Filed Pursuant to Rule 424(b)(2)
Registration No. 333-26437
PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 16, 1998)
LOGO
$150,000,000
FRANCHISE FINANCE CORPORATION OF AMERICA
8.75% SENIOR NOTES DUE 2010
------------
The notes will mature on October 15, 2010. Interest on the notes is payable
semiannually on April 15 and October 15, beginning April 15, 2001. The notes are
unsecured and rank equally with all of FFCA's other unsecured senior
indebtedness. The notes will be issued only in registered form in denominations
of $1,000. FFCA may, at its option, redeem the notes as described in this
prospectus.
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-13 IN THIS PROSPECTUS SUPPLEMENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the related prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Per Note Total
------------ ---------------
Public offering price ..................... 99.205% $148,807,500
Underwriting discounts .................... .650% $ 975,000
Proceeds to FFCA before expenses .......... 98.555% $147,832,500
Interest on the notes will accrue from September 21, 2000.
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The underwriters are offering the notes subject to various conditions. The
underwriters expect to deliver the notes to purchasers on or about September 21,
2000.
------------
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
BANC OF AMERICA SECURITIES LLC
September 18, 2000
<PAGE>
FRANCHISE FINANCE CORPORATION OF AMERICA
Investment Locations as of June 30, 2000(1)
[MAP GRAPHIC OF THE UNITED STATES SHOWING THE INVESTMENT LOCATIONS OF FFCA]
(1) Does not include eight properties located in Alaska, Hawaii and Canada.
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING, AND YOU ARE URGED TO READ BOTH THE
PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL TO OBTAIN MATERIAL INFORMATION
CONCERNING THE NOTES AND AN INVESTMENT IN THE NOTES.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR INCORPORATED BY REFERENCE IN THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS ARE ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS SUPPLEMENT.
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TABLE OF CONTENTS
Page
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Prospectus Supplement
Prospectus Supplement Summary ................................. S-5
Risk Factors .................................................. S-13
Use of Proceeds ............................................... S-17
Capitalization ................................................ S-17
Selected Financial Data ....................................... S-18
Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ S-20
Business and Properties ....................................... S-27
Management and Directors of the Company ....................... S-41
Description of the Notes ...................................... S-43
Certain Federal Income Tax Considerations ..................... S-50
Underwriting .................................................. S-50
Legal Matters ................................................. S-52
Prospectus
Available Information ......................................... 2
Incorporation of Certain Documents by Reference ............... 2
The Company ................................................... 3
Use of Proceeds ............................................... 3
Ratios of Earnings to Fixed Charges ........................... 3
Description of Debt Securities ................................ 4
Description of Common Stock ................................... 13
Description of Preferred Stock ................................ 14
Restrictions On Transfers of Capital Stock .................... 19
Certain Federal Income Tax Considerations ..................... 20
Plan of Distribution .......................................... 25
Legal Matters ................................................. 26
Experts ....................................................... 26
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PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights the information contained in this prospectus
supplement and the accompanying prospectus. This summary is not complete and
does not contain all of the information that you should consider before
investing in the notes. You should read both the prospectus supplement and the
prospectus carefully. 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
FFCA is the largest REIT in the United States providing real estate
financing to multi-unit operators in the chain restaurant industry and a leading
provider of real estate financing to the convenience store and automotive
services and parts industries. FFCA provides flexible financing alternatives
through a variety of investment vehicles including mortgage loans, long-term
real estate leases, equipment loans and construction financing. FFCA has
financed chain restaurant real estate since 1980 and began financing convenience
stores and automotive services and parts stores in 1997. FFCA's portfolio is
diversified by geography, industry sector, operators and chains, which has had a
favorable impact on its access to, and cost of, capital. As of June 30, 2000,
FFCA had an investment/servicing portfolio consisting of approximately 5,600
properties. Over 490 operators in approximately 160 retail chains throughout
North America operate the properties. FFCA provides financing principally
through mortgage loans and sale-leaseback transactions to operators with
experienced management in established retail chains. Generally, multi-unit
operators that have a national or regional presence operate the properties.
FFCA is a fully integrated, self-administered REIT and its common stock is
traded on the New York Stock Exchange under the symbol "FFA." As of September 1,
2000, FFCA had an equity market capitalization of approximately $1.3 billion.
FFCA's corporate offices are located at 17207 North Perimeter Drive,
Scottsdale, Arizona 85255-5402. FFCA's telephone number is (480) 585-4500 and
its Internet web site address is http://www.ffca.com. FFCA's website is not part
of this prospectus supplement or the accompanying prospectus.
BUSINESS OBJECTIVES AND STRATEGIES
FFCA seeks to enhance its operating performance and financial position by
pursuing the following business objectives and strategies:
* ESTABLISHING LONG-TERM FUNDING SOURCE. FFCA entered into a three-year loan
sale agreement in December 1999 with Washington Mutual Bank, FA, the
nation's eighth largest financial services company. This alliance, to be
Washington Mutual's exclusive provider of chain store loans, subject to
specified conditions, represents a significant source of new capital for
FFCA. FFCA expects that this will reduce its reliance on debt and
shareholder equity as sources of capital to fund its continued growth.
Under the loan sale agreement, Washington Mutual will purchase mortgage
loans from FFCA at the time the loans are originated; however, because
Washington Mutual wishes to limit its concentration of individual borrowers
to a specific dollar amount, Washington Mutual does not purchase every loan
that FFCA originates. Therefore, while FFCA may no longer have to rely on
accumulating large amounts of mortgage loans, using its bank lines of
credit to carry the loans, for sale through securitization transactions, it
may continue to securitize loans in some cases. In connection with the loan
sale agreement, a warrant was issued to Washington Mutual, Inc. to purchase
2 million shares of FFCA common stock at a price of $25.47 per share. The
warrant expires in December 2009, or earlier if the loan sale agreement is
terminated or not renewed upon the expiration of its initial term.
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* UTILIZING CONSERVATIVE INVESTMENT STRUCTURING. FFCA structures its
investments to enhance the stability of its cash flows. FFCA's
sale-leaseback transactions, which are retained in its portfolio, are
structured as triple net leases. These leases provide that lessees are
responsible for the payment of all property operating expenses, including
property taxes, maintenance and insurance expenses. As a result, FFCA
avoids making significant capital expenditures with respect to these
properties. The leases generally have 20-year terms and provide for base
rentals plus additional payments based upon specified contractual increases
or a participation in the gross sales from the properties. FFCA's mortgage
financings are generally secured by first liens on the mortgaged property
and generally provide for full recourse to the borrower. FFCA generally
lends an amount that does not exceed the sum of the aggregate replacement
cost of the building and equipment used in the operation of the mortgaged
property provided as security for the loan, and the fair market value of
the real property based upon the cost of comparable land. In addition, FFCA
generally structures its transactions so that all of the loans made to a
borrower or an affiliated group of borrowers are both cross-defaulted and
cross-collateralized.
* APPLYING RESEARCH-DRIVEN UNDERWRITING. FFCA targets quality investments by
applying conservative, research-driven underwriting criteria designed to
evaluate risk and return indicators. Before underwriting a transaction,
FFCA thoroughly researches various factors, including:
* Operator management depth and experience
* Chain store sales trends and profitability
* Chain store historical cost and requested investment amount
* Concept analysis
-- concept history and stability
-- comparison of operator performance to concept averages
* Site considerations
-- age of improvements/physical condition
-- market penetration & competition
-- environmental issues
* FOCUSING ON EXPERIENCED MULTI-UNIT OPERATORS WITH BRAND NAME FRANCHISES.
FFCA seeks multi-unit operators conducting business under nationally or
regionally recognized brand names to operate the properties it finances. As
a result, FFCA believes it is able to achieve a better risk-adjusted return
for its shareholders. Generally, the operators include both chain store
franchisors and franchisees. Examples of well-known chains in FFCA's
portfolio include Applebee's, Arby's, Burger King, Checker Auto Parts,
Chevron, Circle K, Citgo, Cracker Barrel Old Country Store, Hardee's, Jack
in the Box, Long John Silver's, Midas Muffler Shops, Pizza Hut, 7-Eleven,
Taco Bell, Texaco, Valvoline Instant Oil Change and Wendy's.
* MAINTAINING APPROPRIATE INFRASTRUCTURE TO ACTIVELY MANAGE PORTFOLIO. Since
1980, members of FFCA's management group have gained extensive experience
in the development and refinement of systems of operation, management and
research, which has enhanced FFCA's ability to identify, evaluate and
structure new investments as well as actively monitor and manage its
investment portfolio. FFCA's experience in the real estate industry results
in in-house efficiency with respect to virtually every aspect of real
estate acquisition and management.
