company has
invested extensively in information systems which are specific to the chain
restaurant industry. FFCA has also recently developed a competitive database,
similar to the restaurant industry database, for the convenience store and
automotive parts and services store industry. The Company's databases with
respect to the chain restaurant industry include specific chain restaurant
location data for over 112,000 locations in the United States, and demographic
information, traffic volumes and information regarding surrounding retail and
other commercial development that generate customer traffic. FFCA also maintains
a database of approximately 7,000 chain restaurant industry participants, as
well as databases of restaurant-level financial performance for existing and
prospective clients. The Company has the ability to integrate the information in
its location, participant and restaurant-level financial databases in a
geographic information system which contains demographic, retail space, traffic
count and street information for every significant market in the United States.
FFCA has also collected extensive data regarding management practices within the
chain restaurant industry, franchisor practices and industry trends.
The information collected by the Company is actively used to assess
investment opportunities, measure prospective investment risk, evaluate
portfolio performance and manage underperforming and non-performing assets. FFCA
publishes research on the chain restaurant and convenience store industries
which include 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 automotive parts and services store industries.
The Company employs its client and collections data, gathered over a fifteen
year period, to develop statistical models which aid in the evaluation of
potential investments. FFCA intends to continually develop, improve and use its
real estate industry knowledge through research and broader application of
information technology to lower portfolio risk, improve performance and improve
its competitive advantage.
The Company has internally developed portfolio management systems suited to
its specialized focus on the financing of chain stores. As a result of the
development by FFCA of its automated systems technology, the Company can monitor
issues associated with large diversified portfolios, including lease and
mortgage payments made through automated bank account debits, property taxes,
property insurance coverage and property financial performance.
INVESTMENT CRITERIA
FFCA targets quality investments by applying research-driven underwriting
criteria designed to evaluate risks and return characteristics and to maximize
investment return within risk parameters. The process includes a review of the
following factors:
CHAIN STORE PROFITABILITY. FFCA seeks to invest in chain store real estate
where the unit level economics from operations provide adequate cash flow to
support lease or mortgage payments related to the site.
CHAIN STORE INVESTMENT AMOUNT. FFCA seeks to invest in properties for
amounts that do not exceed the sum of the fair market value of the land and the
replacement cost of the buildings and improvements thereon.
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<PAGE>
SITE CONSIDERATIONS. FFCA seeks to invest in high profile, high traffic
real estate which it believes exhibits strong retail property fundamentals.
MARKET CONSIDERATIONS. FFCA seeks to emphasize investments in properties
used by chains having significant market area penetration.
OPERATING EXPERIENCE. FFCA seeks to invest in properties of multi-unit
chain store operators with strong operating and industry backgrounds.
CREDIT CONSIDERATIONS. FFCA seeks to invest in properties owned and
operated by multi-unit operators with strong, overall corporate profitability.
FFCA's investments generally have full tenant or borrower recourse. Many of the
Company's leases and mortgages also have recourse to guarantors who are owners
or affiliates of the tenant or borrower. FFCA reviews tenant, borrower and
guarantor financial strength to assess the availability of alternate sources of
payment in the event that cash flow from operations might be insufficient to
provide the funds necessary to make lease or mortgage payments. In general, the
Company requires all properties that are leased to the same multi-unit chain
store operator or its affiliates to be cross-defaulted and requires all mortgage
loans that are made to the same multi-unit operator or its affiliates to be both
cross-collateralized and cross-defaulted.
PHYSICAL CONDITION. FFCA seeks to invest in well-maintained existing
properties or in newly constructed properties. Each property financed by the
Company is subject to a physical site inspection, the majority of which are
conducted by the Company's in-house staff of appraisal professionals.
CHAIN STORE SUITABILITY. FFCA seeks to primarily invest in real estate
utilized by large national and regional chain store systems having annual
system-wide sales of more than $250 million.
ENVIRONMENTAL CONSIDERATIONS. For each property in which it invests, other
than certain properties FFCA acquired from its predecessors in 1994, FFCA either
obtains a Phase I environmental assessment (and a Phase II environmental
assessment or other environmental tests, if recommended by the related Phase I)
or an environmental insurance policy from a third-party insurance carrier.
PROPERTIES
OVERVIEW. FFCA's portfolio has grown an average of approximately 30%
annually since 1995, the first full fiscal year after FFCA became a public
company, from 1,176 properties at December 31, 1994, to 3,591 properties at
December 31, 1998. In 1998, FFCA invested approximately $928 million in more
than 1,200 properties, which represented an increase of approximately 85% over
total investment transactions of approximately $500 million in 1997. As of
December 31, 1998, FFCA had investments in properties located in 48 states,
Washington, D.C. and Canada. FFCA's revenues in the first nine months of 1998
totaled $122.7 million, an increase of 22% over the same period in 1997.
PROPERTY CHARACTERISTICS. FFCA provides financing to the chain restaurant
industry as well as the convenience store and automotive parts and services
store industries primarily through sale-leaseback and mortgage loan financing
transactions. At December 31, 1998, FFCA had interests in 3,591 properties
consisting of investments in 2,722 chain restaurants, 709 convenience stores,
150 automotive parts and services stores and 10 other retail properties. FFCA's
portfolio included 1,933 properties represented by investments in real estate,
176 properties represented by mortgage loans and 1,482 properties represented by
securitized mortgage loans in which FFCA held a residual interest. FFCA also
held title to the equipment on approximately 5% of these properties at September
30, 1998. The real estate owned by FFCA consists of the land and buildings
comprising each chain property, except for 119 properties at September 30, 1998
on which FFCA holds title to the land only and made mortgage loans for the
related buildings. The properties and land owned by FFCA are leased to the chain
operators under long-term triple net leases.
FFCA's chain store properties are typically located in areas with
significant automobile traffic and are characterized by high visibility and easy
access required for retail properties. Locations generally fall into five
categories: (1) shopping center and mall pad or outparcel sites; (2) interstate
highway locations; (3) central business district locations; (4) residential
neighborhood locations; and (5) retail and commercial corridor locations. A
chain store is located on each of the properties except for 10 of the properties
which
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<PAGE>
were converted into other retail uses. Chain properties generally have standard
configurations which conform to each chain's specifications. Generally, all
properties owned or financed by FFCA are free-standing and surrounded by paved
parking areas. Buildings are typically constructed using various combinations of
stucco, steel, wood, brick and tile.
The land size for a typical fast food restaurant generally ranges from
30,000 to 40,000 square feet, with land acquisition costs generally ranging from
$200,000 to $400,000. Fast food restaurant buildings generally range from 1,500
to 4,000 square feet in size, with the larger stores having a greater seating
capacity and equipment area. Site preparation costs vary depending on the area
in which the fast food restaurant is located, the size of the building and the
size of the site. Building and site preparation costs generally range from
$250,000 to $700,000 for each property. Land size for full service restaurants
generally ranges from 40,000 to 80,000 square feet and land acquisition costs
generally range from $500,000 to $900,000. Full service restaurant buildings
range from 5,000 to 9,000 square feet in size and from $750,000 to $1.2 million
in building construction costs.
Convenience store sizes range from 800 square feet for a gas station with a
store that sells only the fast moving items found in a traditional convenience
store (tobacco, beverages and snacks) to 5,000 square feet for a store that
offers services such as a bakery, a sit down restaurant area or a pharmacy (many
of these locations also sell gasoline). The typical convenience stores generally
range in size from 2,000 to 3,000 square feet. In 1997, the original investment
per new store averaged $1 million for a rural convenience store and $1.2 million
for an urban convenience store. Automotive parts and services 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 construction costs ranging from $800,000 to $1.8
million. Quick lube buildings are typically 2,500 square feet and are on 17,000
to 25,000 square feet of land. Most are located within shopping centers and have
two to six bays, with total construction 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 construction costs range from $550,000 to
$900,000.
FFCA's lease and mortgage financing documents require each chain store
operator to make any expenditures necessary to comply with applicable laws and
any applicable franchise agreements. Therefore, FFCA is generally not required
to make significant capital expenditures in connection with any property it
finances. Capital expenditures amounted to approximately $120,000 for the nine
months ended September 30, 1998. There were no capital expenditures on
properties in 1997 and $16,000 in capital expenditures in 1996.
Approximately 70% of the Company's revenues for the nine months ended
September 30, 1998 were derived from net lease equity real estate investments.
The initial term of the leases are generally twenty years in length and have
been originated by the Company and its predecessors since May 1981. The
expiration schedule of the initial term of the Company's leases extends through
2018, with a weighted life of such investments of 12.8 years as of September 30,
1998. Approximately 12.7% of the Company's lease revenues are derived from
leases which expire in 2005 and 11.6% are derived from leases which expire in
2018. In all other years, the lease expirations are less than 10% of total lease
revenues.
As of September 30, 1998, all but 13 of the Company's 3,317 properties were
performing under a lease or a mortgage loan agreement. All of the nonperforming
properties are currently held for sale after extensive efforts to remarket these
properties did not produce suitable lessees. Vacant properties held for sale
represent less than 1% of FFCA's total real estate investment portfolio.
GEOGRAPHIC DIVERSIFICATION. FFCA's portfolio is geographically diverse. As
of September 30, 1998, the Company had investments in 3,317 chain properties in
48 states, Washington, D.C. and Canada. The Company's investments, based upon
property revenues for the three months ended September 30, 1998, were located in
the South (39% of such revenue), the East (25% of such revenue), the Midwest
(21% of such revenue) and the West (15% of such revenue). Particular states of
concentration include Texas (11% of such revenue), Florida (11% of such
revenue), Georgia (6% of such revenue), California (6% of such revenue) and
Tennessee (5% of such revenue). No other state comprises more than 5% of such
revenue.
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<PAGE>
A map illustrating geographic distribution of the Company's real estate
investments is included in the inside front cover page of this prospectus
supplement. The following table sets forth certain information regarding the
diversification of the Company's real estate investments by geographic region:
GEOGRAPHIC DIVERSIFICATION
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Total Percent of Number of Percent of
Region Revenues(1) Total Revenues Properties Total Properties
- ------ ----------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
East
Mideast ............... $ 6,345 15% 564 17%
Northeast ............. 4,207 10 372 11
Midwest
East North Central .... 5,723 14 468 14
West North Central .... 2,709 7 219 7
South
Southeast ............. 10,924 26 841 25
Southwest ............. 5,430 13 464 14
West
Mountain .............. 3,165 8 212 7
Pacific ............... 3,087 7 174 5
Canada ................... 28 <1 3 <1
-------- ---- ------ ----
$41,618 100% 3,317 100%
======== ==== ====== ====
</TABLE>
- ----------
(1) Total revenues do not include other miscellaneous income.
INDUSTRY SECTOR DIVERSIFICATION. FFCA's portfolio continues to become more
diverse in terms of industry sectors, with interests in 2,645 chain restaurant
properties, 552 convenience stores, 110 automotive parts and services stores and
10 other retail properties as of September 30, 1998. Chain restaurant properties
represented 80% of the Company's investments as of September 30, 1998, as
compared to over 99% of the Company's investments as of December 31, 1996.
Although FFCA intends to continue expanding in the restaurant sector, FFCA
intends to increase industry sector diversification by further expanding in the
convenience store and automotive parts and services store sectors. The following
table sets forth certain information regarding the diversification of the
Company's real estate investments among different industry sectors:
INDUSTRY SECTOR DIVERSIFICATION
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Total Percent of Number of Percent of
Sector Revenues(1) Total Revenues Properties Total Properties
- ------ ----------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
Restaurants ..................... $38,225 92% 2,645 80%
Convenience Stores .............. 2,532 6 552 17
Automotive Parts and Services ... 743 2 110 3
Other ........................... 118 -- 10 --
-------- ---- ------ ----
Total ........................ $41,618 100% 3,317 100%
======== ==== ====== ====
</TABLE>
- ----------
(1) Total revenues do not include other miscellaneous income.
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<PAGE>
OPERATOR AND CHAIN DIVERSIFICATION. FFCA's portfolio is diverse in terms of
operators and chains with investments that were leased to, or owned by, over 400
national and regional operating companies as of September 30, 1998. Multi-unit
operators are the predominant operators of FFCA's investments. Additionally,
approximately 50 chains are represented in the properties. Management
anticipates the Company's portfolio will continue to become more diverse in
terms of operators and chains as a result of future financings. The following
table sets forth certain information regarding the diversification of the
Company's real estate investments by chain:
CHAIN DIVERSIFICATION
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Total Percent of Number of Percent
Chain(1) Revenues(2) Total Revenues Properties Of Total Properties
- -------- ----------- -------------- ---------- -------------------
<S> <C> <C> <C> <C>
Burger King .............. $ 6,167 14.8% 417 12.6%
Arby's ................... 4,021 9.7% 343 10.3%
Jack in the Box .......... 3,280 7.9% 171 5.1%
Hardee's ................. 3,033 7.3% 351 10.5%
Wendy's .................. 2,848 6.8% 185 5.6%
Quincy's ................. 2,472 5.9% 97 2.9%
Applebee's .............. 1,670 4.0% 73 2.2%
Pizza Hut ................ 1,562 3.8% 187 5.6%
Taco Bell ................ 1,520 3.7% 93 2.8%
KFC ...................... 1,313 3.2% 113 3.4%
Perkins .................. 1,023 2.5% 37 1.1%
Black-eyed Pea ........... 918 2.2% 34 1.0%
Fuddrucker's ............. 882 2.1% 26 0.8%
Uni-Mart(3) .............. 846 2.0% 123 3.7%
7-Eleven(3) .............. 839 2.0% 82 2.5%
Lee's Famous Recipe ...... 559 1.3% 38 1.1%
Mrs. Winner's ............ 442 1.1% 76 2.3%
Long John Silver's ....... 431 1.0% 22 0.7%
Midas Muffler Shops(4) ... 423 1.0% 47 1.4%
Max & Ermas .............. 396 1.0% 8 0.2%
Whataburger .............. 387 0.9% 25 0.8%
Denny's .................. 376 0.9% 22 0.7%
Popeyes .................. 367 0.9% 26 0.8%
PF Changs ................ 346 0.8% 3 0.1%
Bojangles ................ 282 0.7% 17 0.5%
Schlotzsky's Deli ........ 264 0.6% 3 0.1%
Fazoli's ................. 241 0.6% 25 0.8%
E-Z Serve(3) ............. 234 0.6% 148 4.5%
Valvoline(4) ............. 223 0.5% 42 1.3%
T.G.I. Friday's .......... 206 0.5% 6 0.2%
Other .................... 4,047 9.7% 477 14.4%
-------- ----- ----- -----
Total ................. $ 41,618 100.0% 3,317 100.0%
======== ===== ===== =====
</TABLE>
- ----------
(1) Represents restaurant chains unless otherwise indicated. The names of the
concepts are a trademark or service mark of their respective franchisors.
(2) Total revenues do not include other miscellaneous income.
(3) Represents convenience store chains.
(4) Represents automotive parts and services store chains.
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<PAGE>
COMPOSITION OF INVESTMENTS. As of September 30, 1998, approximately 78% of
FFCA's investments were in fee-owned properties subject to lease agreements,
with the remainder in mortgages, subordinated interests in securitized mortgage
loans, equipment, senior loans and revolving lines of credit as set forth in the
following table:
TOTAL INVESTMENT MIX
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
Percent of
Gross Investment Total Investments
---------------- -----------------
Real estate investments, at cost ............ $1,171,195 78%
Mortgage loans held for securitization ...... 171,005 11
Subordinated securities in securitized
mortgage loan pools ........................ 94,690 6
Mortgage loan investments ................... 41,549 3
Other investments ........................... 32,670 2
----------- ----
Total .................................... $1,511,109 100%
=========== ====
RTM, Inc. and its affiliates, which together are the largest franchisee of
Arby's restaurants and the owner and franchisor of the Mrs. Winner's and Lee's
Famous Recipe concepts, contributed 9.0% of the Company's total rental and
mortgage loan interest revenues during 1997 and 8.7% for the three months ended
September 30, 1998 (of which approximately 3% is guaranteed by Arby's, Inc. and
Triarc Companies, Inc.). RTM, Inc. accounted for 8.2% and 8.0% of the Company's
total rental and mortgage loan interest revenues during 1996 and 1995,
respectively. Foodmaker, which predominantly operates Jack in the Box
restaurants, contributed 9.6% of the Company's total rental and mortgage loan
interest revenues (generated from its investment portfolio) during 1997 and 7.8%
for the three months ended September 30, 1998. Foodmaker accounted for 10.9% and
12.5% of the Company's total rental and mortgage loan interest revenues during
1996 and 1995, respectively.
REGULATION
FFCA, through its ownership and financing of real estate, is subject to a
variety of environmental, health, land-use, fire and safety, and other
regulation by federal, state and local governments that affects the development
and regulation of chain store properties. 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 the Company would be based upon the failure of chain store
operators to comply with applicable laws and regulations.
ENVIRONMENTAL RISKS AND POLICIES
The properties which FFCA either purchases or finances are subject to
certain requirements and potential liabilities under federal, state and local
environmental laws and regulations. Certain environmental laws impose liability
on property owners for the presence of hazardous substances on their properties
regardless of whether the owner was responsible for the release of such
substances. Under some environmental laws, a lender may, under certain limited
circumstances, be deemed to be an "owner" or "operator" of a property, thereby
imposing liability upon such lender for the cost of responding to a release or
threat of a release of hazardous substances on or from a borrower's property,
regardless of whether a previous owner caused the environmental damage.
Furthermore, federal and state environmental laws have established a
comprehensive regulatory program for the detection, prevention and clean-up of
leaking underground storage tanks ("USTs").
FFCA's policy with respect to environmental risks, which has been in effect
since mid-1994, is that all properties which are to be either acquired or
financed shall have been the subject of (a) a Phase I environmental assessment
which concludes that no further investigation is necessary or, (b) if such Phase
I environmental assessment recommends further investigation, a Phase II
environmental assessment
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<PAGE>
which concludes that no remediation or further action is required. FFCA has also
adopted a policy that, in the case of properties to be acquired or financed in
which USTs are present and gasoline or other petroleum products are being
dispensed, environmental insurance must be obtained for the benefit of FFCA.
Such insurance provides coverage for certain environmental remediation,
compliance and clean-up costs incurred in connection with the presence at, or
migration from, the insured property of hazardous materials and other
pollutants, as well as liability to third parties.
In the case of properties financed by FFCA through mortgage loans, the
environmental insurance policy term equals the full term of the related mortgage
loan, and, in the event of a loss (as defined in the policy), the insurer must
pay the lesser of (a) the cost of remediation and other clean-up costs and
expenses, and (b) the outstanding principal balance due under the applicable
mortgage loan, less a deductible amount. In the case of properties acquired by
FFCA in sale-leaseback or similar transactions in which gasoline or other
petroleum products are being dispensed, title is acquired in the name of a
special purpose subsidiary of FFCA formed solely for the purpose of holding
title to such properties. The environmental insurance policy which is issued
where FFCA purchases the property is for a term of 20 years, subject to renewals
for ten-year periods. The insurer is obligated to notify FFCA of its intention
not to renew the policy within 120 days prior to the scheduled expiration of the
policy, and, if the insurer notifies FFCA that it does not intend to renew the
policy, FFCA may make a claim under the existing policy for the full cost of
remediation and related expenses. In assessing the environmental risk associated
with the ownership of potentially contaminated real property, FFCA obtains from
its insurer an environmental risk assessment upon which it bases its decision
whether to purchase a given property and the amount of coverage to obtain. In
all instances, it is FFCA's policy to purchase coverage in an amount equal to
100% of the worst-case estimate of the cost of remediation as determined by the
environmental insurer, less the deductible amount.
Properties acquired from FFCA's predecessors, accounting for 28% of FFCA's
properties, did not have environmental investigations 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 does not anticipate
the need to expend any of its funds in the foreseeable future in connection with
its operations or ownership of existing properties relating to environmental
considerations which would have a material adverse effect upon FFCA.
INSURANCE
In addition to the environmental insurance discussed above, management
believes that all of FFCA's properties are covered by adequate comprehensive
liability, fire, flood and extended loss insurance provided by reputable
companies, with commercially reasonable and customary deductibles and limits.
Certain types and amounts of insurance are required to be carried by each
operator under the financing agreements with the Company. There are, however,
certain types of losses (such as from wars or earthquakes) that may be either
uninsurable or not economically insurable in some or all locations. An uninsured
loss could result in a loss to the Company of both its capital investment and
anticipated profits from the affected property.
LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business.
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<PAGE>
REIT QUALIFICATION REQUIREMENTS
FFCA elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, effective for its taxable year ended December 31,
1994 and such election had not been revoked or terminated. In the opinion of
Kutak Rock, based on certain assumptions and representations, FFCA has qualified
for taxation as a REIT for each of its taxable years ending prior to the date
hereof and FFCA's proposed method of operation will enable it to continue to
meet the requirements for qualification and taxation as a REIT. This opinion is
based on various assumptions and is conditioned on certain representations made
by FFCA as to factual matters including, but not limited to, those set forth in
the discussion of "Certain Federal Income Tax Considerations" contained in the
accompanying prospectus, those set forth in the discussion of "Certain Federal
Income Tax Considerations to Holders of Common Stock" contained in this
prospectus supplement and those concerning FFCA's business and properties as set
forth in this prospectus supplement and the accompanying prospectus.
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INDUSTRIES
THE FOOD SERVICE INDUSTRY
The food service industry, as defined by the U.S. Department of Commerce,
is one of the largest sectors of the nation's economy. During 1997, the industry
generated an estimated $321 billion of revenue, representing over 4% of the
Gross Domestic Product of the United States. The food service industry grew at
an estimated inflation-adjusted rate of 1.7% during 1997, representing the sixth
consecutive year of real sales growth for the industry.
The food service industry is composed of three major food segments:
commercial, institutional and military. The commercial food service sector
includes full service and fast food restaurants, cafeterias/buffet restaurants,
social caterers and ice cream/yogurt retail stores. Within the restaurant
industry, the fast food group is typically defined as those restaurants
perceived by consumers as fast food or take-out establishments without table
service, specializing in pizza, chicken, hamburgers and similar food items. Full
service includes those restaurants in the family, steak and casual dining
sections that do not meet the criteria for fast food. Although these segments
can be further differentiated by price, it is consumer perception, as well as
average meal price, that influences how individual restaurant chains are
categorized. Research indicates that an average fast food meal price
approximates $5, while the cost of a full service meal averages between $7 and
$15.
Gross sales in the restaurant industry have increased by $59 billion from
1986 to 1996, while total expenditures on food and beverages everywhere have
increased only $55 billion. This implies that full service and fast food
restaurants have actually taken business away from grocery and other retail
outlets, which saw revenues from food as a percent of total revenues decrease
from 1986 to 1996.
The Company believes that the restaurant industry will continue to
experience consolidation, as the largest chains become increasingly dominant in
an industry where cost control and economies of scale are critical. During the
past decade, restaurant chains have increased market position in comparison to
independent restaurant companies by achieving economies of scale and by
developing strong brand equity. Much of the chains' market share gains in the
past came at the expense of small, independent operators, who tended to be less
sophisticated and less focused on new restaurant development. The top chains may
face greater chain-versus-chain competition, however, rather than
chain-versus-independent competition.
During 1997, the fast food segment in the top 100 restaurant chains
accounted for an estimated 70.5% of total sales and 84.8% of total units. As a
result, FFCA's restaurant portfolio consists primarily of fast food concepts.
Successful fast food operators have developed a low-cost structure, through a
focus on efficient meal preparation processes and a strong retail distribution
network that provides convenient, quality meals at affordable prices. Successful
fast food operators have relatively simple operations, which contribute to their
success as low-cost providers. Fast food operators can differentiate themselves
from the competition through marketing efforts, increasing productivity by
training employees and upgrading technology, and simplifying instore processes.
During 1996 and 1997, the top 100 restaurant chains reported average annual
systemwide new store development of 4.3%. The top 100 chains added 4,879 net new
properties during 1997 compared to 6,028 in 1996. Restaurant industry maturing
has resulted in a slower pace of new store development. As a result, FFCA
principally finances existing properties rather than new construction. In recent
years, investments in newly constructed restaurants have been a small percentage
of new business for the Company. In 1998, 1997 and 1996, the percentage of the
Company's new business related to existing restaurants (as compared to new
restaurant construction) was approximately 90%, 93% and 85%, respectively.
CHAIN RESTAURANT INDUSTRY
According to NPD Recount, a national consulting group which specializes in
the restaurant industry, restaurant chains having three or more properties
accounted for approximately 47% of all restaurants in the United States in 1997.
The majority of these properties are fast food restaurants, with others
generally in the full service segment. Of the 210,000 chain restaurants having
an identified restaurant concept as of
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December 31, 1997, approximately 117,500 were within the 100 largest restaurant
chains. Each of these restaurant chains had 1997 projected total system-wide
sales exceeding $174 million. The Company believes that the largest national
restaurant chains, along with prominent regional chains, are best positioned to
compete effectively and retain or increase market share in the food service
industry. These chains have strong regional or national presence, which provide
them with a brand equity which translates into resilience within a mature and
competitive industry. Accordingly, the Company believes that a diversified
portfolio of real estate investments primarily centered in major restaurant
chains will lower investment risk. Restaurant chains with numerous corporate
locations and extensive franchisee networks have effectively become significant
food distribution systems with distinct competitive advantages over smaller
chains and many independent restaurant operators. The establishment of such food
distribution networks requires significant time and effort which results in
certain restaurant chains having longer-term track records and more predictable
performance patterns. This has resulted in the larger restaurant chains gaining
greater dominance in the industry and growth in market share. However, the chain
restaurant industry is a regional market type of business and nationally
prominent restaurant chains often have definitive regional areas of strength and
weakness. Therefore, the Company's investment policy emphasizes strong
restaurant operators who can successfully manage known restaurant chains in
their markets and also takes into account the strength of specific restaurant
chains.
CONVENIENCE STORE INDUSTRY
The convenience store industry is a subset of two major industries: the
food industry and the oil and gas industry. The convenience store portion of the
sector evolved primarily out of neighborhood grocery stores, while the retail
gas portion is a relatively small part of the large oil and gas industry, which
also includes exploration and production of both oil and gas, refining, and
transportation as well as retail sales.
Convenience store sales have increased every year since the National
Association of Convenience Stores started tracking industry sales in 1971.
Industry sales in 1997 were $156.2 billion, 46.4% in merchandise sales and 53.6%
in gasoline sales. Because of gasoline margin volatility and stricter tobacco
regulation, many petroleum marketers have added or are adding convenience stores
and other ancillary services to their businesses, such as car washes, lube
shops, and fast food stores to contribute more consistent margins.
Gasoline retailers have been closing older and underperforming locations
because of three factors: (i) costs associated with underground storage tank
upgrades to comply with a December 1998 regulatory deadline; (ii) increased
costs of doing business; and (iii) low margins. The net effect on the industry
is a decrease in the number of gasoline stations and an increase in both the
number of convenience stores with gasoline and the number of gasoline dispensers
available per location, reflecting the increase in both the gasoline demand and
average station size. The number of convenience stores increased 1.6% in 1997 to
95,700, while the number of gasoline stations declined 1.2% between mid-1996 and
mid-1997.
Gasoline prices have decreased in recent months and retail margins have
been squeezed. Over the past twelve months, price decreases have been
attributable to a warm winter, lower demand in Asia, and increased output from
OPEC and non-OPEC producers. However, lower gasoline prices have caused some
drivers to purchase better grades of gasoline, providing higher margins. The
Energy Information Agency forecasts a 1.7% increase in gasoline demand in 1999
and that retail prices should remain depressed as well.
Increased competition, margin volatility, and the increased cost of doing
business are expected to promote further consolidation in the industry. To
improve profitability, several major oil companies have announced mergers or
have merged their refining, transportation and marketing operations. In
addition, mergers and acquisitions are occurring among traditional convenience
store chains. Many chains are closing unprofitable locations and refocusing on
core markets, divesting locations outside their core area. The largest North
American convenience store chains are adding more units, with the top 10 adding
1,452 convenience stores in 1997 and the top 50 adding 781 convenience stores in
1997. Nine of the top 10 chains are petroleum marketers, which also dominate the
top 50, operating approximately 60% of all outlets held by the top 50 companies.
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AUTOMOTIVE PARTS AND SERVICES INDUSTRY
The automotive parts and services industry refers to companies engaged in
the service, repair, maintenance and sale of products for motor vehicles after
their sales to the public. The parts sector is comprised of accessories and
replacement parts, while the services sector includes fluids, under the car,
under the hood, tires, autobody, and various combinations of these services.
Competitors in the automotive parts and services industry include automotive
dealerships, parts stores, full service gasoline stations, general repair
garages, tire outlets, discounters and mass merchandisers, and specialty shops
(mufflers, tune-ups, transmissions, paint and bodywork, fast lube oil changes
and auto glass). While some companies adopt a single service/product line
approach, others have expanded to multiple lines.