FFCA uses its infrastructure to continually monitor and administer its
investments to enhance the stability of its cash flows. FFCA collects
financial data on the properties financed by FFCA to determine
profitability, and FFCA's in-house staff inspects underperforming
properties to assess their condition. The servicing staff monitors the
receipt of monthly payments, payment of property taxes and maintenance of
required insurance coverages. Lease and mortgage payments are
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generally collected by electronic account debits on the first day of each
month. Servicing and legal department personnel administer underperforming
and nonperforming properties and also supervise the in-house administration
of property dispositions and tenant substitutions. FFCA has an established
record of resolving underperforming and nonperforming leased assets and
loans. For the three years ended December 31, 1999 and the six months ended
June 30, 2000, the occupancy rate for FFCA's properties has been
approximately 99%.
* MINIMIZING INVESTMENT RISK THROUGH DIVERSIFICATION. In structuring its
portfolio, FFCA seeks diversification, which reduces risk and favorably
impacts its access to, and cost of, capital. Elements of FFCA's investment
diversification include:
-- Geographic Diversification. FFCA's portfolio is geographically diverse
with investments in properties located in all 50 states, Washington,
D.C. and Canada as of June 30, 2000. The map on the inside front cover
of this prospectus supplement shows the location of properties in
FFCA's investment/servicing portfolio as of June 30, 2000, except for
eight properties located in Alaska, Hawaii and Canada.
-- Industry Sector Diversification. FFCA's portfolio continues to become
more diverse in terms of industry sectors, with interests in 3,395
chain restaurant properties, 1,554 convenience stores, 349 automotive
services and parts stores and 10 other retail properties as of June
30, 2000.
-- Operator and Chain Diversification. FFCA's portfolio is diverse in
terms of operators and chains, with properties that were leased to, or
owned by, over 490 national and regional operating companies with no
single operator representing more than 8% of revenues for the six
months ended June 30, 2000. Multi-unit operators are the predominant
operators of FFCA's properties. Additionally, approximately 160 retail
chains are represented in FFCA's portfolio. As of June 30, 2000,
approximately 64% of the properties financed by FFCA were chain
restaurants including Applebee's, Arby's, Black Eyed Pea, Burger King,
Chili's, Denny's, Fuddruckers, Hardee's, Jack in the Box, Kentucky
Fried Chicken, Pizza Hut, Taco Bell, Wendy's and Whataburger. In
addition, approximately 29% of FFCA's investments were in convenience
stores, including Circle K, E-Z Serve, 7-Eleven and White Hen Pantry,
and 7% were in automotive services and parts stores, including SpeeDee
Oil, Midas and Checker Auto Parts.
* OFFERING OPERATORS A FULL RANGE OF FINANCING PRODUCTS. FFCA provides its
customers with a variety of financing alternatives including mortgage
loans, sale-leaseback transactions, equipment loans, senior loans,
participating mortgages and construction loans. FFCA believes that offering
its customers a full range of financing products gives the company a
competitive advantage over traditional mortgage lenders and other real
estate financing companies. Additionally, FFCA continuously reviews other
financing products that it may offer operators to further improve the
company's competitive position.
* MAINTAINING A CONSERVATIVE CAPITAL STRUCTURE. FFCA seeks to operate with a
moderate use of leverage and believes that its investments' stable,
predictable cash flows will permit it to continue obtaining attractive debt
and equity financing. FFCA seeks to maintain a ratio of total indebtedness
to total market capitalization of not more than 40%. Based on debt
outstanding on FFCA's balance sheet as of June 30, 2000 and its closing
stock price on that date, FFCA's total indebtedness as a percentage of
total market capitalization was approximately 36%. Total indebtedness
includes debt associated with originating mortgages held for sale.
* MAXIMIZING CAPITAL MARKET FLEXIBILITY. FFCA's strategic alliance with
Washington Mutual enables FFCA to sell mortgage loans to Washington Mutual
and retain the servicing of the loans.
S-7
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In addition to loans sold to Washington Mutual, FFCA has the flexibility to
sell mortgage loans it originates in securitized offerings. FFCA typically
retains interests in securitized pools in the form of subordinated
securities, interest-only securities and mortgage servicing rights. To
date, FFCA has successfully completed five mortgage loan securitizations.
The face amounts of the mortgages involved were: (1) $178.8 million in
1996; (2) $260.8 million in 1997; (3) $335.3 million in 1998; (4) $414.9
million in the second quarter of 1999; and (5) $674.4 million in the fourth
quarter of 1999.
RECENT DEVELOPMENTS
The following is a summary of recent developments affecting FFCA:
RATINGS UPGRADE
* APRIL 2000: Moody's Investors Service upgraded the senior unsecured debt
rating of FFCA to Baa2 from Baa3. According to Moody's, the rating upgrade
was based on FFCA's strong underwriting and leadership in finance for
restaurant properties, the further diversification of FFCA's funding
sources through the loan sale facility with Washington Mutual and FFCA's
controlled expansion beyond the chain restaurant property industry into
convenience/gas stores and automotive parts and services outlets.
LONG-TERM FUNDING SOURCE ESTABLISHED
* DECEMBER 1999: FFCA and Washington Mutual entered into a three-year loan
sale agreement. Under this arrangement, Washington Mutual purchases loans
originated by FFCA and FFCA continues to service the loans.
ACQUISITIONS AND FINANCINGS
* SEPTEMBER 2000: FFCA provided $99 million of mortgage financing to
Shoney's, Inc. for 142 restaurant locations across the United States.
* JULY 2000: FFCA provided $142.6 million of mortgage financing for 65
Cracker Barrel restaurant locations across the United States, operated by
affiliates of CBRL Group, Inc.
* JUNE 2000: FFCA provided $14.8 million of mortgage financing for five
restaurant locations across the United States, operated by an affiliate of
Chart House Enterprises, Inc. FFCA also provided $19.7 million of mortgage
and equipment financing to an affiliate of E-Z Serve Convenience Stores,
Inc. for 26 convenience store locations in Georgia and Florida.
* APRIL 2000: FFCA provided $20.9 million of mortgage and equipment financing
to an affiliate of E-Z Serve Convenience Stores, Inc. for 17 Chevron Food
Mart locations in Alabama and Mississippi. FFCA also provided $39.7 million
of mortgage and equipment financing to affiliates of Uni-Marts, Inc. for 36
convenience store locations in Pennsylvania.
* FEBRUARY 2000: FFCA provided $17.5 million of mortgage financing to OSI
Group, Inc. for 22 Exxon locations in West Virginia.
S-8
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DEBT OFFERINGS AND SECURITIZATIONS
* JUNE 2000: FFCA issued $15 million in unsecured notes due in 2010, bearing
interest at 8.905%. FFCA used the note proceeds to pay down its revolving
line of credit.
* JANUARY 2000: FFCA issued $50 million in unsecured notes due in 2002,
bearing interest at 8.43% and $50 million in unsecured notes due in 2004
bearing interest at 8.68%. FFCA used the proceeds of the notes to pay down
its revolving line of credit.
* NOVEMBER 1999: FFCA priced and sold approximately $607 million of secured
franchise loan asset-backed securities. FFCA received proceeds from the
sale of securities, net of expenses, of approximately $651 million.
OTHER DEVELOPMENT
* AUGUST 2000: Citgo Petroleum Corporation, a gasoline refining and marketing
company, named FFCA as its preferred financing partner. The designation has
positioned FFCA as a preferred provider of a variety of financial products
and services to Citgo's independent marketers and operators in 43 states.
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THE OFFERING
<TABLE>
<S> <C>
Notes Offered ................ FFCA is offering a total of $150 million of 8.75% senior notes.
Issue Price .................. FFCA is offering the notes for $1,000 per note purchased.
Maturity ..................... The notes will mature on October 15, 2010.
Interest ..................... FFCA will pay interest on the notes at an annual rate of
8.75%. FFCA will pay the interest due on the notes every
six months on April 15 and October 15. FFCA will make the
first payment on April 15, 2001.
Certain Covenants ............ FFCA will issue the notes under an indenture with Wells
Fargo Bank Arizona, National Association, as trustee. The
indenture will restrict FFCA's ability, and the ability of
FFCA's subsidiaries, to:
* incur debt;
* secure debt with FFCA's assets or those of
FFCA's subsidiaries; and
* sell specified assets or merge with other companies.
Ranking of the Notes ......... The notes represent senior unsecured debt of FFCA:
* The notes will rank equally with all of FFCA's
current and future debt that does not expressly
provide that it ranks junior to senior unsecured
debt of FFCA. On June 30, 2000, on a "pro forma"
basis after giving effect to the offering and the
application of the net proceeds, FFCA would have
had $767.7 million of senior unsecured debt
outstanding.
* The notes will rank ahead of all of FFCA's current
and future debt that expressly provides that it is
subordinated to senior unsecured debt of FFCA. On
June 30, 2000, on a "pro forma" basis after giving
effect to the offering and the application of the
net proceeds, FFCA would not have had any of this
type of debt outstanding.