The 1997 automotive parts and services industry reached $136.7 billion in
sales, a 3.3% increase over 1996 according to the Lang Marketing Resources, an
acknowledged industry expert. Purchased services, i.e. all labor costs (not
including parts) paid by end users, totaled $36.0 billion, or 26.3% of the
automotive parts and services industry, a 4.1% increase over 1996. Car products
accounted for 30.4% of the automotive parts and services industry, down from
31.6% in 1996; truck products exceeded car products for the second year at 35.5%
of the automotive parts and services industry and other products accounted for
7.8% of the automotive parts and services industry. Products do not include
autobody parts, crash parts, audio equipment, sound accessories, fuel, tires,
wheels, and other miscellaneous accessories.
Do-it-yourselfers ("DIY") purchased $19.3 billion in car and truck
aftermarket products in 1997, a 6% increase over 1990. Meanwhile, purchased or
do-it-for-me ("DIFM") services have increased nearly 80% between 1987 and 1997,
totaling $36 billion in 1997. The implication is that DIFM services is a growth
area and DIY product sales (sold at auto parts stores) is mature.
The growth in the DIFM sector is attributed to two-income families with
increased time pressures, a general increase in consumer demand for convenience,
an increase in the number of foreign vehicles, emissions testing requirements,
increased vehicle sophistication, decreasing blue collar jobs, and most
importantly, aging baby boomers with disposable income. The last trend, aging
baby boomers, is expected to continue to drive growth in this sector into the
next century. In recent years, DIFM shops began to franchise and rapidly expand.
This trend is expected to continue.
Many of these chains are growing through the acquisition of smaller,
independent operators. Lube chains have been pursuing franchisees of other
brands to join with them. The industry growth rate for fast lube services was
7.5% between 1996 and 1997. The top 10 fast lube chains account for over 33.4%
of all fast lube outlets and an estimated 12.4% of all stores that change oil.
The anticipated 1998 growth rate for the top 10 lube chains is 20.5%.
Specialty repair shop share of the car and light truck service market grew
from 12.6% in 1986 to 20.5% in 1997. Between 1993 and 1997, product sales growth
for specialty repair shops was 46.9%. Specialty repair shops captured an 18%
share of service bays in 1997, increasing their number of bays 18.5% between
1987 and 1997, while the number of bays operated by service stations/garages and
vehicle dealers decreased significantly, 20.1% and 10.4% respectively, during
the same period. Service bays are handling more vehicles, approximately 160
vehicles per service bay in 1997 (up from 126 vehicles per bay in 1987), and
this ratio is estimated to grow to 175 vehicles per bay by the year 2002.
Auto parts retail chains, servicing the DIY customer, have experienced
rapid consolidation as small regional chains sell stores to larger chains. A
positive factor for this sector is that the average age of vehicles is
increasing, while new car prices continue to climb. Aiding the overall industry
is an increase in the average number of miles driven annually, an increase in
the number of drivers, and closure of full service gas stations. However, with
the advent of vehicles that can drive 100,000 miles before a tune-up and
generally improved product quality, product sales are not likely to see major
increases in the next few years. Retail auto parts stores sell 38% of DIY
customer purchased products. The number of retail auto parts stores increased
21.9% between 1990 and 1997 to 13,320, and is expected to increase to nearly
16,000 stores by the year 2000, a 20.1% increase over the 1997 count. The top 10
parts retailers accounted for over 41.9% of auto parts stores and experienced a
9.3% increase in outlets between early 1996 and year-end 1997.
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MANAGEMENT
The directors and executive officers of the Company are:
Name Age Position
---- --- --------
Morton H. Fleischer(1) ...... 62 Director, Chairman of the Board, President
and Chief Executive Officer
John R. Barravecchia ........ 43 Execute Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
Christopher H. Volk ......... 42 Executive Vice President, Chief Operating
Officer, Secretary and Assistant Treasurer
Dennis L. Ruben ............. 45 Executive Vice President, General Counsel
and Assistant Secretary
Stephen G. Schmitz .......... 44 Executive Vice President, Chief Investment
Officer Officer, Assistant Secretary and
Assistant Secretary
Catherine F. Long ........... 42 Senior Vice President--Finance, Principal
Accounting Officer, Assistant Secretary
and Assistant Treasurer
Robert W. Halliday(1) ....... 78 Director and Chairman Emeritus of the Board
Willie R. Barnes(3)(4) ...... 67 Director
Kelvin L. Davis(1)(2) ....... 35 Director
Donald C. Hannah(1) ......... 66 Director
Dennis E. Mitchem(3) ........ 67 Director
Louis P. Neeb(2)(4) ......... 59 Director
Kenneth B. Roath(3) ......... 63 Director
Wendell J. Smith(3) ......... 66 Director
Casey J. Sylla(2)(4) ........ 55 Director
Shelby Yastrow(2)(4) ........ 63 Director
- ----------
(1) Member, Executive Committee of the Board of Directors.
(2) Member, Compensation Committee of the Board of Directors.
(3) Member, Audit Committee of the Board of Directors.
(4) Member, Nominating and Governance Committee of the Board of Directors.
MORTON H. FLEISCHER has served as a director of the Company since June 22,
1993. Mr. Fleischer is also Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Fleischer previously served as the President, Chief
Executive Officer and director of Franchise Finance Corporation of America I, a
Delaware corporation ("FFCA I") (a predecessor corporation of the Company),
since its formation in 1980. Mr. Fleischer was an individual general partner (or
general partner of the general partner) of the eleven public limited
partnerships that were consolidated to form the Company in 1994. In addition, he
is a general partner (or general partner of the general partner) in the
following public limited partnerships whose investments are set forth in
parentheticals: Participating Income Properties 1986, L.P. (travel plazas);
Participating Income Properties II, L.P. (travel plazas); Participating Income
Properties III Limited Partnership (travel plazas); and Scottsdale Land Trust
Limited Partnership (commercial land development).
JOHN R. BARRAVECCHIA is Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary. Mr. Barravecchia has served as an executive
officer of the Company since June 1, 1994. Mr. Barravecchia previously served as
Senior Vice President, Chief Financial Officer and Treasurer of the Company from
June 1, 1994 until July 28, 1995, and as Senior Vice President of FFCA I from
October 1989 until June 1, 1994. Prior to joining FFCA I in March 1984, Mr.
Barravecchia was associated with the international public accounting firm of
Arthur Andersen.
CHRISTOPHER H. VOLK is Executive Vice President, Chief Operating Officer,
Secretary and Assistant Treasurer. Mr. Volk has served as an executive officer
of the Company since June 1, 1994. Mr. Volk previously served as Senior Vice
President-Underwriting and Research of the Company from June 1, 1994 until July
28, 1995, and as Vice President-Research of FFCA I from October 1989 until June
1, 1994. Mr. Volk is a member of NAREIT and has served as co-chair of its
Public Relations Committee.
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DENNIS L. RUBEN is Executive Vice President, General Counsel and Assistant
Secretary. Mr. Ruben has served as an executive officer of the Company since
June 1, 1994. Mr. Ruben served as Senior Vice President and General Counsel of
the Company from June 1, 1994 to January 28, 1997. Mr. Ruben previously served
as an attorney and counsel of FFCA I from March 1991 until June 1, 1994. Prior
to joining FFCA I, Mr. Ruben was a partner with the national law firm of Kutak
Rock.
STEPHEN G. SCHMITZ is Executive Vice President, Chief Investment Officer
and Assistant Secretary. Mr. Schmitz has served as an executive officer of the
Company Since May 31, 1995. Mr. Schmitz served as Senior Vice
President-Corporate Finance from June 1, 1994 to January 28, 1997. Mr. Schmitz
previously served as Senior Vice President of the Company and served in various
positions as an officer of FFCA I from 1986 to June 1, 1994.
CATHERINE F. LONG is Senior Vice President-Finance, Principal Accounting
Officer, Assistant Secretary and Assistant Treasurer. Ms. Long has served as an
executive officer of the Company since June 1, 1994. Ms. Long served as Vice
President-Finance of the Company from June 1, 1994 to January 28, 1997. Ms.
Long previously served as Vice President-Finance of FFCA I from June 1990 until
June 1, 1994. From 1978 to May 1990, Ms. Long was associated with the
international public accounting firm of Arthur Andersen.
ROBERT W. HALLIDAY is a director and Chairman Emeritus of the Board of the
Company. Mr. Halliday has been with the Company since June 22, 1993. Mr.
Halliday previously served as the Chairman of the Board of the Company since its
organization and of the FFCA I since its formation in 1980. He has served as a
director of several publicly held American and Canadian companies, including
Great Pacific Corporation, Mitchell Energy & Development Corporation, Boise
Cascade Corporation and Jim Pattison Enterprises.
WILLIE R. BARNES is a director of the Company. Mr. Barnes has been with
the Company since March 14, 1995. Mr. Barnes is a corporate and securities law
attorney. Mr. Barnes has been a partner in the law firm of Musick, Peeler &
Garrett since June 1992. He is a member of the Business Law Section of the
American Bar Association, in addition to other committees. Mr. Barnes was
appointed as the Commissioner of Corporations for the State of California in
1975 and is a member of the California Senate Commission on Corporate
Governance, Shareholder Rights and Securities Transactions. He is currently a
director and secretary of American Shared Hospital Services.
KELVIN L. DAVIS has served as a director of the Company since March 13,
1998. Mr. Davis is President and Chief Operating Officer of Colony Capital,
Inc., an international real estate-related investment firm. He has been with
Colony since its formation in 1991. He also serves as Co-Managing General
Partner of Colony's active discretionary equity funds, including Colony
Investors II, L.P., and Colony Investors III, L.P. Prior to 1991, Mr. Davis was
a principal of RMB Realty, Inc. Prior to that time he was employed by Goldman,
Sachs & Co. and Trammell Crow Company.
DONALD C. HANNAH has served as a director of the Company since August 1,
1994. Mr. Hannah is Chairman and Chief Executive Officer of U.S. Properties,
Inc. Mr. Hannah is a member of the Chief Executives Organization and the World
Presidents' Organization, and is a director of the Precision Standard
Corporation (NASDAQ), the Samoth Capital Corporation and the Marine Resources
Foundation.
DENNIS E. MITCHEM has served as a director of the Company since January 29,
1996. Mr. Mitchem has been Director of Corporate Relations, Northern Arizona
University, since October 1998. Mr. Mitchem has also served as Executive
Director of Habitat for Humanity, Valley of the Sun, since April 1996, and prior
to that time was an independent management consultant for privatization and
financial services projects. From March 1994 to December 1995, Mr. Mitchem
worked in Moscow serving as a consultant to the Russian Privatization Center in
the establishment of its local Privatization Centers. From July 1992 to February
1994, he was Managing Director of CAJV, a joint venture between Arthur Andersen
and Castillo Company, Inc., and managed the Denver, Colorado, financial
processing center of the Resolution Trust Corporation. From 1954 to June 1993,
he was employed by Arthur Andersen, where he became a partner in 1967 and
retired as a senior partner in June 1993.
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LOUIS P. NEEB has served as a director of the Company since August 1,
1994. Mr. Neeb is Chairman of the Board and Chief Executive Officer of Casa Ole
Restaurants, Inc. since October 1995. Mr. Neeb also serves as President of Neeb
Enterprises, Inc., a restaurant consulting firm. He was President and Chief
Executive Officer of Spaghetti Warehouse, Inc., from 1991 to January 1994 and
President of Geest Foods USA from September 1989 to June 1991, prior to which
he served as President and Chief Executive Officer of Taco Villa, Inc. Mr. Neeb
spent ten years with the Pillsbury Company in various positions which included:
Executive Vice President, Pillsbury; Chairman of the Board, Burger King; and
President, Steak 'N Ale Restaurants. Mr. Neeb is also a director of ShowBiz
Pizza Time, Inc. and Silver Diner Development Inc. and was previously a
director of On the Border Cafes, Inc.
KENNETH B. ROATH has served as a director of the Company since August 1,
1994. Mr. Roath is Chairman and Chief Executive Officer of Health Care Property
Investors, Inc., a real estate investment trust organized in 1985 to invest, on
a net lease basis, in health care properties. Mr. Roath is a director and
chairman of the compensation committee of Arden Realty, Inc. (NYSE), a real
estate investment trust. Mr. Roath is also the past Chairman of NAREIT and is
currently a member of the Board of Governors of NAREIT.
WENDELL J. SMITH has served as a director of the Company since August 1,
1994. Mr. Smith is President of W.J.S. & Associates, which was established by
Mr. Smith in 1984 as a consultant to pension funds and pension fund real estate
advisors. Mr. Smith also serves as a director of Shurgard Storage Centers
(NYSE), a real estate investment trust organized to invest in self-storage
facilities. He is a member of the Board of Directors of Chastain Capital
Corporation. He is also a member of the Board of Directors of PGA Tour
Properties, which invests in golf courses throughout the world. Mr. Smith
retired in 1991 from the State of California Public Employees Retirement System
("CALPERS"), after 27 years of employment. During the last 21 years of his
employment with CALPERS, Mr. Smith was responsible for all real estate equities
and mortgage acquisitions for CALPERS. Mr. Smith previously served on the
Western and National Advisory Boards of the Federal National Mortgage
Association, on the Advisory Board of the Center for Real Estate Research at the
University of California, and as a director of Real Estate Investment Trust of
California.
CASEY J. SYLLA has served as a director of the Company since August 1,
1994. Mr. Sylla is Senior Vice President and Chief Investment Officer of
Allstate Insurance Company. From 1992 until July 1995, Mr. Sylla was an
Executive Officer and Vice President and head of the Securities Department of
The Northwestern Mutual Life Insurance Company.
SHELBY YASTROW has served as a director of the Company since July 24, 1997.
Mr. Yastrow is an attorney and counsel to the law firm of Sonnenschein Nath &
Rosenthal in Chicago, Illinois. He joined McDonald's Corporation in 1978 as Vice
President, Chief Counsel of Litigation and Assistant Secretary. He was appointed
Vice President, General Counsel of McDonald's Corporation in 1982 and Senior
Vice President in 1988, before being named Executive Vice President in 1995. He
retired from McDonald's Corporation in December 1997. Mr. Yastrow received his
law degree from Northwestern University in 1959.
COMPENSATION OF DIRECTORS
The Company pays an annual fee of $30,000 to its directors who are not
employees of the Company or its affiliates (the "Independent Directors"). In
1997, the Independent Directors received 20% of such annual fee in non-qualified
stock options to purchase shares based upon the Black-Scholes option pricing
model. In 1997, Messrs. Barnes, Foxley, Halliday, Hannah, Mitchem, Neeb, Roath,
Smith and Sylla each received options to purchase 2,470 shares at $24.375 per
share, the fair market value of the shares on May 9, 1997, the date of grant.