* The notes will rank behind any of FFCA's mortgage
and other secured indebtedness and behind debt and
other liabilities of FFCA's subsidiaries. On June 30, 2000,
on a "pro forma" basis after giving effect to the offering
and the application of the net proceeds, FFCA would not
have had any of this type of debt outstanding.
Optional Redemption .......... FFCA may redeem some or all of the notes at any time at
the redemption prices described in the section "Description
of the Notes" under the heading "Optional Redemption,"
plus any interest that is due and unpaid on the date FFCA
redeems the notes.
Use of Proceeds .............. FFCA will use the net proceeds of the notes to reduce
amounts outstanding under FFCA's unsecured revolving
credit facility with Bank of America, N.A.
</TABLE>
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SUMMARY FINANCIAL INFORMATION
FFCA derived the historical financial information shown below from FFCA's
audited financial statements for 1997 through 1999 and unaudited financial
statements for the six months ended June 30, 1999 and June 30, 2000. 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, which is incorporated into the accompanying prospectus, as
well as the financial information included in this prospectus supplement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- ---------------------------------------
2000 1999 1999 1998 1997
--------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Rental ....................................... $ 80,760 $ 73,009 $ 151,193 $ 121,490 $ 101,292
Mortgage loan interest ....................... 11,219 12,942 28,769 26,118 10,987
Investment income and other .................. 23,719 15,780 38,513 21,960 22,709
--------- --------- ---------- --------- ----------
Total Revenues ............................. 115,698 101,731 218,475 169,568 134,988
--------- --------- ---------- --------- ----------
Expenses:
Depreciation and amortization ................ 17,339 14,883 30,923 24,518 20,784
Operating, general and administrative......... 11,674 6,602 20,612 14,244 11,106
Property costs ............................... 1,035 947 1,884 1,778 1,641
Interest ..................................... 30,870 27,229 57,312 43,846 35,750
--------- --------- ---------- --------- ----------
Total Expenses ............................. 60,918 49,661 110,731 84,386 69,281
--------- --------- ---------- --------- ----------
Income before gain on sale of property
and other costs ............................. 54,780 52,070 107,744 85,182 65,707
Gain on sale of property, net ................. 11,588 9,847 40,983 10,535 5,471
Other, net .................................... 2,485 -- -- -- 1,719
--------- --------- ---------- --------- ----------
Net Income .................................... $ 68,853 $ 61,917 $ 148,727 $ 95,717 $ 72,897
========= ========= ========== ========= ==========
Basic earnings per share ...................... $ 1.22 $ 1.13 $ 2.69 $ 2.01 $ 1.78
========= ========= ========== ========= ==========
Diluted earnings per share .................... $ 1.22 $ 1.13 $ 2.68 $ 2.00 $ 1.76
========= ========= ========== ========= ==========
OTHER DATA:
EBITDA(1) ..................................... $ 117,724 $ 104,029 $ 236,962 $ 164,081 $ 129,431
FFO(2) ........................................ 78,889 68,068 145,137 111,974 87,559
FFO per share, assuming dilution(2) ........... 1.40 1.24 2.61 2.34 2.12
Ratio of earnings to fixed charges(3) ......... 3.20x 3.23x 3.55x 3.17x 3.04x
Ratio of EBITDA to interest
expense(1) .................................. 3.81x 3.82x 4.13x 3.74x 3.62x
Number of properties owned .................... 2,278 2,055 2,264 1,933 1,477
</TABLE>
(Footnotes for table are presented on next page)
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<TABLE>
<CAPTION>
As of June 30, As of December 31,
---------------------- ------------------------------------
2000 1999 1999 1998 1997
--------- --------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Real estate before accumulated
depreciation ................................ $1,489,708 $1,369,948 $1,474,758 $1,274,600 $ 951,305
Mortgage loans held for sale .................. 112,097 277,878 139,703 163,172 251,622
Mortgage loans receivable ..................... 53,630 54,283 57,996 43,343 35,184
Real estate investment securities ............. 191,634 143,563 185,252 113,692 55,185
Total assets .................................. 1,702,346 1,720,801 1,710,796 1,460,429 1,179,198
Total debt .................................... 732,704 802,513 748,359 696,668 619,860
Total shareholders' equity .................... 917,567 870,324 903,632 716,434 522,996
</TABLE>
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(1) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and you should not consider it as an
alternative to cash flow as a measure of liquidity or as an alternative to
net income as an indicator of operating performance. EBITDA is included in
this prospectus supplement because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt. EBITDA as calculated by FFCA may not be comparable to
calculations as presented by other companies, even in the same industry.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations, or FFO, represents net income determined
in accordance with generally accepted accounting principles, excluding gains
(or losses) from debt restructuring and sale of property, plus depreciation
of chain store property. Beginning in 2000, FFCA's ongoing business includes
the origination and sale of mortgage loans through its subsidiary, FFCA
Funding Corporation; therefore, the cash gains or losses on the sale of
these mortgage loans are included in FFCA's FFO. FFO does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and should not be considered as an alternative to net
income as an indication of FFCA's performance or to cash flow as a measure
of liquidity. FFO presented herein is not necessarily comparable to FFO
presented by other real estate companies due to the fact that not all real
estate companies use the same definition.
(3) For the purpose of computing such ratios, "earnings" represents net income
plus fixed charges. "Fixed charges" represents interest expense, which
includes amortization of debt issuance costs.
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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 the
forward-looking statements are reasonable, FFCA can give no assurance that these
plans, intentions or expectations will be achieved. FFCA has included 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" and "-- Regulation" in its Annual Report on
Form 10-K for the year ended December 31, 1999, or the 1999 Form 10-K,
incorporated by reference in the accompanying prospectus. FFCA qualifies these
forward-looking statements by the cautionary statements below.
You should consider the following risks, as well as those listed under
"Business -- Factors Affecting Future Operating Results" in the 1999 Form 10-K
incorporated by reference in the accompanying prospectus, in deciding whether to
purchase the notes:
DEBT FINANCING RISKS
FFCA is subject to the risks associated with debt financing, including the
risk that the cash provided by FFCA's operating activities will be insufficient
to meet required payments of principal and interest and the risk that FFCA will
not be able to repay or refinance existing indebtedness or that the terms of any
refinancing will not be as favorable as the terms of existing indebtedness. If
FFCA is unable to refinance its indebtedness on acceptable terms, it might be
forced to dispose of properties on disadvantageous terms, which might result in
losses.
TRADING MARKET FOR THE NOTES
Prior to the offering, there has been no public market for the notes. The
underwriters have advised FFCA that they intend to make a market in the notes;
however, the underwriters are not obligated to do so. The underwriters may
discontinue any market-making at any time, and there is no assurance that an
active public market for the notes will develop or, if it develops, that it will
continue. Further, declines and volatility in the market for securities
generally, as well as changes in FFCA's financial performance or prospects, may
adversely affect the liquidity of, and trading market for, the notes.
DEPENDENCE ON THE SUCCESS OF THE CONCEPTS AND FACILITIES FINANCED BY FFCA
FFCA invests primarily in chain restaurant properties, convenience stores
and automotive services and parts retail facilities. Investments in these
properties are subject to various risks, including decreases in demand for
products, increased labor costs, (including increases in the minimum wage or
statutorily-mandated benefits), changes in tax laws or environmental
regulations, increases in the number of, and the physical condition of,
competing properties offering similar products and dependence on operators for
the profitable operation of the properties.
Some of the risks the chain restaurant industry is subject to include
changes in consumer demand or food preferences, and contaminated food products.
Some of the risks applicable to the convenience store industry are competition
from new retail facilities offering similar products in the immediate vicinity
of each particular store, pending changes in legislation concerning the sale of
tobacco products, and, to the extent applicable, gasoline margin volatility and
the availability of gasoline supplies. Some of the risks of the automotive
services and parts industry are technological changes in the production and
maintenance of automobiles and changes in consumer preferences in transportation
options. FFCA's success is dependent on the success of these industries in
general and the specific chains and retail facilities which FFCA finances.
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The ability of the operators to pay their obligations to FFCA in a timely
manner depends on a number of 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:
* national, regional and local economic conditions, which may be adversely
affected by industry slowdowns, company relocations, prevailing employment
conditions and levels of employment and other factors;
* local real estate conditions, like competition from facilities having
businesses similar to the chain store facility;
* changes or weaknesses in specific industry segments;
* perceptions by prospective customers of the safety, convenience, services
and attractiveness of the chain store facility and of the related concept;
* changes in demographics, consumer tastes and traffic patterns;
* the ability to obtain and retain capable management;
* retroactive changes to building codes, similar ordinances and other legal
requirements; and
* increases in operating expenses.
In the second quarter of 2000, Quincy's Restaurants, Inc. failed to make
two monthly payments and FFCA terminated the master lease relating to 96 of the
properties. FFCA took a deed instead of foreclosing on the remaining 16
properties, which together contributed 4% to FFCA's first quarter 2000 revenues.