These options are exercisable when granted.
Directors who are employees of the Company are not paid director's fees,
but the Company does reimburse directors for travel expenses incurred in
connection with their activities on behalf of the Company. Each director also
receives $500 for each committee meeting the director attends, with the chairman
of the respective committee receiving $1,000 for each committee meeting.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
TO HOLDERS OF COMMON STOCK
The following summary of certain U.S. federal income tax considerations to
holders of the Company's shares is based on current law, is for general
information only, and is not tax advice. The tax treatment of holders of shares
will vary depending on a holder's particular situation and this discussion does
not purport to deal with all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders subject to special treatment
under the federal income tax laws, except to the extent discussed under the
heading "-- Taxation of Tax-Exempt Stockholders" and "-- Taxation of Non-U.S.
Stockholders." Holders the of Company's shares subject to special rules include,
without limitation, insurance companies, tax-exempt organizations, stockholders
holding shares as part of a conversion transaction, as part of a hedge or
hedging transaction, or as a position in a straddle for tax purposes, certain
financial institutions, broker-dealers, foreign corporations, foreign
partnerships and persons who are not citizens or residents of the United States.
This discussion should be read in conjunction with the discussion under "Certain
Federal Income Tax Considerations" in the accompanying prospectus. In addition,
the summary below does not consider the effect of any foreign, state, local or
other tax laws that may be applicable to prospective purchasers of the shares or
the effect of any changes in applicable tax laws.
This prospectus supplement does not address the taxation of the Company or
the impact on the Company of its election to be taxed as REIT. The federal
income tax treatment of the Company is set forth in the accompanying prospectus
under the heading "Certain Federal Income Tax Considerations." The discussion
below assumes that the Company qualifies as a REIT under the Code. If in any
taxable year the Company were to fail to qualify as a REIT, the Company would
not be allowed a deduction for dividends paid to stockholders in computing
taxable income and would be subject to federal income tax on its taxable income
at regular corporate rates. As a result, the funds available for distribution to
the Company's stockholders would be reduced. See "Risk Factors -- REIT Tax
Status" in this prospectus supplement and "Certain Federal Income Tax
Considerations -- Failure of the Company to Qualify as a REIT" in the
accompanying prospectus.
The information in this section is based on the Code, current, temporary
and proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, current administrative interpretations and practices of the
Internal Revenue Service (the "IRS") (including its practices and policies as
expressed in certain private letter rulings which are not binding on the IRS
except with respect to the particular taxpayers who requested and received such
rulings), and court decisions, all as of the date of this prospectus supplement.
Future legislation, Treasury Regulations, administrative interpretations and
practices or court decisions may adversely affect, perhaps retroactively, the
tax considerations described herein. The Company has not requested, and does not
plan to request, any rulings from the IRS concerning the Company's tax treatment
and the statements in the accompanying prospectus are not binding on the IRS or
a court. Thus, we can provide no assurance that these statements will not be
challenged by the IRS or sustained by a court if challenged by the IRS.
Each investor is advised to consult the accompanying prospectus for
information regarding the federal income tax considerations to the Company of
its election to be taxed as a REIT. Each investor is also advised to consult his
or her tax advisor regarding the specific tax consequences to him or her of the
acquisition, ownership and sale of the common stock of the Company, including
the federal, state, local, foreign and other tax consequences of such
acquisition, ownership and sale and of potential changes in the applicable tax
laws.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used below, the term "U.S. Stockholder" means a holder of shares of the
Company's common stock who (for United States federal income tax purposes):
+ is a citizen or resident of the United States, including certain
resident aliens;
+ is a corporation, partnership, or other entity created or organized in
or under the laws of the United States or of any state thereof or in
the District of Columbia, unless, in the case of a partnership,
Treasury Regulations provide otherwise;
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+ is an estate the income of which is subject to United States federal
income taxation regardless of its source; or
+ is a trust whose administration is subject to the primary supervision
of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of
the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
Regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to this date that elect to continue to be treated as
United States persons, shall also be considered U.S. Stockholders.
DISTRIBUTIONS GENERALLY. As long as the Company qualifies as a REIT,
distributions out of current or accumulated earnings and profits, other than
capital gain dividends discussed below, will constitute dividends taxable to our
taxable U.S. Stockholders as ordinary income. These distributions will not be
eligible for the dividends-received deduction in the case of U.S.
Stockholders that are corporations.
To the extent that the Company makes distributions, other than capital gain
dividends, in excess of our current and accumulated earnings and profits, these
distributions will be treated first as a tax-free return of capital to each U.S.
Stockholder. This treatment will reduce the adjusted basis which each U.S.
Stockholder has in his shares of stock for tax purposes by the amount of the
distribution (but not below zero). Distributions in excess of a U.S.
Stockholder's adjusted basis in his shares will be taxable as capital gains
(provided that the shares have been held as a capital asset) and will be taxable
as long-term capital gain if the shares have been held for more than one year.
Dividends the Company declares in October, November, or December of any year and
payable to a stockholder of record on a specified date in any of these months
shall be treated as both paid by us and received by the stockholder on December
31 of that year, provided the Company actually pays the dividend on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any of our net operating losses or capital losses.
CAPITAL GAIN DISTRIBUTIONS. Distributions that we properly designate as
capital gain dividends will be taxable to taxable U.S. Stockholders as gains (to
the extent that they do not exceed our actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time we have held the assets which produced these gains, and on certain
designations, if any, which we may make, these gains may be taxable to
non-corporate U.S. stockholders at a 20% or 25% rate. U.S. Stockholders that are
corporations may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income.
PASSIVE ACTIVITY LOSSES AND INVESTMENT INTEREST LIMITATIONS. Distributions
we make and gain arising from the sale or exchange by a U.S. Stockholder of our
shares will not be treated as passive activity income. As a result, U.S.
Stockholders generally will not be able to apply any "passive losses" against
this income or gain. Distributions we make (to the extent they do not constitute
a return of capital) generally will be treated as investment income for purposes
of computing the investment interest limitation. Gain arising from the sale or
other disposition of our shares, however, will not be treated as investment
income under certain circumstances.
RETENTION OF NET LONG-TERM CAPITAL GAINS. We may elect to retain, rather
than distribute as a capital gain dividend, our net long-term capital gains. If
we make this election, we would pay tax on our retained net long-term capital
gains. In addition, to the extent we designate, a U.S. Stockholder generally
would:
+ include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls (subject
to certain limitations as to the amount that is includable);
+ be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. Stockholder's long-term
capital gains;
+ receive a credit or refund for the amount of tax deemed paid by it;
+ increase the adjusted basis of its shares by the difference between
the amount of includable gains and the tax deemed to have been paid by
it; and
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+ in the case of a U.S. Stockholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
DISPOSITIONS OF SHARES
If you are a U.S. Stockholder and you sell or dispose of your shares of the
Company's common stock, you will recognize gain or loss for federal income tax
purposes in an amount equal to the difference between the amount of cash and the
fair market value of any property you receive on the sale or other disposition
and your adjusted basis in the shares for tax purposes. This gain or loss will
be capital if you have held the shares as a capital asset and will be long- term
capital gain or loss if you have held the shares for more than one year. In
general, if you are a U.S. Stockholder and you recognize loss upon the sale or
other disposition of the Company's shares that you have held for six months or
less (after applying certain holding period rules), the loss you recognize will
be treated as a long-term capital loss, to the extent you received distributions
from us which were required to be treated as long-term capital gains.
BACKUP WITHHOLDING
We report to our U.S. Stockholders and the IRS the amount of dividends paid
during each calendar year, and the amount of any tax withheld. Under the backup
withholding rules, a stockholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless the holder is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or provides a taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. Stockholder that does not
provide us with his correct taxpayer identification number may also be subject
to penalties imposed by the IRS. Backup withholding is not an additional tax.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions to any stockholders who fail to certify
their non-foreign status. See "-- Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt shareholders described below) has not held its shares
as "debt financed property" within the meaning of the Code (generally, shares of
the Company's common stock, the acquisition of which was financed through a
borrowing by the tax exempt stockholder) and the shares are not otherwise used
in a trade or business, dividend income from us and income from the sale of
shares will not be UBTI to a tax-exempt shareholder.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in our shares will constitute UBTI unless the organization is able to
properly deduct amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its investment in our shares. These
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" will be treated as UBTI as to any tax-exempt trust which is
described in Section 401(a) of the Code (a "qualified trust") and which holds
more than 10% (by value) of the interests in the REIT. A REIT is a "pension held
REIT" if:
+ it would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Code provides that stock owned by qualified trusts
shall be treated, for purposes of the "not closely held" requirement,
as owned by the beneficiaries of the trust (rather than by the trust
itself); and
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+ either at least one such qualified trust holds more than 25% (by
value) of the interests in the REIT, or one or more such qualified
trusts, each of which owns more than 10% (by value) of the interests
in the REIT, holds in the aggregate more than 50% (by value) of the
interests in the REIT.
The percentage of any REIT dividend treated as UBTI is equal to the ratio
of:
+ the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to
+ the total gross income of the REIT.
A de minimis exception applies where the percentage is less than 5% for any
year. The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception with
respect to qualified trusts. Based on the ownership of the Company's shares and
the ownership limits set forth in its charter, the Company does not believe that
it has been, and does not expect that it will be a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of Company shares by
persons that are not U.S. Stockholders ("Non-U.S. Stockholders"). In general,
Non-U.S. Stockholders may be subject to special tax withholding requirements on
distributions from us and with respect to their sale or other disposition of our
Company shares, except to the extent reduced or eliminated by an income tax
treaty between the United States and the Non-U.S. Stockholder's country. A
Non-U.S. Stockholder who is a stockholder of record and is eligible for
reduction or elimination of withholding must file an appropriate form with us in
order to claim such treatment. Non-U.S. Stockholders should consult their own
tax advisors concerning the federal income tax consequences to them of an
acquisition of shares of Company's common stock, including the federal income
tax treatment of dispositions of interests in us and the receipt of
distributions from us. Potential Non-U.S. Stockholders should note that the
Company believes that its common stock will be considered regularly traded on an
established securities market for purposes of the special rules of Section
897(c)(3).
OTHER TAX CONSEQUENCES
Stockholders may be subject to state or local taxation in various state or
local jurisdictions, including those in which they transact business or reside.
Your state and local tax treatment may not conform to the federal income tax
consequences discussed above. Consequently, you should consult your tax advisors
regarding the effect of state and local tax laws on an investment in the
Company's shares.
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UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
dated the date of this prospectus supplement (the "Purchase Agreement"), each of
the underwriters named below (the "Underwriters"), through their representatives
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc.,
have severally agreed to purchase from FFCA the aggregate number of shares of
common stock set forth opposite its name below:
Underwriter Number of Shares
----------- ----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .....................
Bear, Stearns & Co. Inc. .....................
Morgan Stanley & Co. Incorporated ............
NationsBanc Montgomery Securities LLC ........
Salomon Smith Barney Inc. ....................
---------
Total ........................................ 6,000,000
=========
In the Purchase Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of common
stock offered hereby if any shares are purchased.
The Underwriters have advised FFCA that they propose initially to offer the
shares of common stock to the public at the offering price set forth on the
cover page of this prospectus supplement, and to certain dealers at this price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession to certain other dealers not in
excess of $ per share. After the initial public offering, the
public offering prices and such concessions may be changed from time to time.
FFCA has granted a 30-day over-allotment option to the Underwriters to
purchase up to 900,000 additional shares of common stock exercisable at the
public offering price less the underwriting discounts and commissions, each as
set forth on the cover page of this prospectus supplement. If the Underwriters
exercise such option in whole or in part, then each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of additional
shares proportionate to such Underwriter's initial commitment as indicated in
the table above.
The following table shows the per share and total public offering price,
underwriting discount to be paid by FFCA to the Underwriters and the proceeds
before expenses to FFCA. This information is presented assuming either no
exercise or full exercise by the Underwriters of their over-allotment option.
Without With
Per Share Option Option
--------- ------ ------
Public Offering Price .................. $ $ $
Underwriting Discount .................. $ $ $
Proceeds, before expenses, to FFCA....... $ $ $
FFCA has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments which
the Underwriters may be required to make in respect thereof.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock,
including purchases of the common stock to stabilize its market price, purchases
of the common stock to cover some or all of a short position in the common stock
maintained by the Underwriters and the imposition of penalty bids.
Until the distribution of the shares is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters to bid for and
purchase the shares. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of FFCA's
common stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the common stock.
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<PAGE>
If the Underwriters create a short position in the common stock in
connection with this offering (i.e., if they sell more shares than are set forth
on the cover page of this prospectus supplement), the Underwriters may reduce
that short position by purchasing shares in the open market. The Underwriters
may also elect to reduce any short position through the exercise of all or part
of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither FFCA nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
FFCA nor any of the Underwriters makes any representation that the Underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
The Underwriters and their affiliates have provided, are currently
providing, and expect to provide in the future, commercial and investment
banking services to FFCA for which they have received and will receive fees and
commissions.
LEGAL MATTERS
Certain legal matters relating to the shares of common stock offered
hereby, and certain REIT matters relating to the Company, are being passed upon
for FFCA by the national law firm of Kutak Rock, Denver, Colorado. Certain legal
matters relating to this offering are being passed upon for the Underwriters by
the law firm of Latham & Watkins, Los Angeles, California. Members and attorneys
of Kutak Rock own an aggregate of approximately 32,000 shares of common stock of
FFCA.
S-48
<PAGE>
PROSPECTUS
FRANCHISE FINANCE CORPORATION OF AMERICA
$1,000,000,000
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
Franchise Finance Corporation of America (the "Company") may from time to
time offer in one or more series (i) its debt securities (the "Debt
Securities"), or (ii) shares of its preferred stock (the "Preferred Stock"), or
(iii) shares of its Common Stock, par value $.01 per share (the "Common
Stock"), with an aggregate public offering price of up to $1,000,000,000 on
terms to be determined at the time of offering. The Debt Securities, the
Preferred Stock and the Common Stock (collectively, the "Securities") may be
offered, separately or together, in separate series, in amounts, at prices and
on terms to be set forth in one or more supplements to this Prospectus (each, a
"Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus
is being delivered will be set forth in the applicable Prospectus Supplement
and will include, where applicable: (i) in the case of Debt Securities, the
specific title, aggregate principal amount, currency, form (which may be
registered or bearer, or certificated or global), authorized denominations,
maturity, rate (or manner of calculation thereof) and time of payment of
interest, terms for redemption at the Company's option or repayment at the
holder's option, terms for sinking fund payments, terms for conversion into
Preferred Stock or Common Stock, covenants and any initial public offering
price; and (ii) in the case of Preferred Stock, the specific designation and
stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; and (iii) in the case of
Common Stock, any initial public offering price. In addition, such specific
terms may include limitations on actual or constructive ownership and
restrictions on transfer of the Securities, in each case as may be appropriate
to preserve the status of the Company as a real estate investment trust
("REIT") for federal income tax purposes. See "Restrictions on Transfers of
Capital Stock."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities
covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from
time to time by the Company, or to or through underwriters or dealers. If any
agents or underwriters are involved in the sale of any of the Securities, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable
from the information set forth, in the applicable Prospectus Supplement. See
"Plan of Distribution." No Securities may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the
offering of such series of Securities.