FFCA subsequently leased 97 of the properties to a third party under a lease
that expires September 30, 2000. FFCA is currently negotiating a long-term lease
of the properties; however, there can be no assurance that FFCA will be able to
successfully lease the properties.
OPERATOR, CONCEPT AND GEOGRAPHIC CONCENTRATION
For the six months ended June 30, 2000;
* 24% of FFCA's revenues were generated by FFCA's top five clients;
* 13% of FFCA's revenues were generated by operators of Burger King
restaurant facilities; and
* 35% of FFCA's revenues were generated by properties located in five
states--Florida, Texas, Georgia, Ohio and California.
FFCA may face additional operator concentration risk in the future because
the industries that FFCA finances have been consolidating and FFCA typically
finances the larger operators seeking to consolidate these industries. For the
six months ended June 30, 2000, 7.7% of FFCA's revenues came from RTM, Inc. and
its affiliates (a portion of which is guaranteed by Arby's, Inc. and Triarc
Companies, Inc.). RTM is the largest franchisee of Arby's restaurants and the
owner and franchisor of the Mrs. Winner's and Lee's Famous Recipe concepts.
Thus, RTM as an operator, Burger King as a concept, and properties located in
the states of Florida, Texas, Georgia, Ohio and California, will continue to
have a meaningful impact on FFCA's revenues.
DEPENDENCE ON FRANCHISORS AND OTHERS
Each of the chain store facilities in which FFCA has an investment is
operating as part of a chain of restaurants, convenience stores or automotive
services and parts stores. The management practices of the franchisors of the
chains, a lack of support by such franchisors, franchisee organizations or third
parties, or the bankruptcy or business discontinuation of any 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 these operators, which could have an adverse effect on an
operator's ability to make payments to FFCA under a lease or loan.
RELIANCE UPON LOAN SALE AGREEMENT WITH WASHINGTON MUTUAL
FFCA's loan sale agreement with Washington Mutual has a three-year term.
There is no obligation for Washington Mutual to renew the arrangement upon the
expiration of that term.
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Moreover, the agreement with Washington Mutual does not obligate Washington
Mutual to purchase loans from FFCA. Washington Mutual may elect not to purchase
loans from FFCA because of concentration issues, underwriting criteria, or for
other reasons. Additionally, because Washington Mutual is a regulated lending
institution, its ability to continue to purchase loans from FFCA may be subject
to changes in regulations affecting these institutions.
SECURITIZATION RISKS AND CHANGING MARKET CONDITIONS
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. Volatility in the credit markets may impair FFCA's ability to
successfully securitize its loans in the future.
FFCA has a $600 million loan sale facility with Morgan Stanley. To the
extent FFCA sells loans through the Morgan Stanley loan sale facility or in
connection with a direct securitization, the 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 any
breaches, FFCA will be required to: (1) cure the 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 Morgan Stanley loan sale facility,
FFCA may be required in some circumstances to make payments to Morgan Stanley 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 securitizes. These
interests are in a "first loss" position relative to the more senior securities
sold to third parties, and accordingly carry a greater risk as it relates to the
nonpayment of the loans. At June 30, 2000, FFCA had approximately $192 million
invested in these subordinated interests, which represented less than 12% of
FFCA's total assets. The value of the subordinated interests, excluding those
classified as held-to-maturity 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 that would result in a reduction in their value on
FFCA's financial statements. These reductions could negatively impact FFCA's net
income, stockholders' equity and total assets in the future.
ENVIRONMENTAL MATTERS
The properties FFCA invests in are subject to requirements and potential
liabilities under environmental laws and regulations. For example, some
environmental laws impose liability upon property owners or operators for the
presence of hazardous substances on their property regardless of whether the
owner was responsible for the release of these substances. In addition, a
property owner or operator may be subject to common law claims by third parties
for personal injury based on exposure to hazardous substances or for property
damage based on environmental contamination emanating from a property. The costs
of any required remediation or removal of these substances may be substantial
and the owner's or operator's liability as to any property is generally not
limited under these laws and regulations and could significantly exceed the
value of the property or the aggregate assets of the owner.
Under some environmental laws, like the federal Comprehensive Environmental
Response, Compensation and Liability Act, or CERCLA, a lender may become liable,
as an "owner" or "operator", for the costs 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 or operator caused the environmental
damage. Although the Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996, offers limited protection to lenders from CERCLA
liability, a lender may lose the protection if agents or employees of the lender
are deemed to have exercised decision-making control over the borrower's
environmental compliance or hazardous substance handling and disposal practices
or to have assumed day-to-day management of the operational functions of the
site.
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Under the Resource Conservation and Recovery Act, the Environmental
Protection Agency established a comprehensive regulatory program for the
detection, prevention and cleanup of leaking underground storage tanks UST.
Expanded regulations enacted by the EPA, which became generally effective in
1998, established requirements for:
* installing UST systems;
* upgrading UST systems;
* taking corrective action in response to releases;
* closing UST systems;
* keeping appropriate records; and
* maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases.
These regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements that are at least as stringent
as the federal standards. States with programs approved by the EPA may assume
primary responsibility for enforcing the national requirements.
Various federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials, or
ACMs, when the ACMs are in poor condition or during renovation or demolition of
a building. These laws, as well as common law standards, may impose liability
for releases of ACMs and may permit third parties to seek recovery from owners
or operators of real properties for personal injuries associated with the
releases. Losses arising from the presence of ACMs are not covered by FFCA's
environmental insurance policies.
The environmental due diligence that FFCA performs on a property may not
have identified or reasonably quantified all environmental conditions. FFCA did
not perform environmental audits on most of the properties acquired from its
predecessors. In addition, the environmental condition of a property could in
the future be affected by actions or omissions by borrowers under FFCA's
mortgage loans or by third parties unrelated to the borrowers. While FFCA has
purchased environmental insurance for many of the properties it has financed or
acquired, and for all of those that have USTs or those that are selling gasoline
or other petroleum products, there can be no assurance that the environmental
insurance policies will provide sufficient coverage in the event of
environmental liability at a property, or that applicable deductibles, per loss
limitations and aggregate coverages or exclusions from coverage may not
contribute to a loss to investors or that the environmental insurer will pay
amounts due under the environmental insurance policies. For more detailed
information see "BUSINESS AND PROPERTIES--Regulation."
HEDGING TRANSACTIONS
FFCA invests in derivative financial instruments for the sole purpose of
providing protection against fluctuations in interest rates. From the time
FFCA's fixed-rate mortgage loans are originated until the time they are sold
through a securitization transaction, the company hedges against fluctuations in
interest rates through the use of derivative financial instruments. At June 30,
2000, FFCA had outstanding interest rate swap contracts aggregating $38 million
in notional amount. FFCA intends to terminate these contracts upon
securitization of the related fixed-rate mortgage loans. Based on prevailing
interest rates, FFCA would have paid approximately $314,000 if it had terminated
the swap contracts at June 30, 2000.
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
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adverse effect on FFCA. Income tax treatment of REITs may be modified,
prospectively or retroactively, by legislative, judicial or administrative
action at any time which, in addition to the direct effects the changes might
have, could also affect the ability of FFCA to realize its investment
objectives.
USE OF PROCEEDS
FFCA will use the net proceeds, after expenses, from this offering of the
8.75% Senior Notes due 2010, estimated to be approximately $147,332,500, to
reduce amounts outstanding under FFCA's $350 million unsecured revolving credit
facility with Bank of America. As of September 15, 2000, the amount outstanding
under the credit facility was $188 million. Interest under the credit facility
is due in periodic installments at a rate equal to the 30-day London Interbank
Offered Rate, or LIBOR, plus 125 basis points. The credit facility expires in
September 2003.
CAPITALIZATION
The following table shows the capitalization of FFCA as of June 30, 2000
and the adjusted capitalization of FFCA as of that date after giving effect to
the issuance and sale of the notes offered in this prospectus and the
application of the net proceeds from the offering. This information should be
read together with the information under "Prospectus Supplement Summary,"
"Selected Financial Data" and FFCA's consolidated financial statements and
related notes incorporated by reference into the accompanying prospectus.
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------------------
Historical As Adjusted
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
8.75% Senior Notes due 2010 ....................................... $ -- $ 150,000
Notes Payable ..................................................... 617,704 617,704
Credit Agreement(1) ............................................... 115,000 --
---------- ----------
Total Debt ..................................................... 732,704 767,704
---------- ----------
Shareholders' Equity:
Preferred stock, par value $.01 per share, 10 million shares
authorized, none issued or outstanding ......................... -- --
Common stock, par value $.01 per share, authorized 200 million
shares, issued and outstanding 56,427,416 shares ............... 564 564
Capital in excess of par value ................................... 933,450 933,450
Accumulated other comprehensive loss ............................. (1,150) (1,150)
Cumulative net income ............................................ 515,403 515,403
Cumulative dividends ............................................. (530,700) (530,700)
---------- ----------
Total Shareholders' Equity ..................................... 917,567 917,567
---------- ----------
Total Capitalization ........................................... $1,650,271 $1,685,271
========== ==========
</TABLE>
----------
(1) As of September 15, 2000, the amount outstanding under the credit facility
with Bank of America was $188 million.