------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------
The date of this Prospectus is April 16, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company makes its filings electronically. The Commission maintains a website
that contains reports, proxy and information statements and other information
regarding registrants that file electronically, which information can be
accessed at http://www.sec.gov. In addition, the Common Stock is listed on the
New York Stock Exchange and similar information concerning the Company can be
inspected and copied at the New York Stock Exchange, 20 Broad Street, New York,
New York 10005.
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Prospectus by reference:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(ii) the Company's Current Report on Form 8-K dated January 27, 1998;
(iii) the Company's Current Report on Form 8-K dated February 17, 1998;
and
(iv) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed June 28, 1994.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to termination of the offering of the Securities, shall be
deemed to be incorporated by reference in this Prospectus from the date of the
filing of such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Prospectus shall be deemed to be modified or
superseded to the extent that a statement contained in this Prospectus or in
any document filed after the date of this Prospectus which is deemed to be
incorporated by reference in this Prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents incorporated by reference in this Prospectus
(not including exhibits to the documents that have been incorporated herein by
reference unless the exhibits are themselves specifically incorporated by
reference). Such written or oral request should be directed to the Corporate
Secretary at 17207 North Perimeter Drive, Scottsdale, Arizona 85255, telephone
number (602) 585-4500.
2
<PAGE>
THE COMPANY
Franchise Finance Corporation of America (the "Company") is a specialty
retail finance company dedicated primarily to providing real estate financing
to the chain restaurant industry, as well as to the convenience store and
automotive parts and service industries. The Company's primary strategy is to
provide all necessary financing for multi-unit operators and franchisors who
operate retail properties in which the Company invests. The Company's
investments are diversified by geographic region, operator and chain. The
Company's Common Stock trades on the New York Stock Exchange (the "NYSE") under
the symbol FFA. The Company is a Delaware corporation and maintains its
corporate offices at 17207 North Perimeter Drive, Scottsdale, Arizona 85255 and
its telephone number is (602) 585-4500.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include investment in additional
properties, the expansion and improvement of certain properties in the
Company's portfolio and the repayment of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The ratio shown for the year ended December 31, 1993 is derived
from the combined historical financial information of Franchise Finance
Corporation of America I, a Delaware corporation, and eleven real estate
limited partnerships, the predecessors to the Company (the "Combined
Predecessors"). The ratio shown for the year ended December 31, 1994 is derived
from the financial information of both the Combined Predecessors and the
Company. The ratios shown for the years ended December 31, 1995, 1996 and 1997
are for the Company.
The Company commenced operations on June 1, 1994 as a result of the merger
of the Combined Predecessors. The information for the periods prior to that
date is, in effect, a restatement of the historical operating results of
Franchise Finance Corporation of America I and eleven real estate limited
partnerships as if they had been consolidated since January 1, 1993. The
predecessor companies were primarily public real estate limited partnerships
which were prohibited from borrowing for real estate acquisitions and had no
opportunity for growth through acquisitions; therefore, the investment
objectives of the Company are different than the objectives of the Combined
Predecessors, and the information presented below does not necessarily present
the ratios of earnings to fixed charges as they would have been had the Company
operated as a REIT for all periods presented.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
43.73 16.78 4.16 3.54 3.04
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income (including gain
or loss on the sale of property) before REIT transaction related costs plus
fixed charges. Fixed charges consist of interest expense (including interest
costs capitalized, if any) and the amortization of debt issuance costs. To
date, the Company has not issued any Preferred Stock; therefore, the ratios of
earnings to combined fixed charges and preferred share dividends are the same
as the ratios presented above.
3
<PAGE>
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may
be secured or unsecured, and which may be senior or subordinated indebtedness
of the Company. An unqualified opinion of counsel as to legality of the Debt
Securities will be obtained by the Company and filed by means of a
post-effective amendment or Form 8-K prior to the time any sales of the Debt
Securities are made. The Debt Securities will be issued under an indenture,
dated as of November 21, 1995, subject to such amendments or supplements as may
be adopted from time to time (the "Indenture") between the Company and Norwest
Bank Arizona, National Association, as trustee (the "Trustee"). The Indenture
will be subject to, and governed by, the Trust Indenture Act of 1939, as
amended. The statements made hereunder relating to the Indenture and the Debt
Securities to be issued thereunder are summaries of certain provisions thereof,
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all provisions of the Indenture and such Debt
Securities. Capitalized terms used but not defined herein shall have the
respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along
with any applicable modifications of or additions to the general terms of the
Debt Securities as described herein and in the applicable Indenture and any
applicable material federal income tax considerations. Accordingly, for a
description of the terms of any series of Debt Securities, reference must be
made to both the Prospectus Supplement relating thereto and the description of
the Debt Securities set forth in this Prospectus.
The Indenture provides that the Debt Securities may be issued without
limits as to aggregate principal amount, in one or more series, in each case as
established from time to time by the Company's Board of Directors or as
established in one or more indentures supplemental to the Indenture. All Debt
Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the
holders (the "Holders") of the Debt Securities of such series, for issuances of
additional Debt Securities of such series.
The Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under the Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may
be appointed to act with respect to such series. If two or more persons are
acting as Trustee with respect to different series of Debt Securities, each
such Trustee shall be a Trustee of a trust under the Indenture separate and
apart from the trust administered by any other Trustee and, except as otherwise
indicated herein, any action described herein to be taken by a Trustee may be
taken by each such Trustee with respect to, and only with respect to, the one
or more series of Debt Securities for which it is Trustee under the Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities offered thereby for the specific terms thereof, including:
(a) the title of such Debt Securities;
(b) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount (subject to certain exceptions
described in the Indenture);
(c) the price (expressed as a percentage of the principal amount
thereof or otherwise) at which such Debt Securities will be issued and, if
other than the principal amount thereof, the portion of the principal
amount thereof payable upon declaration of acceleration of the maturity
thereof, or (if applicable) the portion of the principal amount of such
Debt Securities that is convertible into Common Stock or Preferred Stock or
the method by which any such portion shall be determined;
(d) if convertible into Common Stock, Preferred Stock, or both, the
terms on which such Debt Securities are convertible (including the initial
conversion price or rate and conversion period) and,
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<PAGE>
in connection with the preservation of the Company's status as a REIT, any
applicable limitations on conversion or on the ownership or transferability
of the Common Stock or the Preferred Stock into which such Debt Securities
are convertible;
(e) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(f) the rate or rates, at which such Debt Securities will bear
interest, if any, or the method by which such rate or rates shall be
determined, the date or dates, or the method for determining such date or
dates, from which any interest will accrue, the dates upon which any such
interest will be payable, the record dates for payment of such interest, or
the method by which any such dates shall be determined, and the basis upon
which interest shall be calculated if other than that of a 360-day year of
twelve 30-day months;
(g) the place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for conversion, registration of
transfer, or exchange (each to the extent applicable), and where notices or
demands to or upon the Company in respect of such Debt Securities and the
Indenture may be served;
(h) the period or periods, if any, within which, the price or prices
at which, and the terms and conditions upon which such Debt Securities may
be redeemed, as a whole or, in part, at the Company's option (if the
Company has the option to redeem);
(i) the obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or periods
within which, the price or prices at which and the terms and conditions
upon which such Debt Securities will be redeemed, repaid or purchased, as a
whole or in part, pursuant to such obligation;
(j) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency, currency unit, or a composite currency or currencies, and the
terms and conditions relating thereto;
(k) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not, be based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(l) whether such Debt Securities will be issued in certificated and/or
book-entry form, and the identity of any applicable depositary for such
Debt Securities;
(m) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(n) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof or addition thereto;
(o) any deletions from, modifications of or additions to the events of
default or covenants of the Company, described herein or in the Indenture
with respect to such Debt Securities, and any change in the right of any
Trustee or any of the Holders to declare the principal amount of any such
Debt Securities due and payable;
(p) whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge to Holders that are not United States
persons, and, if so, whether the Company will have the option to redeem
such Debt Securities in lieu of making such payment (and the terms of any
such option);
(q) the subordination provisions, if any, relating to such Debt
Securities;
(r) the provisions, if any, relating to any security provided for such
Debt Securities; and
5
<PAGE>
(s) any other terms of such Debt Securities not inconsistent with the
provisions of the Indenture.
If so provided in the applicable Prospectus Supplement, the Debt
Securities may be issued at a discount below their principal amount and provide
for less than the entire principal amount thereof to be payable upon
declaration of acceleration of the maturity thereof ("Original Issue Discount
Securities"). In such cases, any special U.S. federal income tax, accounting
and other considerations applicable to Original Issue Discount Securities will
be described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt
Securities will not contain any provisions that would limit the Company's
ability to incur indebtedness or that would afford Holders of Debt Securities
protection in the event of a highly leveraged or similar transaction involving
the Company or in the event of a change of control. Certain existing
restrictions on ownership and transfers of the Common Stock and Preferred Stock
are, however, designed to preserve the Company's status as a REIT and,
therefore, may act to prevent or hinder a change of control. See "Restrictions
on Transfers of Capital Stock." Reference is made to the applicable Prospectus
Supplement for information with respect to any deletions from, modifications of
or additions to the events of default or covenants of the Company that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of
Debt Securities will be payable at the applicable Trustee's corporate trust
office, the address of which will be set forth in the applicable Prospectus
Supplement; provided, however, that, at the Company's option, payment of
interest may be made by check mailed to the address of the person entitled
thereto as it appears in the applicable register for such Debt Securities or by
wire transfer of funds to such person at an account maintained within the
United States.
Subject to certain limitations imposed on Debt Securities in the
Indenture, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tender upon surrender of such Debt
Securities at the applicable Trustee's corporate trust office or at the
applicable office of any agency of the Company. In addition, subject to certain
limitations imposed on Debt Securities in the Indenture, the Debt Securities of
any series may be surrendered for registration by transfer thereof at the
applicable Trustee's corporate trust office or at the applicable office of any
agency of the Company. Every Debt Security surrendered for registration of
transfer or exchange shall be duly endorsed or accompanied by a written
instrument of transfer and evidence of title and identity satisfactory to the
Trustee, the Company, or its transfer agent, as applicable. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities. However, (with certain exceptions) the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. If the applicable Prospectus Supplement refers to any
transfer agent (in addition to the applicable Trustee) initially designated by
the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location through which any such transfer agent acts, except that the
Company will be required to maintain a transfer agent in each place of payment
for such series. The Company may at any time designate additional transfer
agents with respect to any series of Debt Securities.
Neither the Company nor any Trustee shall be required to (a) issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before the day of mailing
of notice of redemption of any Debt Securities of that series that may be
selected for redemption and ending at the close of business on the day of
mailing the relevant notice of redemption (or publication of such notice with
respect to bearer securities); (b) register the transfer of or exchange any
Debt Security, or portion thereof, so selected for redemption, in whole or in
part, except the
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unredeemed portion of any Debt Security being redeemed in part; or (c) issue,
register the transfer of or exchange any Debt Security that has been
surrendered for repayment at the Holder's option, except the portion, if any,
of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may, with or without the
consent of the Holders of any outstanding Debt Securities, consolidate with, or
sell, lease or convey all or substantially all of its assets to, or merge with
or into, any other entity, provided that (a) either the Company shall be the
continuing entity, or the successor entity (if other than the Company) formed
by or resulting from any such consolidation or merger or which shall have
received the transfer of such assets shall be an entity organized and existing
under the laws of the United States or a state thereof and such successor
entity shall expressly assume the Company's obligation to pay the principal of
(and premium, if any) and interest on all the Debt Securities and shall also
assume the due and punctual performance and observance of all the covenants and
conditions contained in the Indenture; (b) immediately after giving effect to
such transaction and treating any indebtedness that becomes an obligation of
such successor entity, the Company or any subsidiary as a result thereof as
having been incurred by such successor entity, the Company or such subsidiary
at the time of such transaction, no event of default under the Indenture, and
no event that, after notice or the lapse of time, or both, would become such an
event of default, shall have occurred and be continuing; and (c) an officers'
certificate and legal opinion covering such conditions shall be delivered to
each Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "Merger, Consolidation or Sale of
Assets," the Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, material rights (by certificate of incorporation, bylaws and
statute) and material franchises; provided, however, that the Company shall not
be required to preserve any right or franchise if its Board of Directors
determines that the preservation thereof is no longer desirable in the conduct
of its business.
MAINTENANCE OF PROPERTIES. The Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on or in connection therewith may be properly and
advantageously conducted at all times; provided, however, that the Company and
its subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business.
INSURANCE. The Indenture will require the Company to, and to cause each of
its subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be customary in the industry in accordance
with prevailing market conditions and availability.
PAYMENT OF TAXES AND OTHER CLAIMS. The Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied
or imposed on it or any subsidiary or on the income, profits or property of the
Company or any subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith by appropriate proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
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documents with the Commission if the Company were so subject, (a) to transmit
by mail to all Holders of Debt Securities, as their names and addresses appear
in the applicable register for such Debt Securities, without cost to such
Holders, copies of the annual reports, quarterly reports and other documents
that the Company would have been required to file with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act if the Company were subject to such
Sections, (b) to file with the Trustee copies of the annual reports, quarterly
reports and other documents that the Company would have been required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the
Company were subject to such Sections, and (c) to supply, promptly upon written
request and payment of the reasonable cost of duplication and delivery, copies
of such documents to any prospective Holder of Debt Securities.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Prospectus Supplement, the
following events are "events of default" with respect to any series of Debt
Securities issued under the Indenture: (a) default for 30 days in the payment
of any installment of interest on any Debt Security of such series; (b) default
in the payment of the principal of (or premium, if any, on) any Debt Security
of such series at its Maturity; (c) default in making any sinking fund payment
as required for any Debt Security of such series; (d) default in the
performance or breach of any other covenant or warranty of the Company
contained in the Indenture (other than a covenant or warranty a default in the
performance of which or the breach of which is elsewhere in this paragraph
specifically dealt with), continued for 60 days after written notice as
provided in the applicable Indenture; (e) a default under any bond, debenture,
note or other evidence of indebtedness for money borrowed by the Company or any
of its subsidiaries (including obligations under leases required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles), in an aggregate principal amount in excess of $10
million or under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any indebtedness for money
borrowed by the Company or any of its subsidiaries (including such leases), in
an aggregate principal amount in excess of $10 million, whether such
indebtedness now exists or shall hereafter be created, which default shall have
resulted in such indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise have become due and payable or such
obligations being accelerated, without such acceleration having been rescinded
or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company or any
Significant Subsidiary of the Company; and (g) any other Event of Default as
defined with respect to a particular series of Debt Securities. The term
"Significant Subsidiary" has the meaning ascribed to such term in Regulation
S-K promulgated under the Securities Act.