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SELECTED FINANCIAL DATA
FFCA derived the historical financial information below from its audited
financial statements for 1995 through 1999 and unaudited financial statements
for the six months ended June 30, 1999 and June 30, 2000. The information 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>
Six Months Ended June 30, Year Ended December 31,
------------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Rental .................................. $ 80,760 $ 73,009 $ 151,193 $ 121,490 $ 101,292 $ 95,612 $ 86,182
Mortgage loan interest .................. 11,219 12,942 28,769 26,118 10,987 15,738 14,118
Investment income and other ............. 23,719 15,780 38,513 21,960 13,672 6,955 2,283
Interest (related party) ................ -- -- -- -- 9,037 2,861 --
-------- --------- --------- --------- --------- --------- ---------
Total Revenues .......................... 115,698 101,731 218,475 169,568 134,988 121,166 102,583
-------- --------- --------- --------- --------- --------- ---------
Expenses:
Depreciation and amortization ........... 17,339 14,883 30,923 24,518 20,784 20,654 21,201
Operating, general and administrative ... 11,674 6,602 20,612 14,244 11,106 11,488 10,283
Property costs .......................... 1,035 947 1,884 1,778 1,641 2,041 2,046
Interest ................................ 30,543 26,721 56,297 42,846 34,764 25,974 15,276
Interest (related party) ................ 327 508 1,015 1,000 986 973 961
-------- --------- --------- --------- --------- --------- ---------
Total Expenses ......................... 60,918 49,661 110,731 84,386 69,281 61,130 49,767
-------- --------- --------- --------- --------- --------- ---------
Income before gain on sale of property
and other costs ......................... 54,780 52,070 107,744 85,182 65,707 60,036 52,816
Unrealized gain on real estate
investment securities ................... 3,147 -- -- -- -- -- --
Gain on sale of property, net ............ 11,588 9,847 40,983 10,535 5,471 9,899 977
Equity in net income (loss) of affiliate . -- -- -- -- 1,719 (1,396) --
Extraordinary item-loss on early
extinguishment of debt .................. -- -- -- -- -- -- (2,464)
Income tax expense ....................... 662 -- -- -- -- -- --
-------- --------- --------- --------- --------- --------- ---------
Net Income ............................... $ 68,853 $ 61,917 $ 148,727 $ 95,717 $ 72,897 $ 68,539 $ 51,329
======== ========= ========= ========= ========= ========= =========
Basic earnings per share ................. $ 1.22 $ 1.13 $ 2.69 $ 2.01 $ 1.78 $ 1.70 $ 1.28
======== ========= ========= ========= ========= ========= =========
Diluted earnings per share ............... $ 1.22 $ 1.13 $ 2.68 $ 2.00 $ 1.76 $ 1.69 $ 1.27
======== ========= ========= ========= ========= ========= =========
Other Data:
EBITDA(1) ................................ $117,724 $ 104,029 $ 236,962 $ 164,081 $ 129,431 $ 116,140 $ 88,767
FFO(2) ................................... 78,889 68,068 145,137 111,974 87,559 79,492 73,539
FFO per share, assuming dilution(2) ...... 1.40 1.24 2.61 2.34 2.12 1.96 1.83
Cash flows from operating activities ..... 65,363 63,125 145,940 112,300 83,129 85,949 78,621
Cash flows from investing activities ..... 11,493 (249,296) (238,996) (293,984) (204,326) (148,629) (259,715)
Cash flows from financing activities ..... (71,720) 200,236 93,932 178,435 116,977 71,963 171,066
Ratio of earnings to fixed charges(3) .... 3.20x 3.23x 3.55x 3.17x 3.04x 3.54x 4.16x
Ratio of EBITDA to interest expense(1) ... 3.81x 3.82x 4.13x 3.74x 3.62x 4.31x 5.47x
Number of properties owned ............... 2,278 2,055 2,264 1,933 1,477 1,371 1,261
Number of properties represented
by interests in securities .............. 2,862 1,796 2,888 1,483 626 243 --
</TABLE>
(Footnotes for table are located on next page)
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<PAGE>
<TABLE>
<CAPTION>
As of June 30, Year Ended December 31,
---------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Real estate before accumulated
depreciation ............................. $1,489,708 $1,369,948 $1,474,758 $1,274,600 $ 951,305 $868,215 $794,580
Mortgage loans held for sale .............. 112,097 277,878 139,703 163,172 251,622 -- --
Mortgage loans receivable ................. 53,630 54,283 57,996 43,343 35,184 57,808 199,486
Real estate investment securities ......... 191,634 143,563 185,252 113,692 55,185 29,733 --
Total assets .............................. 1,702,346 1,720,801 1,710,796 1,460,429 1,179,198 988,776 843,504
Total debt ................................ 732,704 802,513 748,359 696,668 619,860 457,956 317,202
Total shareholders' equity ................ 917,567 870,324 903,632 716,434 522,996 495,370 493,817
</TABLE>
------------
(1) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and investors should not consider it as
an alternative to cash flow as a measure of liquidity or as an alternative
to net income as an indicator of operating performance. EBITDA is included
in this prospectus supplement because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt. EBITDA as calculated by FFCA may not be comparable to
calculations as presented by other companies, even in the same industry.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations, or FFO, represents net income determined
in accordance with generally accepted accounting principles, excluding gains
(or losses) from debt restructuring and sales of property, plus depreciation
of chain store property. Beginning in 2000, FFCA's ongoing business includes
the origination and sale of mortgage loans through its subsidiary, FFCA
Funding Corporation; therefore, the cash gains or losses on the sale of
these mortgage loans are included in FFCA's FFO. FFO does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and should not be considered as an alternative to net
income as an indication of FFCA's performance or to cash flow as a measure
of liquidity. FFO presented herein is not necessarily comparable to FFO
presented by other real estate companies due to the fact that not all real
estate companies use the same definition.
(3) For the purpose of computing such ratios, "earnings" represents net income
plus fixed charges and REIT formation transaction costs. "Fixed charges"
represents interest expense, which includes amortization of debt issuance
costs.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
FFCA is a self-administered REIT which provides real estate financing to
multi-unit operators of chain restaurants, convenience stores and automotive
services and parts outlets. FFCA offers financing through various products
including mortgage loans, equipment loans, construction financing and long-term
real estate leases. At June 30, 2000, FFCA's servicing portfolio represented
approximately 5,600 properties, including chain store mortgage loans serviced
for others. FFCA had interests in 5,308 properties representing nearly $1.9
billion in gross investments in chain store properties located throughout the
United States and in Canada, although investments in Canada are not significant.
In addition to this geographic diversification, more than 490 different
operators in approximately 160 retail chains comprise the portfolio. FFCA's
investment portfolio included 2,446 chain store properties represented by
investments in real estate mortgage loans and properties subject to leases and
2,862 properties represented by securitized mortgage loans in which FFCA holds a
residual interest.
FFCA entered into a three-year loan sale agreement beginning in January
2000 with Washington Mutual Bank, FA, where Washington Mutual agreed to purchase
loans that FFCA originates and services. This alliance with the nation's eighth
largest financial services company to be its exclusive provider of chain store
loans represents a significant source of new capital. FFCA expects that this
will reduce its reliance on debt and shareholder equity as sources of capital to
fund its continued growth. Under the loan sale agreement, Washington Mutual will
purchase mortgage loans from FFCA at the time the loans are originated; however,
because Washington Mutual wishes to limit its concentration of individual
borrowers to a specific dollar amount, Washington Mutual does not purchase every
loan that FFCA originates. Therefore, while FFCA may no longer have to rely on
accumulating large amounts of mortgage loans, using its bank lines of credit to
carry the loans, for sale through securitization transactions, it may continue
to securitize loans in some cases. In connection with the loan sale agreement, a
warrant was issued to Washington Mutual to purchase 2 million shares of FFCA
common stock at a price of $25.47 per share. The warrant expires in December
2009, or earlier, in accordance with the terms of the warrant agreement.
On January 4, 2000, FFCA established a nonqualified REIT subsidiary, FFCA
Funding Corporation, or "Funding Corp.," to enhance FFCA's access to the capital
markets. Funding Corp., a taxable corporation, will originate mortgage loans for
sale to Washington Mutual. FFCA will then service the mortgage loans. FFCA
transferred, among other things, its future mortgage loan origination business,
including a transfer of certain employees and an assignment of the Washington
Mutual loan sale agreement, to Funding Corp. in exchange for 10 shares of
newly-issued, nonvoting preferred stock. The preferred stock, which represents
all of the issued and outstanding stock of its class, entitles FFCA to 99% of
any dividends declared by Funding Corp. Certain executive officers of FFCA own
all of the outstanding voting common stock of Funding Corp. In connection with
the start up of this new company, FFCA advanced $5 million to Funding Corp.
under a one-year note agreement, with interest due monthly and principal due at
maturity.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 2000, FFCA and its subsidiary, Funding Corp.,
originated $169 million in new real estate financings ($41 million in chain
restaurant properties, $113 million in convenience stores and $15 million in
automotive services and parts stores). Over 90% of the new financings during the
second quarter of the year 2000 were mortgage loans and notes ($157 million) and
the balance were properties subject to operating leases ($12 million). During
the quarter, $150 million in loans were sold to Washington Mutual under the loan
sale agreement that became effective in January 2000, resulting in gains
totaling $5 million, net of the estimated liability for obligations under a
limited loan loss provision. It is anticipated that a large percentage of the
loans originated during the remainder of the year will be sold under this loan
sale agreement instead of being held in FFCA's portfolio pending sale through a
securitization transaction. This strategy will have the effect
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<PAGE>
of reducing the rate of growth in FFCA's mortgage interest income (since the
loans are sold on the same day as they are originated, they generate no interest
income for FFCA) and increasing net income through the recognition of cash gains
on the sale of the loans. Due to the unpredictable timing of the sale of loans,
the recognition of gains is expected to increase the volatility of FFCA's
earnings on a quarter-to-quarter basis.
Under the Washington Mutual loan sale agreement, Funding Corp. originates
loans and simultaneously sells them to Washington Mutual; therefore, Washington
Mutual effectively funds the loans at origination. Accordingly, Funding Corp.
does not require significant liquidity or access to capital to originate loans.
FFCA's other investment activities are funded initially by draws on its
revolving credit facilities and cash generated from operations. At June 30,
2000, FFCA had $235 million available on its $350 million bank revolving loan
facility and $348 million available on its $600 million loan sale facility
described below. On September 15, 2000, FFCA amended and renewed its bank
revolving loan facility. As of September 15, 2000, FFCA had $188 million
outstanding under this facility. The current bank revolving loan facility
expires in September 2003.
FFCA has a $600 million loan sale facility with Morgan Stanley. This loan
sale facility permits FFCA to sell loans on a regular basis to a trust for an
agreed upon advance rate until the trust accumulates a sufficiently large pool
of loans for sale through a larger securitization transaction. Generally, FFCA
intends to use this loan facility in circumstances where Washington Mutual
declines the loan or where the amount of a loan origination transaction exceeds
the amount that Washington Mutual will purchase due to the limit on its
concentration of loans to an individual borrower group. FFCA acts as servicer
for the loans following the sale to the trust. During the quarter ended June 30,
2000, FFCA sold 119 loans with an aggregate principal balance of $74 million
through the loan sale facility. Cash proceeds from the sale amounted to
approximately 85% of the mortgage loan balance with the remaining sale proceeds
represented by trust certificates. These retained subordinated investment
securities, totaling approximately $14 million, were accounted for as the sale
of mortgage loans and the purchase of trust certificates. The net cash proceeds
approximated $63 million and were used to reduce amounts outstanding under
FFCA's bank revolving loan facility. The subordinated investment securities held
by FFCA are the last of the securities to be repaid from the loan pool, so that
if any of the underlying mortgage loans default, these securities take the first
loss. Any future credit losses in the securitized loan pool would be
concentrated in these subordinated investment securities retained by FFCA;
however, FFCA originates and services mortgage loans and has the infrastructure
and resources to deal with potential defaults on the securitized portfolio (as
it does with the mortgage loans it holds for investment). As of June 30, 2000,
delinquent mortgage loans represent approximately 1% of the total securitized
loan pool balance.
While FFCA intends to originate mortgage loans through its subsidiary,
Funding Corp., for sale to Washington Mutual, it may continue to securitize
loans in some cases. Several factors affect FFCA's ability to complete
securitizations of its loans, including conditions in the securities markets
generally, conditions in the asset-backed securities market specifically, the
credit quality of FFCA's loans, compliance of FFCA's loans with the eligibility
requirements established by the securitization documents and the absence of any
material downgrading or withdrawal of ratings given to certificates issued in
FFCA's previous securitizations. Adverse changes in any of these factors could
impair FFCA's ability to originate and sell loans on a favorable or timely
basis. FFCA's inability to sell or securitize loans may adversely affect FFCA's
financial performance and growth prospects. The credit markets have in recent
years experienced volatility. Continued volatility may impair FFCA's ability to
successfully securitize its loans in the future. In addition, unpredictability
in the debt and equity markets may impact FFCA's cost of borrowings and ability
to efficiently raise equity capital. Accordingly, the cost of raising debt or
equity capital may be higher in the future, which could adversely impact FFCA's
results of operations.
During the quarter, FFCA accessed the debt markets by issuing medium term
notes. On June 26, 2000, FFCA issued $15 million in unsecured notes due in 2010,
bearing interest at 8.905%. The note proceeds were used to pay down FFCA's bank
revolving line of credit. In April 2000, Moody's Investors Service upgraded the
senior unsecured debt rating of FFCA to Baa2 from Baa3. According
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<PAGE>
to Moody's, the rating upgrade was based on FFCA's strong underwriting and
leadership in finance for restaurant properties, the further diversification of
FFCA's funding sources through the loan sale facility with Washington Mutual and
FFCA's controlled expansion beyond the chain restaurant property industry into
convenience/gas stores and automotive parts and services outlets.
Cash generated from operations provides distributions to the shareholders
in the form of quarterly dividends. Operations during the six months ended June
30, 2000 provided net cash of $65 million as compared to $63 million for the six
months ended June 30, 1999. FFCA also plans to use cash generated from
operations during 2000 to reduce amounts outstanding on its bank revolving loan
facility. FFCA intends to pay down its bank debt in order to provide flexibility
for the payment of the senior notes, totaling $150 million, that mature in
November. Depending on the debt markets, FFCA may issue new unsecured debt or
may in the interim use its bank revolving loan facility to pay the senior notes
until new debt or equity securities of FFCA are issued.
FFCA has a dividend reinvestment plan that allows shareholders to acquire
additional shares of FFCA stock by automatically reinvesting their quarterly
dividends. As of June 30, 2000, shareholders owning approximately 6% of the
outstanding shares of FFCA common stock participate in the dividend reinvestment
plan and dividends reinvested during the quarter ended June 30, 2000 totaled
approximately $1.8 million. FFCA declared a second quarter 2000 dividend of
$0.53 per share, or $2.12 per share on an annualized basis, payable on August
18, 2000 to shareholders of record on August 10, 2000. Management anticipates
that cash generated from operations will be sufficient to meet operating
requirements and provide the level of shareholder dividends required to maintain
FFCA's status as a REIT.
On May 1, 2000, FFCA paid the principal due on a mortgage on its corporate
headquarters building, payable to its affiliate in the amount of $8.5 million,
together with accrued interest, and additional interest in the amount of $1.13
million as provided in the related loan agreement. In addition, FFCA entered
into a contract with this affiliate to purchase a parcel of land (3.6 acres) for
approximately $1.9 million. The land parcel is located adjacent to FFCA's
current corporate headquarters site and may be used for the future expansion of
FFCA's corporate headquarters.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FFCA invests in certain financial instruments that are subject to various
forms of market risk such as interest rate fluctuations, credit risk and
prepayment risk. FFCA's primary exposure is the risk of loss that may result
from the potential change in the value of its mortgage loans and investments
held for sale as a result of changes in interest rates.
For those fixed-rate mortgage loans originated by FFCA for sale through a
securitization transaction, FFCA generally hedges against fluctuations in
interest rates through the use of derivative financial instruments (primarily
interest rate swap contracts) from the time the fixed-rate mortgage loans are
originated until the time they are sold. FFCA intends to terminate these
contracts upon securitization of the related fixed-rate mortgage loans and, at
that time, both the gain or loss on the sale of the loans and the gain or loss
on the termination of the interest rate swap contracts will be measured and
recognized in the statement of operations. At June 30, 2000, FFCA had
outstanding interest rate swap contracts aggregating $38 million in notional
amount. Based on the level of interest rates prevailing, FFCA would have paid
approximately $314,000 if it had terminated the swap contracts at June 30, 2000.
FFCA estimates that a hypothetical one percentage point increase or
decrease in long-term interest rates at June 30, 2000 would impact the financial
instruments described above and result in a change to net income of
approximately $170,000. This sensitivity analysis contains certain simplifying
assumptions (for example, it does not consider the impact of prepayment risk or
credit spread risk). Therefore, although it gives an indication of FFCA's
exposure to interest rate changes at June 30, 2000, it is not intended to
predict future results and FFCA's actual results will likely vary.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2000 Compared to the Three and Six
Months Ended June 30, 1999. FFCA's operations for the second quarter of 2000
resulted in net income of $33.9 million
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($.60 per share) as compared to net income of $36.5 million ($.65 per share) in
1999. Net income for the six months ended June 30, 2000, rose to $68.9 million
($1.22 per share) from $61.9 million ($1.13 per share) for the comparable period
in 1999. Net income for the quarter was impacted by lower growth in rental
revenue due to nonperformance of a master lease (discussed below) and increases
in general and administrative expenses.