If an event of default under the Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or indexed securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at
any time after such a declaration of acceleration with respect to Debt
Securities of such series has been made, but before a judgment or decree for
payment of the money due has been obtained by the applicable Trustee, the
holders of not less than a majority of the principal amount of the outstanding
Debt Securities of such series may rescind and annul such declaration and its
consequences if (a) the Company shall have deposited with the applicable
Trustee all required payments of the principal of (and premium, if any) and
overdue interest on the Debt Securities of such series, plus certain fees,
expenses, disbursements and advances of the applicable Trustee and (b) all
events of default, other than the nonpayment of accelerated principal (or
specified portion thereof), with respect to Debt Securities of such series have
been cured or waived as provided in the Indenture. The Indenture will also
provide that the holders of not less than a majority in principal amount of the
outstanding Debt Securities of any series may waive any past default with
respect to such series and
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its consequences, except a default (y) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (z) in
respect of a covenant or provision contained in the Indenture that cannot be
modified or amended without the consent of the holder of each outstanding Debt
Security affected thereby.
The Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived; provided, however, that such Trustee
may withhold notice to the holders of any series of Debt Securities of any
default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of the Trustee
consider such withholding to be in such holders' interest.
The Indenture will provide that no holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect to
the Indenture or for any remedy thereunder, except in the case of failure of
the Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it and no
contrary directions from the holders of more than 50% of the outstanding Debt
Securities of such series. This provision will not prevent, however, any holder
of Debt Securities from instituting suit for the enforcement of payment of the
principal of (and premium, if any) and interest on such Debt Securities at the
respective due dates thereof.
The Indenture will provide that the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding
under the Indenture, unless such holders shall have offered to the Trustee
reasonable security or indemnity. The holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or of exercising any trust or power
conferred upon the Trustee. The Trustee may, however, refuse to follow any
direction that is in conflict with any law or the Indenture or that may involve
the Trustee in personal liability or that may be unduly prejudicial to the
holders of Debt Securities of such series not joining therein.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture with respect to any series
will be permitted only with the consent of the holders of not less than a
majority in principal amount of all outstanding Debt Securities of such series;
provided, however, that no such modification or amendment may, without the
consent of the holder of each Debt Security of such series, (a) change the
Stated Maturity of the principal of (or premium, if any, on), or any
installment of principal of or interest on any such Debt Security; (b) reduce
the principal amount of, or the rate or amount of interest on, or any premium
payable on redemption of, any such Debt Security, or reduce the amount of
principal of an Original Issue Discount Security that would be due and payable
upon declaration of acceleration of the Maturity thereof or would be provable
in bankruptcy, or adversely affect any right of repayment of the holder of any
such Debt Security; (c) change the place of payment, or the coin or currency,
for payment of principal of (or premium, if any), or interest on any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security on or after the Stated
Maturity or redemption date thereof; (e) reduce the above-stated percentage of
Outstanding Debt Securities of any series necessary to modify or amend the
Indenture, to waive compliance with certain provisions thereof or certain
defaults and consequences thereunder or to reduce the quorum or voting
requirements set forth in the Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage to
effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of such Debt Security.
The holders of a majority in aggregate principal amount of outstanding
Debt Securities of each series may, on behalf of all holders of Debt Securities
of that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the Indenture.
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Modifications and amendments of the Indenture will be permitted to be made
by the Company and the Trustee without the consent of any holder of Debt
Securities for any of the following purposes: (a) to evidence the succession of
another person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company
in the Indenture; (c) to add additional events of default for the benefit of
the holders of all or any series of Debt Securities; (d) to add or change
certain provisions of the Indenture to facilitate the issuance of, or to
liberalize certain terms of, Debt Securities in bearer form, or to permit or
facilitate the issuance of Debt Securities in uncertificated form, provided
that such action shall not adversely affect the interests of the holders of the
Debt Securities of any series in any material respect; (e) to change or
eliminate any provisions of the Indenture, provided that any such change or
elimination shall become effective only when there are no Debt Securities
outstanding of any series created prior thereto that are entitled to the
benefit of such provision; (f) to secure the Debt Securities; (g) to establish
the form or terms of Debt Securities of any Series, including the provisions
and procedures, if applicable, for the conversion of such Debt Securities into
Common Stock or Preferred Stock; (h) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under the Indenture by more than one Trustee; (i) to cure any ambiguity,
defect or inconsistency in the Indenture; provided, however, that such action
shall not adversely affect the interests of holders of Debt Securities of any
series in any material respect; or (j) to supplement any of the provisions of
the Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of such Debt Securities, provided, however, that such
action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect.
The Indenture provides that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (a) the principal amount of an Original Issue Discount Security
that shall be deemed to be outstanding shall be the amount of the principal
thereof that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (b) the principal amount
of any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (a) above), (c) the
principal amount of an indexed security that shall be deemed outstanding shall
be the principal face amount of such indexed security at original issuance,
unless otherwise provided with respect to such indexed security in the
applicable Indenture, and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
The Indenture contains provisions for convening meetings of the holders of
Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee, and also, upon request, by the Company or the holders of
at least 10% in principal amount of the outstanding Debt Securities of such
series, in any such case upon notice given as provided in the Indenture. Except
for any consent that must be given by the holder of each Debt Security affected
by certain modifications and amendments of the Indenture, any resolution
presented at a meeting or adjourned meeting duly reconvened at which a quorum
is present may be adopted by the affirmative vote of the holders of a majority
in principal amount of the outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
outstanding Debt Securities of a series may be adopted at a meeting or
adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal
amount of the outstanding Debt Securities of that series. Any resolution passed
or decision taken at any meeting of holders of Debt Securities of any series
duly held in accordance with the Indenture will be binding on all holders of
Debt Securities of that series. The quorum at any meeting called to adopt a
resolution, and at any reconvened meeting, will be persons holding or
representing a majority in principal amount of the outstanding Debt Securities
of a series; provided, however, that if any action is to be taken at such
meeting with respect to a consent or waiver
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that may be given by the holders of not less than a specified percentage in
principal amount of the outstanding Debt Securities of a series, the persons
holding or representing such specified percentage in principal amount of the
outstanding Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indenture provides that if
any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders
of such series and one or more additional series: (a) there shall be no minimum
quorum requirement for such meeting and (b) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been
made, given or taken under the Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
If provided for in the applicable Prospectus Supplement, the Company will
be permitted, at its option, to discharge certain obligations to holders of any
series of Debt Securities by irrevocably depositing with the applicable
Trustee, in trust, funds in such currency or currencies, currency unit or units
or composite currency or currencies in which such Debt Securities are payable
in an amount sufficient to pay the entire indebtedness on such Debt Securities
in respect of principal (and premium, if any) and interest.
If provided for in the applicable Prospectus Supplement, the Company may
elect either to (a) defease and be discharged from any and all obligations with
respect to any series of Debt Securities (except for the obligation to pay
additional amounts, if any, upon the occurrence of certain events of tax,
assessment or governmental charge with respect to payments on such Debt
Securities and the obligations to register the transfer or exchange of such
Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of such Debt
Securities and to hold money for payment in trust) ("defeasance") or (b) be
released from certain obligations with respect to such Debt Securities under
the applicable Indenture (generally being the restrictions described under
"Certain Covenants", herein) or, if provided in the applicable Prospectus
Supplement, its obligations with respect to any other covenant, and any
omission to comply with such obligations shall not constitute a default or an
event of default with respect to such Debt Securities ("covenant defeasance"),
in either case upon the irrevocable deposit by the Company with the applicable
Trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such Debt Securities are
payable at Stated Maturity, or Government Obligations (as defined below), or
both, applicable to such Debt Securities that through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company
has delivered to the applicable Trustee an opinion of counsel (as specified in
the applicable indenture) to the effect that the holders of such Debt
Securities will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of such defeasance or covenant defeasance and will be
subject to U.S. federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance or covenant
defeasance had not occurred, and such opinion of counsel, in the case of
defeasance, must refer to and be based on a ruling of the Internal Revenue
Service (the "IRS") or a change in applicable U.S. federal income tax law
occurring after the date of the Indenture. In the event of such defeasance, the
holders of such Debt Securities would thereafter be able to look only to such
trust fund for payment of principal (and premium, if any) and interest.
"Government Obligations" means securities that are (a) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged, or (b) obligations
of a
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person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the foreign
Currency in which the Debt Securities of such series are payable, the payment
of which is unconditionally guaranteed as a full faith and credit Obligation by
the United States of America or such other government, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall
also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the account of the holder of a depository receipt; provided,
however, that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the Government
Obligation or the specific payment of interest on or principal of the
Government Obligation evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if
after the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any
series, (a) the holder of a Debt Security of such series is entitled to, and
does, elect pursuant to the applicable Indenture or the terms of such Debt
Security to receive payment in a currency, currency unit or composite currency
other than that in which such deposit has been made in respect of such Debt
Security or (b) a Conversion Event (as defined below) occurs in respect of the
currency, currency unit or composite currency in which such deposit has been
made, the indebtedness represented by such Debt Security will be deemed to have
been, and will be, fully discharged and satisfied through the payment of the
principal of (and premium, if any) and interest on such Debt Security as they
become due out of the proceeds yielded by converting the amount so deposited in
respect of such Debt Security into the currency, currency unit or composite
currency in which such Debt Security becomes payable as a result of such
election or Conversion Event based on the applicable market exchange rate.
"Conversion Event" means the cessation of use of (i) a currency, currency unit
or composite currency both by the government of the country which issued such
currency and for the settlement of transactions by a central bank or other
public institution of or within the international banking community, (ii) the
ECU both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Communities, or
(iii) any currency unit or composite currency other than the ECU for the
purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a foreign currency
that ceases to be used by its government of issuance shall be made in U.S.
dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because
of the occurrence of any event of default other than the event of default
described in clause (d) under "Events of Default, Notice and Waiver" with
respect to the specified sections of the applicable Indenture (which sections
would no longer be applicable to such Debt Securities) or clause (g) thereunder
with respect to any other covenant as to which there has been covenant
defeasance, the amount in such currency, currency unit or composite currency in
which such Debt Securities are payable, and Government Obligations on deposit
with the applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their stated maturity, but may not be sufficient to
pay amounts due on such Debt Securities at the time of the acceleration
resulting from such event of default. The Company would, however, remain liable
to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether
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conversion will be, at the option of the holders or the Company, the events
requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such Debt Securities and any
restrictions on conversion, including restrictions directed at maintaining the
Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any Series of
Debt Securities will be payable at the Trustee's corporate trust office, the
address of which will be stated in the applicable Prospectus Supplement;
provided, however, that, at the Company's option, payment of interest may be
made by check mailed to the address of the person entitled thereto as it
appears in the applicable register for such Debt Securities or by wire transfer
of funds to such person at an account maintained within the United States.
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security
that remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for
payment thereof, subject to applicable state escheat laws.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such Series.
DESCRIPTION OF COMMON STOCK
The Company has authority to issue 200,000,000 shares of Common Stock, par
value $.01 per share (the "Common Stock"). At March 13, 1998, the Company had
outstanding 47,885,524 shares of Common Stock.
GENERAL
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that the Common Stock will
be issuable upon conversion of Debt Securities or Preferred Stock. An
unqualified opinion of counsel as to legality of the Common Stock will be
obtained by the Company and filed by means of a post-effective amendment or
Form 8-K prior to the time any sales of Common Stock are made. The statements
below describing the Common Stock are in all respects subject to and qualified
in their entirety by reference to the applicable provisions of the Company's
Second Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Bylaws.
TERMS
Subject to the preferential rights of any other shares or series of stock,
holders of Common Stock will be entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. Payment and declaration of dividends on the Common Stock and
purchases of shares thereof by the Company will be subject to certain
restrictions if the Company fails to pay dividends on the Preferred Stock, if
any. See "Description of Preferred Stock." Upon any liquidation, dissolution or
winding up of the Company, holders of Common Stock will be entitled to share
equally and ratably in any assets available for distribution to them, after
payment or provision for payment of the debts and other liabilities of the
Company and the preferential amounts owing with respect to any outstanding
Preferred Stock. The Common Stock will possess ordinary voting rights for the
election of
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directors and in respect of other corporate matters, each share entitling the
holder thereof to one vote. Holders of Common Stock will not have cumulative
voting rights in the election of directors, which means that holders of more
than 50% of all the shares of the Company's Common Stock voting for the
election of directors can elect all the directors if they choose to do so and
the holders of the remaining shares of Common Stock cannot elect any directors.
Holders of shares of Common Stock will not have preemptive rights, which means
they have no right to acquire any additional shares of Common Stock that may be
issued by the Company at a subsequent date. All shares of Common Stock now
outstanding are, and additional shares of Common Stock offered will be when
issued, fully paid and nonassessable; and no shares of Common Stock are or will
be subject to any exchange or conversion rights.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, actually or constructively, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year. To assist the Company in meeting this requirement, the
Company may take certain actions to limit the beneficial ownership, actually or
constructively, by a single person or entity of the Company's outstanding
equity securities. See "Restrictions on Transfers of Capital Stock."
TRANSFER AGENT
The registrar and transfer agent for the Common Stock is Gemisys Transfer
Agents, 7103 South Revere Parkway, Englewood, CO 80112.
DESCRIPTION OF PREFERRED STOCK
The Company has authority to issue up to 10,000,000 shares of Preferred
Stock as described below. At March 13, 1998, there were no shares of Preferred
Stock issued or outstanding.
GENERAL
The following description of the Preferred Stock sets forth certain
general terms and provisions of the Preferred Stock to which any Prospectus
Supplement may relate. An unqualified opinion of counsel as to legality of the
Preferred Stock will be obtained by the Company and filed by means of a
post-effective amendment or Form 8-K prior to the time any sales of Preferred
Stock are made. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Certificate of Incorporation (including the
applicable Certificate of Designations) and Bylaws.