Total revenues rose to $57 million during the quarter from $53 million in
the comparable quarter of 1999 primarily due to the growth of FFCA's investment
in securitized loan pools. Revenues for the six months ended June 30, 2000,
showed a similar increase from the comparable period of the prior year and also
increased due to the growth in FFCA's portfolio of properties subject to leases.
In prior quarters, FFCA's primary source of revenue growth had been rental
revenues generated by new investments in chain store properties; however, during
1999, FFCA made a strategic decision to focus on originating mortgage loan
products rather than sale-leasebacks because of better shareholder returns.
After consideration of various options, in December 1999, FFCA entered into a
three-year loan sale agreement with Washington Mutual Bank whereby Washington
Mutual agreed to purchase loans that FFCA originates and services. Under the
loan sale agreement, Washington Mutual will purchase mortgage loans from FFCA at
the time the loans are originated; however, there can be no assurance that
Washington Mutual will purchase every loan that FFCA originates, therefore, FFCA
may continue to securitize loans in some cases. Accordingly, growth in earnings
of FFCA in the near future is anticipated to be primarily from gains on the sale
of mortgage loans originated by FFCA and, to a lesser extent, from increases in
real estate investment securities income.
During the quarter ended June 30, 2000, rental revenue was negatively
impacted by the nonperformance of certain properties owned by FFCA that were
leased to Quincy's Restaurants, Inc. ("Quincy's"), a family restaurant chain.
The chain leased 96 properties from FFCA under a master lease, and for the first
quarter of 2000 contributed approximately 4% to FFCA's total revenues. Quincy's,
with monthly lease and loan payments aggregating nearly $800,000, failed to make
its April and May payments. FFCA terminated the master lease on May 31, 2000 and
took a deed in lieu of foreclosure on 16 additional properties securing certain
related loans. On June 8, 2000, FFCA signed an agreement with a new restaurant
operator to lease and operate 97 of the properties and during the term of this
new agreement, FFCA intends to negotiate a long-term lease arrangement with
respect to these properties. Fifteen of the properties that were the subject of
the deed in lieu of foreclosure remain vacant and will be remarketed for lease
or sale.
Certain of the leases and mortgages in FFCA's portfolio also provide for
contingent revenues based on a percentage of the gross sales of the related
chain store properties. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements, clarifying generally accepted accounting principles related to
accounting for contingent rental revenues. This new accounting guidance requires
companies to recognize contingent rentals as revenue when the change in the
factor on which the contingent lease payment is based actually occurs. Recently,
the SEC issued SAB 101B, deferring the implementation of SAB 101 until the
fourth quarter of 2000 and, accordingly, FFCA has delayed its adoption of SAB
101 until that time. Currently, FFCA recognizes estimated contingent revenues
ratably throughout the year when it is probable that a property will exceed the
sales threshold where percentage rental revenues are due, with verification of
the actual amount of percentage revenues due received from the operator at
various times during the year, based on the operator's reporting requirements.
Since many of the operators of FFCA's chain store properties report sales on a
calendar year basis, it is anticipated that, had FFCA adopted SAB 101, the
effect on the June 30, 2000 financial statements would have been a shifting of
the recognition of contingent revenues that otherwise would have been recognized
in the first half of the year to the latter part of the year.
Mortgage interest income generated by FFCA's loan portfolio totaled $5.1
million for the quarter ended June 30, 2000 as compared to $8 million for the
second quarter of 1999. The majority of the mortgage interest income is
generated by mortgage loans that are held for sale. Increases and decreases in
mortgage interest income between quarters have been, and will continue to be,
impacted by the amount of loans held for sale and the timing of the sale of
these loans. It is anticipated that a
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large percentage of the loans originated during the remainder of the year will
be sold under the loan sale agreement with Washington Mutual instead of being
held in FFCA's portfolio pending sale through a securitization transaction;
therefore, it is expected that mortgage interest income will continue to be a
smaller percentage of FFCA's revenue in the current year than in the prior year.
For those loans that are sold through securitization transactions, FFCA no
longer receives mortgage interest income from the mortgages it has sold;
however, it retains certain interests through the purchase of subordinated
investment securities. These securities generate revenues that are included in
"Real Estate Investment Securities Income" in the accompanying financial
statements. The increase in real estate investment securities income between
1999 and 2000 is due primarily to the addition of subordinated investment
securities related to the securitization transactions that closed in 1999 and
2000.
Expenses increased to $31.4 million during the quarter from $26 million in
the comparable quarter of 1999. This increase was primarily due to increased
operating, general and administrative expenses and higher interest expense.
Operating, general and administrative expenses in the second quarter of 2000
were $3 million higher than the same quarter in 1999 due to several factors.
Salary expense increased from the prior year due primarily to the addition of
loan origination and servicing personnel required to administer FFCA's growing
loan origination and servicing activities. In addition, FFCA incurred consulting
costs of approximately $600,000 during the quarter to evaluate the feasibility
and extent of opportunities in providing internet-based products and services to
chain stores. FFCA does not anticipate material ongoing expenses related to this
project. Interest expense for the quarter also increased slightly due to an
increase in interest rates. Expenses for the six months ended June 30, 2000,
showed similar increases from the comparable period of 1999.
During the quarter, FFCA sold 26 properties, as compared to 20 properties
sold in the second quarter of 1999, and recorded net gains totaling $1.1 million
on these sales, as compared to net gains of $1.4 million recorded in the second
quarter of 1999. Loan prepayments received during the quarter on securitized
mortgage loans represented another three properties removed from FFCA's
servicing portfolio. During the quarter, mortgage loans originated by Funding
Corp., together with loans that FFCA sold into its loan sale facility during
1999 and 2000, were sold to Washington Mutual resulting in gains totaling
approximately $5 million. Cash proceeds from the sales of property and from
mortgage loan and note payoffs during the quarter were used to pay down FFCA's
bank credit facility.
Fiscal Year Ended December 31, 1999 Compared to Fiscal Years Ended December
31, 1998 and 1997. FFCA had net income of $148.7 million ($2.68 per share,
assuming dilution) in 1999 as compared to $95.7 million ($2.00 per share) in
1998 and $72.9 million ($1.76 per share) in 1997. The increases in net income
each year resulted from increased revenues due to the continued growth in FFCA's
real estate investment portfolio and from increased gains on the sale of assets.
Revenues rose to $218 million in 1999 from $170 million in 1998 and $135 million
in 1997. Gains on the sale of assets rose to $41 million in 1999 from $11
million in 1998 and $5 million in 1997.
FFCA's primary source of revenues continues to be rental revenues generated
by its portfolio of chain store properties that are leased to operators on a
triple-net basis. Rental revenues represented 69% of total revenues in 1999 as
compared to 72% in 1998 and 75% in 1997. With the introduction of FFCA's
mortgage financing products in 1995, the proportion of total revenues generated
by lease financing has decreased, though lease revenues generated each year
continue to be higher than in the previous year. Most of the increases in rental
revenues each year resulted from new investment activity. New investments in
property subject to operating leases totaled $258 million in 1999, $365 million
in 1998 and $140 million in 1997. Generally, property purchases occur throughout
the year, resulting in weighted average balances for these new investments of
$129 million in 1999, $145 million in 1998 and $43 million in 1997. Weighted
average base lease rates on the new investments were 9.9% in 1999 as compared to
9.9% in 1998 and 9.3% in 1997. Partially offsetting the revenue increases
generated by the new investments were decreases in rent revenues related to
properties sold.
Approximately one-half of the properties in FFCA's portfolio provide for a
base rental plus contingent rentals based on a percentage of the operator's
gross sales of the related chain stores. In
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addition, a small percentage of the mortgages originated by FFCA provide for
additional interest based on a percentage of the operator's gross sales of the
related chain stores. Such contingent rentals and additional interest aggregated
$8.3 million in 1999 as compared to $7.9 million in 1998 and $6.7 million in
1997. The increases relate primarily to increases in individual store-level
sales volumes and to chain stores whose sales levels have, for the first time,
exceeded the threshold where contingent rentals or additional interest are due.
Generally, leases without the contingent rental provision provide for rent
increases during the lease term based on increases in the consumer price index
or other rent escalation features.