Shares of Preferred Stock may be issued from time to time in one or more
series as authorized by the Company's Board of Directors. Subject to
limitations prescribed by the Delaware General Corporation Law and the
Certificate of Incorporation, the Company's Board of Directors is authorized to
fix the number of shares constituting each series of Preferred Stock and the
designations and powers, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions thereof,
including such provisions as may be desired concerning voting, redemption,
dividends, dissolution or the distribution of assets, conversion or exchange,
and such other subjects or matters as may be fixed by resolution by the Board
of Directors or a duly authorized committee thereof. Notwithstanding the
foregoing (i) any series of Preferred Stock may be voting or non-voting,
provided that the voting rights of any voting shares of Preferred Stock will be
limited to no more than one vote per share on matters voted upon by the holders
of such series, and (ii) in the event any person acquires 20% or more of the
outstanding shares of Common Stock and/or Preferred Stock, the Board of
Directors cannot issue any series of Preferred Stock unless such issuance is
approved by the vote of holders of at least 50% of the outstanding shares of
Common Stock. The Preferred Stock will, when issued, be fully paid and
nonassessable and will have no preemptive rights.
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Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(a) the title and stated value of such Preferred Stock;
(b) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(c) the dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock;
(d) the date from which dividends on such Preferred Stock shall
accumulate;
(e) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(f) the provision for a sinking fund, if any, for such Preferred
Stock;
(g) any voting rights of such Preferred Stock;
(h) the provision for redemption, if applicable, of such Preferred
Stock;
(i) any listing of such Preferred Stock on any securities exchange;
(j) the terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(k) a discussion of material federal income tax considerations
applicable to such Preferred Stock;
(l) any limitations on actual, beneficial or constructive ownership
and restrictions on transfer, in each case as may be appropriate to
preserve the Company's REIT status;
(m) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(n) any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company; and
(o) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (a)
senior to all Common Stock and to all equity or other securities ranking junior
to such Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; (b) on a parity with all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank on a parity with the Preferred Stock with
respect to dividend rights or rights upon liquidation, dissolution or winding
up of the affairs of the Company; and (c) junior to all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank senior to the Preferred Stock with respect to dividend rights
or rights upon liquidation, dissolution or winding up of the affairs of the
Company. For these purposes, the term "equity securities" does not include
convertible debt securities.
DIVIDENDS
Holders of shares of the Preferred Stock of each series shall be entitled
to receive, when, as and if declared by the Company's Board of Directors, out
of the Company's assets legally available for payment, cash dividends at such
rates and on such dates as will be set forth in the applicable Prospectus
Supplement. Each such dividend shall be payable to holders of record as they
appear on the Company's stock transfer books on such record dates as shall be
fixed by the Company's Board of Directors.
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Dividends on any series of Preferred Stock will be cumulative. Dividends
will be cumulative from and after the date set forth in the applicable
Prospectus Supplement.
If any shares of Preferred Stock of any series are outstanding, full
dividends shall not be declared or paid or set apart for payment on the
Preferred Stock of any other series ranking, as to dividends, on a parity with
or junior to the Preferred Stock of such series for any period unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment on the Preferred Stock of such series for all past dividend periods and
the then current dividend period. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the shares of
Preferred Stock of any series and the shares of any other series of Preferred
Stock ranking on a parity as to dividends with the Preferred Stock of such
series, all dividends declared on shares of Preferred Stock of such series and
any other series of Preferred Stock ranking on a parity as to dividends of such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share on the Preferred Stock of such series and such other series
of Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the shares of Preferred Stock of such series and
such other series of Preferred Stock bear to each other. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on Preferred Stock of such series that may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period, no dividends (other than in the Common Stock
or other capital stock of the Company ranking junior to the Preferred Stock of
such series as to dividends and upon liquidation) shall be declared or paid or
set aside for payment nor shall any other distribution be declared or made on
the Common Stock or any other capital stock of the Company ranking junior to or
on a parity with the Preferred Stock of such series as to dividends or upon
liquidation, nor shall the Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the Preferred Stock of such
series as to dividends or upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any amounts be paid to or made available for
a sinking fund for the redemption of any shares of any such stock) by the
Company (except by conversion into or exchange for other capital stock of the
Company ranking junior to the Preferred Stock of such series as to dividends
and upon liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series that remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accumulated and unpaid dividends thereon
to the date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital stock of the Company, the terms of such
Preferred Stock may provide that, if no such capital stock shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable
capital stock of the Company pursuant to conversion provisions specified in the
applicable Prospectus Supplement.
Notwithstanding the foregoing, unless full cumulative dividends on all
shares of such series of Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof is
set apart for payment for all past dividend periods and the then current
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dividend period, no shares of such series of Preferred Stock shall be redeemed
unless all outstanding shares of Preferred Stock of such series are
simultaneously redeemed; provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of Preferred Stock of such series
to preserve the Company's REIT status or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series. In addition, unless full cumulative dividends on all
outstanding shares of such series of Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period, the Company shall not purchase or otherwise
acquire directly or indirectly any shares of Preferred Stock of such series
(except by conversion into or exchange for capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of shares of Preferred Stock of such series to preserve
the Company's REIT status or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series.
If fewer than all the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company that is consistent with the
Certificate of Incorporation.
Notice of redemption will be mailed at least 30, but not more than 60,
days before the redemption date to each holder of record of a share of
Preferred Stock of any series to be redeemed at the address shown on the
Company's stock transfer books. Each notice shall state: (a) the redemption
date; (b) the number of shares and series of the Preferred Stock to be
redeemed; (c) the redemption price; (d) the place or places where certificates
for such Preferred Stock are to be surrendered for payment of the redemption
price; (e) that dividends on the shares to be redeemed will cease to accumulate
on such redemption date; and (f) the date on which the holder's conversion
rights, if any, as to such shares shall terminate. If fewer than all the shares
of Preferred Stock of any series are to be redeemed, the notice mailed to each
such holder thereof shall also specify the number of shares of Preferred Stock
to be redeemed from each such holder and, upon redemption, a new certificate
shall be issued representing the unredeemed shares without cost to the holder
thereof. If notice of redemption of any shares of Preferred Stock has been
given and if the funds necessary for such redemption have been set aside by the
Company in trust for the benefit of the holders of any shares of Preferred
Stock so called for redemption, then from and after the redemption date
dividends will cease to accrue on such shares of Preferred Stock, such shares
of Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares will terminate, except the right to receive the
redemption price. In order to facilitate the redemption of shares of Preferred
Stock of any series, the Board of Directors may fix a record date for the
determination of shares of such series of Preferred Stock to be redeemed.
Subject to applicable law and the limitation on purchases when dividends
on a series of Preferred Stock are in arrears, the Company may, at any time and
from time to time purchase any shares of such series of Preferred Stock in the
open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, then, before any distribution or payment shall
be made to the holders of the Common Stock or any other class or series of
capital stock of the Company ranking junior to any series of the Preferred
Stock in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Company, the holders of such series of
Preferred Stock shall be entitled to receive out of assets of the Company
legally available for distribution to shareholders liquidating distributions in
the amount of the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and
unpaid thereon. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Preferred Stock will
have no right or claim to any of the remaining assets of the Company. If, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
legally available assets of the Company are insufficient to pay the amount of
the
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liquidating distributions on all outstanding shares of any series of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of capital stock of the Company ranking on a parity with such series of
Preferred Stock in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of such series of Preferred Stock and all other
such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders
of any series of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of any other classes or series of capital stock
ranking junior to such series of Preferred Stock upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other entity, or the
sale, lease, transfer or conveyance of all or substantially all of the
Company's property or business, shall not be deemed to constitute a
liquidation, dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as
any shares of Preferred Stock of a series remain outstanding, the Company shall
not, without the affirmative vote or consent of the holders of at least a
majority of the shares of such series of Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class), (a) authorize or create, or increase the
authorized or issued amount of, any class or series of capital stock ranking
prior to such series of Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital stock of the Company into any such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (b) amend, alter or repeal
the provisions of the Certificate of Incorporation or the Certificate of
Designations for such series of Preferred Stock, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any right,
preference, privilege or voting power of such series of Preferred Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or any increase in the amount of authorized shares of such
series or any other series of Preferred Stock, in each case ranking on a parity
with or junior to the Preferred Stock of such series with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or
winding up, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption upon proper notice and sufficient
funds shall have been deposited in trust to effect such redemption.
Under Delaware law, notwithstanding anything to the contrary set forth
above, holders of each series of Preferred Stock will be entitled to vote as a
class upon a proposed amendment to the Certificate of Incorporation, whether or
not entitled to vote thereon by the Restated Certificate of Incorporation, if
the amendment would increase or decrease the aggregate number of authorized
shares of such series, increase or decrease the par value of the shares of such
series, or alter or change the powers, preferences or special rights of the
shares of such series so as to affect them adversely.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the
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conversion price or manner of calculation thereof, the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or
constructively, by five or fewer individuals (defined in the Code to include
certain entities) during the last half of a taxable year. To assist the Company
in meeting this requirement, the Company may take certain actions to limit the
beneficial ownership, actually or constructively, by a single person or entity
of the Company's outstanding equity securities. See "Restrictions on Transfers
of Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for any series of Preferred Stock will be
set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
actually or constructively, by five or fewer individuals (defined in the Code
to include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
355 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year. To ensure that the Company remains qualified as a REIT,
the Certificate of Incorporation, subject to certain exceptions, provides that
a transfer of Common Stock is void if it would result in Beneficial Ownership
(as defined below) of the Common Stock in excess of the Ownership Limit (as
defined below) or would result in the Common Stock being beneficially owned by
less than 100 persons. "Transfer" generally means any sale, transfer, gift,
assignment, devise or other disposition of Common Stock, whether voluntary or
involuntary, whether of record or beneficially and whether by operation of law
or otherwise. "Beneficial Ownership" generally means ownership of Common Stock
by a person who would be treated as an owner of such shares of Common Stock
either actually or constructively through the application of Section 544 of the
Internal Revenue Code of 1986, as modified by Section 856(h)(1)(B) of the
Internal Revenue Code of 1986. "Ownership Limit" generally means 9.8% of the
outstanding Common Stock of the Company and, after certain adjustments pursuant
to the Certificate of Incorporation, means such greater percentage of the
outstanding Common Stock as so adjusted. The Board of Directors may, in its
discretion, adjust the Ownership Limit of any Person provided that after such
adjustment, the Ownership Limit of all other persons shall be adjusted such
that in no event may any five persons Beneficially Own more than 49% of the
Common Stock. Any class or series of Preferred Stock may be subject to these
restrictions if so stated in the resolutions providing for the issuance of such
Preferred Stock. The Restated Certificate of Incorporation provides certain
remedies to the Board of Directors in the event the restrictions on Transfer
are not met.
All certificates of Common Stock, any other series of the Company's Common
Stock and any class or series of Preferred Stock will bear a legend referring
to the restrictions described above and as described in the certificate of
designation relating to any issuance of Preferred Stock. All persons who have
Beneficial Ownership or who are a shareholder of record of a specified
percentage (or more) of the outstanding capital stock of the Company must file
a notice with the Company containing information regarding their ownership of
stock as set forth in the Treasury Regulations. Under current Treasury
Regulations, the percentage is set between .5% and 5%, depending on the number
of record holders of capital stock.
This ownership limitation may have the effect of precluding acquisition of
control of the Company by a third party unless the Board of Directors
determines that maintenance of REIT status is no longer in the best interests
of the Company.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a summary of the material provisions which govern the
federal income tax treatment of the Company. The summary is based on current
law, is for general information only, and is not tax advice. The tax treatment
of a holder of any of the Securities will vary depending on the terms of the
specific Securities acquired by such holder, as well as his or her particular
situation. This discussion does not attempt to address any aspects of federal
income taxation relating to holders of Securities. Certain federal income tax
considerations relevant to a holder of Securities will be provided in the
Prospectus Supplement relating thereto.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT,
AS WELL AS HIS OR HER OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OR
HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE OFFERED SECURITIES, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE LAWS.
QUALIFICATION OF THE COMPANY AS A REIT; OPINION OF COUNSEL
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Code, commencing with its fiscal year ended December 31, 1994. The
election to be taxed as a REIT will continue until it is revoked or otherwise
terminated. The most important consequence to the Company of being treated as a
REIT for federal income tax purposes is that it will not be subject to federal
corporate income taxes on net income that is currently distributed to its
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that typically results when a corporation
earns income and distributes that income to stockholders in the form of a
dividend. Accordingly, if the Company at any time fails to qualify as a REIT,
the Company will be taxed on its distributed income, thereby reducing the amount
of cash available for distribution to its stockholders.
In the opinion of Kutak Rock, counsel to the Company, commencing with the
taxable year ended December 31, 1994, the Company has been organized in
conformity with the requirements for qualification as a REIT and its proposed
method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. This opinion is based on
various assumptions and is conditioned upon the representations of the Company
as to factual matters. Moreover, continued qualification and taxation as a REIT
will depend on the Company's ability to satisfy on a continuing basis certain
distribution levels, diversity of stock ownership and various income and asset
limitations, including certain limitations concerning the ownership of
securities, imposed by the Code as summarized below. While the Company intends
to operate so that it will continue to qualify as a REIT, given the highly
complex nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in the circumstances of
the Company, no assurance can be given by counsel or the Company that the
Company will so qualify for any particular year. Kutak Rock will not review
compliance with these tests on a continuing basis, and will not undertake to
update its opinion subsequent to the date hereof.
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal income tax on net income that is currently distributed to
its stockholders. The Company may, however, be subject to certain federal taxes
based on the amount of its distributions or its inability to meet certain REIT
qualification requirements. These taxes are the following:
TAX ON UNDISTRIBUTED INCOME. First, if the Company does not distribute all
of its net taxable income, including any net capital gain, the Company would be
taxed at regular corporate rates on the undistributed income or gains. The
Company may elect to retain and pay tax on its capital gains.
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TAX ON PROHIBITED TRANSACTIONS. Second, if the Company has net income from
certain prohibited transactions, including sales or dispositions of property
held primarily for sale to customers in the ordinary course of business, such
net income would be subject to a 100% confiscatory tax.
TAX ON FAILURE TO MEET GROSS INCOME REQUIREMENTS. Third, if the Company
should fail to meet either the 75% or 95% gross income test as described below
but still qualify for REIT status because, among other requirements, it was
able to show that such failure was due to reasonable cause, it will be subject
to a 100% tax on an amount equal to (a) the gross income attributable to the
greater of the amount, if any, by which the Company failed either the 75% or
the 95% gross income test, multiplied by (b) a fraction intended to reflect the
Company's profitability.
TAX ON FAILURE TO MEET DISTRIBUTION REQUIREMENTS. Fourth, if the Company
should fail to distribute during each calendar year at least the sum of (a) 85%
of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net
income for such year, and (c) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
ALTERNATIVE MINIMUM TAX. Fifth, the Company may be subject to alternative
minimum tax on certain items of tax preference.
TAX ON FORECLOSURE PROPERTY. Sixth, if the Company has (a) net income from
the sale or other disposition of foreclosure property that is held primarily
for sale to customers in the ordinary course of business or (b) other
nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income.
TAX ON BUILT-IN GAIN. Seventh, if during the 10-year period (the
"Recognition Period") beginning on the date that the Company's corporate
predecessor merged with and into the Company, the Company recognizes gain on
the disposition of any asset acquired by the Company from the corporate
predecessor, then to the extent of the excess of (a) the fair market value of
such asset as of the beginning of such Recognition Period over (b) the
Company's adjusted basis in such asset as of the beginning of such Recognition
Period, such gain will be subject to tax at the highest regular corporate rate
pursuant to IRS regulations that have not yet been promulgated.
OVERVIEW OF REIT QUALIFICATION RULES
The following summarizes the basic requirements for REIT status:
(a) The Company must be a corporation, trust or association that is
managed by one or more trustees or directors.
(b) The Company's stock or beneficial interests must be transferable
and held by more than 100 stockholders, and no more than 50% of the value
of the Company's stock may be held, actually or constructively, by five or
fewer individuals (defined in the Code to include certain entities).
(c) Generally, 75% (by value) of the Company's investments must be in
real estate, mortgages secured by real estate, cash or government
securities.
(d) The Company must meet three gross income tests:
(i) First, at least 75% of the gross income must be derived from
specific real estate sources;
(ii) Second, at least 95% of the gross income must be from the
real estate sources includable in the 75% test, or from dividends,
interest or gains from the sale or disposition of stock and
securities; and
(iii) Third, for taxable years beginning on or before August 5,
1997, less than 30% of the gross income may be derived from the sale
of real estate assets held for less than four years, from the sale of
certain "dealer" properties or from the sale of stock or securities
having a short-term holding period.
(e) The Company must distribute to its stockholders in each taxable
year an amount at least equal to 95% of the Company's "REIT taxable income"
(which is generally equivalent to taxable ordinary income and is defined
below).
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The discussion set forth below explains these REIT qualification
requirements in greater detail. It also addresses how these highly technical
rules may be expected to impact the Company in its operations, noting areas of
uncertainty that perhaps could lead to adverse consequences to the Company and
its stockholders.
SHARE OWNERSHIP. The Company's shares of stock are fully transferable and
are subject to transfer restrictions set forth in its Certificate of
Incorporation. Furthermore, the Company has more than 100 shareholders and its
Certificate of Incorporation, as a general matter, provides, to decrease the
possibility that the Company will ever be closely held, that no individual,
corporation or partnership is permitted to actually or constructively own more
than 9.8% of the number of outstanding shares of Common Stock. The Ownership
Limit may be adjusted, however, by the Company's Board of Directors in certain
circumstances. Purported transfers which would violate the Ownership Limit will
be void. In addition, shares of Common Stock acquired in excess of the
Ownership Limit may be redeemed by the Company. The ownership and transfer
restrictions pertaining generally to a particular issue of Preferred Stock will
be described in the Prospectus Supplement relating to such issue. In the case
of a REIT which solicits certain required information from its shareholders,
the failure to satisfy the closely held requirement described above will result
in disqualification only if the REIT had knowledge or upon the exercise of
reasonable diligence would have known of the failure to satisfy such
requirement.
NATURE OF ASSETS. On the last day of each calendar quarter, at least 75%
of the value of the Company's total assets must consist of (a) real estate
assets (including interests in real property and mortgages on loans secured by
real property), (b) cash and cash items (including receivables), and (c)
government securities (collectively, the "real estate assets"). Except for
certain partnerships and "qualified REIT subsidiaries," as described below, the
securities of any issuer, other than the United States government, may not
represent more than 5% of the value of the Company's total assets or 10% of the
outstanding voting securities of any one issuer.
While, as noted above, a REIT cannot own more than 10% of the outstanding
voting securities of any single issuer, an exception to this rule permits REITs
to own "qualified REIT subsidiaries." A "qualified REIT subsidiary" is any
corporation in which 100% of its stock is owned by the REIT. The Company owns
the stock or beneficial interests of several entities which will be treated as
"qualified REIT subsidiaries" and will not adversely affect the Company's
qualification as a REIT.
The Company may acquire interests in partnerships that directly or
indirectly own and operate properties similar to those currently owned by the
Company. The Company, for purposes of satisfying its REIT asset and income
tests, will be treated as if it owns a proportionate share of each of the
assets of these partnerships attributable to such interests. For these
purposes, the Company's interest in each of the partnerships will be determined
in accordance with its capital interest in such partnership. The character of
the various assets in the hands of the partnership and the items of gross
income of the partnership will remain the same in the Company's hands for these
purposes. Accordingly, to the extent the partnership receives qualified real
estate rentals and holds real property, a proportionate share of such qualified
income and assets, based on the Company's capital interest in the partnerships,
will be treated as qualified rental income and real estate assets of the
Company for purposes of determining its REIT characterization. It is expected
that substantially all the properties of the partnerships will constitute real
estate assets and generate qualified rental income for these REIT qualification
purposes.
This treatment for partnerships is conditioned on the treatment of these
entities as partnerships for federal income tax purposes (as opposed to
associations taxable as corporations). If any of the partnerships were treated
as an association (or, in some cases, a publicly traded partnership), it would
be taxable as a corporation. In such situation, if the Company's ownership in
any of the partnerships exceeded 10% of the partnership's voting interests or
the value of such interest exceeded 5% of the value of the Company's assets,
the Company would cease to qualify as a REIT. Furthermore, in such a situation,
distributions from any of the partnerships to the Company would be treated as
dividends, which are not taken into account in satisfying the 75% gross income
test described below and which could therefore make it more difficult for the
Company to qualify as a REIT for the taxable year in which such distribution
was received. In addition, in such a situation, the interest in any of the
partnerships held by the
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Company would not qualify as "real estate assets," which could make it more
difficult for the Company to meet the 75% asset test described above. Finally,
in such a situation, the Company would not be able to deduct its share of any
losses generated by the partnerships in computing its taxable income. The
Company will take all steps reasonably necessary to ensure that any partnership
in which it acquires an interest will be treated for tax purposes as a
partnership (and not as an association taxable as a corporation). However,
there can be no assurance that the IRS may not successfully challenge the tax
status of any such partnership.
INCOME TESTS. To maintain its qualification as a REIT, the Company must
meet three gross income requirements that must be satisfied annually. First, at
least 75% of the REIT's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the REIT's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments, and from
dividends, interest and gain from the sale or disposition of stock or
securities, from any combination of the foregoing or from certain hedging
agreements entered into to reduce interest rate risks. Third, for taxable years
commencing on or before August 5, 1997, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
from the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
must represent less than 30% of the REIT's gross income (including gross income
from prohibited transactions) for each taxable year.
Rents received by the Company on the lease of its properties will qualify
as "rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
rent must not be based in whole or in part on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Code provides
that rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income test if the Company, or an owner of
10% or more of the Company, actually or constructively owns 10% or more of such
tenant (a "Related-Party Tenant"). Third, if rent attributable to personal
property leased in connection with the lease of real property is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." The Company does not anticipate charging rent for any property that
is based in whole or in part on the income or profits of any person (other than
rent based on a fixed percentage or percentages of receipts or sales) and the
Company does not anticipate receiving any rents from Related-Party Tenants.
Furthermore, the Company expects that in substantially all cases the rents
attributable to its leased personal property will be less than 15% of the total
rent payable under such lease.
Finally, for rents to qualify as "rents from real property," the Company
must not operate or manage the property or furnish or render services to
tenants unless the Company furnishes or renders such services through an
independent contractor from whom the Company derives no revenue. The Company
need not utilize an independent contractor to the extent that services provided
by the Company are usually and customarily rendered in connection with the
rental of space for occupancy only and are not otherwise considered "rendered
to the occupant." If the amount received by the Company from impermissible
tenant services does not exceed 1% of the total amounts received by the Company
with respect to such related property, such rents will not as a result be
treated as nonqualifying income. Impermissible tenant services include services
rendered by the Company to tenants, other than the foregoing customary services
and services with regard to managing or operating the property. The Company
does not anticipate that it will provide any services with respect to its
properties.
The Company intends to monitor the percentage of nonqualifying income and
reduce the percentage of nonqualifying income if necessary. Because the income
tests are based on a percentage of total gross income, increases in qualifying
rents will reduce the percentage of nonqualifying income. In addition, the
Company intends to acquire additional real estate assets that would generate
qualifying income, thereby lowering the percentage of total nonqualifying
income. Increases in other nonqualifying income may
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similarly affect these calculations. The Company does not expect to generate
nonqualifying income in quantities which would cause it to fail either at the
foregoing 75% or 95% gross income tests.
If the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's failure to
meet such test was due to reasonable cause and not willful neglect and the
Company attaches a schedule of its income sources to its tax return that does
not fraudulently or intentionally exclude any income sources. As discussed
above, even if these relief provisions apply, a tax would be imposed with
respect to such excess income.
ANNUAL DISTRIBUTION REQUIREMENTS. Each year, the Company must have a
deduction for dividends paid (determined under Section 561 of the Code) to its
stockholders in an amount equal to (a) 95% of the sum of (i) its "REIT taxable
income" as defined below (computed without a deduction for dividends paid and
excluding any net capital gain), (ii) any net income from foreclosure property
less the tax on such income, minus (b) any "excess noncash income," as defined
below. "REIT taxable income" is the taxable income of a REIT subject to certain
adjustments, including, without limitation, an exclusion for net income from
foreclosure property, a deduction for the excise tax on the greater of the
amount by which the REIT fails the 75% or the 95% income test, and an exclusion
for an amount equal to any net income derived from prohibited transactions.
"Excess noncash income" means the excess of certain amounts that the REIT is
required to recognize as income in advance of receiving cash, such as original
issue discount on purchase money debt, over 5% of the REIT taxable income
before deduction for dividends paid and excluding any net capital gain. Such
distributions must be made in the taxable year to which they relate, or in the
following taxable year if declared before the REIT timely files its tax return
for such year and is paid on or before the first regular dividend payment after
such declaration.
It is possible that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (a) the actual receipt of income and the
actual payment of deductible expenses and (b) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company.
Furthermore, principal payments on Company indebtedness, which would have the
effect of lowering the amount of distributable cash without an offsetting
deduction to Company taxable income, may adversely affect the Company's ability
to meet this distribution requirement. In the event that such timing
differences or reduction to distributable cash occurs, in order to meet the 95%
distribution requirement, the Company may find it necessary to arrange for
short-term, or possible long-term, borrowings or to pay dividends in the form
of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year that may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay to the IRS interest
based on the amount of any deduction taken for deficiency dividends.
Congress is currently considering several proposals which, if adopted,
would modify the requirements applicable to REITs. Among such requirements is
one which would preclude a REIT from owning more than 10% of the value of the
stock of any subsidiary, other than a qualified REIT subsidiary. An additional
proposal would prohibit an existing corporation from deferring built-in gains
upon filing an election to be treated as a REIT. If an entity's election to be
treated as a REIT were terminated, such provision, if enacted, would make
requalification as a REIT substantially more difficult. It is not possible to
predict which, if any, of the current proposals will be enacted or the effect
of such proposals on the Company.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company would be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, thereby reducing the amount of cash available for
distribution to its stockholders. Distributions to stockholders in any year in
which the Company fails to
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qualify would not be deductible by the Company nor would they be required to be
made. In such an event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders would be taxable as ordinary income
and, subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends-received deduction. Unless entitled to relief under
specific statutory relief provisions, the Company would also be disqualified
from taxation as a REIT for the four taxable years following the year during
which such qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
STATE AND LOCAL TAXES
The Company may be subject to state or local taxes in other jurisdictions
such as those in which the Company may be deemed to be engaged in activities or
own property or other interests. Such tax treatment of the Company in states
having taxing jurisdiction over it may differ from the federal income tax
treatment described in this summary. Each stockholder should consult his or her
tax advisor as to the status of the Company and the Securities under the
respective state laws applicable to them.
PLAN OF DISTRIBUTION
The terms of any offering of Securities under this Registration Statement
will be set forth in the applicable Prospectus Supplement. The Company may sell
the Securities to one or more underwriters for public offering and sale by them
or may sell the Securities to investors directly or through agents or dealers.
Any such underwriter or agent involved in the offer and sale of the Securities
will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at
prices relating to such prevailing market prices or at negotiated prices. The
Company also may, from time to time, authorize dealers acting as the Company's
agents to offer and sell the Securities upon the terms and conditions as are
set forth in the applicable Prospectus Supplement. In connection with the sale
of Securities, underwriters may receive compensation from the Company in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of Securities for whom they may act as agent. Underwriters may
sell Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent. Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Dealers and agents
participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may
be customers of, engage in transactions with and perform services for the
Company and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock. The Common Stock is currently listed on the NYSE.
Unless otherwise specified in the related Prospectus Supplement, any shares of
Common Stock sold pursuant to a Prospectus Supplement will be listed on the
NYSE, subject to official notice of issuance. The Company may elect to list any
series of Debt Securities or Preferred Stock on the NYSE or other exchange, but
is not obligated to do so. It is possible that one or more underwriters may
make a market in a series of Securities, but will not be obligated to do so and
may discontinue any market making at any time without notice. Therefore, there
can be no assurance as to the liquidity of, or the trading market for, the
Securities.
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If so indicated in the Prospectus Supplement, the Company will authorize
agents and underwriters or dealers to solicit offers by certain purchasers to
purchase Securities from the Company at the public offering price set forth in
the Prospectus Supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. Such contracts will be
subject to only those conditions set forth in the Prospectus Supplement, and
the Prospectus Supplement will set forth the commission payable for
solicitation of such offers.
LEGAL MATTERS
Certain legal matters relating to the Securities to be offered hereby, and
certain REIT matters relating to the Company, will be passed upon for the
Company by the national law firm of Kutak Rock, 717 Seventeenth Street, Suite
2900, Denver, Colorado 80202.
EXPERTS
The financial statements and schedules for the fiscal year ended December
31, 1997 incorporated by reference in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report, with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
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================================================================================
6,000,000 Shares
Franchise Finance
Corporation of America
Common Stock
---------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Morgan Stanley Dean Witter
NationsBanc Montgomery Securities LLC
Salomon Smith Barney
, 1999
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