A growing portion of FFCA's income relates to the origination and
subsequent sale of mortgage loans through securitization transactions. Mortgage
interest income amounted to 13% of revenues in 1999 as compared to 15% of
revenues in 1998 and 1997, including related party interest income in 1997 from
indirect investments in mortgage loans through an unconsolidated taxable
affiliate, FFCA Mortgage Corporation. FFCA originated $1.1 billion in mortgage
loans in 1999, $534 million in 1998 and $362 million in 1997. Rates achieved on
the loans originated during 1999 averaged 9.6% as compared to 8.9% achieved
during 1998 and 9.2% in 1997. This change in rates is reflective of the overall
changes in the interest rate environment over the years. The amount of mortgage
interest income generated each year has been impacted by the amount of loans
originated for sale each year 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 through securitization transactions, it
retains certain interests through the purchase of subordinated investment
securities that FFCA intends to hold to maturity. These securities generate
revenues that are included in "Real Estate Investment Securities Income" in the
accompanying financial statements and represented 14% of total revenues in 1999
as compared to 8% in 1998 and 6% in 1997. Mortgage prepayments represented 126
chain store properties in 1999, 49 chain store properties in 1998 and 60 chain
store properties in 1997. A portion of FFCA's investment portfolio,
approximating $58 million in 1999 and $43 million in 1998, represents mortgage
loans receivable that are not being held for sale. These loans generally have
short terms or other loan features that make them less marketable for sale or
securitization transactions. FFCA plans to hold these loans to maturity.
FFCA's revenue is generated by a real estate investment portfolio that is
diversified by industry, by concept, by geographical area and by operator. FFCA
finances chain store real estate in three industries, representing over 5,300
locations throughout the United States and Canada, though investments in Canada
are not significant. During the year ended December 31, 1999, 78% of the
revenues generated by the portfolio reflect restaurant investments, 17% reflect
convenience store investments and 5% reflect automotive services and parts
investments, as compared to 91%, 7% and 2%, respectively, in 1998. With the
addition of the convenience store and automotive services and parts industries
in 1997, FFCA's portfolio has expanded to include over 150 different chains,
including such well-known chains as Applebee's, Arby's, Burger King, Checker
Auto Parts, Chevron, Circle K, Citgo, Cracker Barrel Old Country Store,
Hardee's, Jack in the Box, Long John Silver's, Midas Muffler Shops, Pizza Hut,
7-Eleven, Taco Bell, Texaco, Valvoline Instant Oil Change and Wendy's. The lease
or mortgage loan agreements are with approximately 480 operators represented
within FFCA's investment portfolio. Most of these are multi-unit operators,
though no single operator represented 10% or more of FFCA's total portfolio
revenues during 1999, 1998 or 1997. As FFCA continues to grow, management
expects the portfolio to continue to become more diversified.
With the growth achieved in FFCA's real estate investment portfolio,
expenses grew to $110.7 million in 1999 as compared to $84.4 million in 1998 and
$69.3 million in 1997, primarily due to increases in interest expense each year.
Interest expense rose by $13.5 million in 1999 and $8.1 million in 1998 due to
the use of borrowings for investments in chain store properties. FFCA's weighted
average debt outstanding increased to $742 million in 1999 from $590 million in
1998 and $470 million in 1997. In addition, FFCA's borrowing rate has changed
over the past several years due to changes in FFCA's mix of long-term and
short-term debt, together with overall changes in the interest rate environment.
FFCA's effective borrowing rate increased from 6.93% during 1997 to 7.01% during
1998 and 7.30% during 1999.
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Operating, general and administrative expenses in 1999 included consulting
and other costs aggregating $2.975 million, incurred in connection with the
exploration of strategic alternatives. Excluding these non-routine costs,
operating, general and administrative expenses for 1999 increased 24% from 1998,
as compared to 1998's increase of 28% over 1997, and remain constant over the
past three years at approximately 8% of revenues. The increase in operating
expenses between 1997 and 1999 resulted primarily from the addition of personnel
needed to expand FFCA's line of financial products and to increase FFCA's
investment origination and servicing capacity. FFCA's continued investment in
computer system technology has increased the efficiency of its information and
portfolio servicing systems, which enables FFCA to expand its revenue base while
containing operating costs. Property costs, which are primarily related to
vacant or underperforming properties, have remained relatively unchanged at
approximately 1% of revenues.
During 1999, FFCA continued to originate loans held for sale through
securitization transactions. Certain mortgage loans originated by FFCA, its
predecessors and affiliates totaling $1.1 billion in 1999, $335 million in 1998
and $261 million in 1997 were securitized and Secured Franchise Loan Trust
Certificates were sold to investors through a trust. The majority of each
securitized loan pool was sold to third parties, while FFCA retained the
subordinated investment securities ranging from 9% to 12.5% of the mortgage loan
pools' balance. FFCA also retained the servicing rights on the mortgage loans it
sold.
The retained securities, totaling $185 million and $114 million at December
31, 1999 and 1998, respectively, generated $31.1 million, $14.4 million and $7.7
million of revenue in 1999, 1998 and 1997, respectively. The subordinated
investment securities held by FFCA are the last of the securities to be repaid
from the loan pool, so that if any of the underlying mortgage loans default,
these securities take the first loss. Any future credit losses in the
securitized loan pool would be concentrated in these subordinated investment
securities retained by FFCA; however, FFCA originates and services mortgage
loans and has the infrastructure in place to deal with potential defaults on the
securitized portfolio (as it does with the mortgage loans it holds for
investment). To date, delinquencies in the securitized loan pools represent less
than 1% of the total mortgage loan pool balance.
FFCA recorded net gains of $41 million on the sale of property during 1999
as compared to $10.5 million during 1998 and $5.5 million in 1997. Of these
gains, the sale of mortgages generated gains totaling approximately $36.1
million in 1999, $6.2 million in 1998 and $430,000 in 1997. The gains on the
sale of mortgages represent the difference between the carrying amount of the
mortgage loans sold and their adjusted sales price. The gains on the sale of the
mortgage loans were adjusted for estimated probable losses under the
subordination provisions of the securitization transactions. The remaining gains
represent the net effect of gains and losses from sales of property, which occur
primarily through the disposition of underperforming properties and through the
lessee's exercise of purchase options. Approximately 60% of FFCA's land and
building leases provide for purchase options and approximately one-half of these
options are currently exercisable. During 1999, FFCA sold 87 properties and
related equipment as compared to 57 properties sold in 1998 and 55 properties
sold in 1997; however, only 13 properties were sold through purchase options in
1999 and only nine and 12 such properties were sold through purchase options in
1998 and 1997, respectively. Where applicable, the lessee also has the option to
purchase equipment at the end of the related equipment lease term. Generally,
the purchase options are exercisable at fair market value (but not less than
original cost in most cases). FFCA expects that the exercise of purchase options
will continue to be insignificant.
FFCA periodically reviews its real estate portfolio for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
property may not be recoverable, such as may be the case with vacant properties.
If an impairment loss is indicated, the loss is measured as the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Gain on
the sale of property on the consolidated statements of income for the years
ended December 31, 1999, 1998 and 1997 is net of approximately $1.6 million, $4
million and $1.9 million, respectively, of loss related to vacant and
underperforming properties. Vacant properties held for sale represent less than
1% of
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FFCA's total real estate investment portfolio. The vacancy level in the
portfolio is currently at less than 1% and has remained at less than 2% since
FFCA became a REIT in 1994.
BUSINESS AND PROPERTIES
BUSINESS OBJECTIVES AND STRATEGY
FFCA seeks to enhance its operating performance and financial position:
* through continued investment activity;
* by controlling expenses through greater operational efficiencies and
economies of scale;
* through the receipt of contractual lease escalations; and
* by increasing its use of internally generated cash flow for
investments or other transactions that strengthen its financial
position.
FFCA seeks to achieve growth in cash flow, while maintaining low portfolio
investment risk, through diligent adherence to our tested underwriting criteria,
investment diversification and conservative capital structure.
FFCA's primary business strategy is to become the dominant single financing
source for the chain store industry. Over time, FFCA developed its strategic
position in response to the capital markets and the changing needs of its
customers. When FFCA became a REIT in 1994, its main focus was providing a
long-term lease product to the chain restaurant industry. Then, in order to
serve those potential customers who wanted to own, rather than lease, property,
FFCA began providing mortgage loan financing in 1995. To further increase its
product flexibility, FFCA started offering variable rate mortgages and developed
a construction-financing program for its customers. As these products were being
developed, FFCA also began exploring the idea of expanding from chain restaurant
financing to address the financing needs of the convenience store and automotive
aftermarket industries. These industries were targeted by FFCA because they meet
FFCA's existing investment criteria and the real estate they require is similar
in many respects to the locations chosen by chain restaurants. After extensive
research on these industries, FFCA began financing convenience stores and
automotive services and parts outlets in 1997. These industries are now an
increasing part of FFCA's total market. For the six months ended June 30, 2000,
76% of the revenues generated by the portfolio reflect restaurant investments,
18% reflect convenience store investments and 6% reflect automotive services and
parts investments, as compared to the year ended December 31, 1996 where over
99% of revenues were reflected in restaurant investments. During 1999, FFCA made
a strategic decision to focus on offering mortgage loan products, rather than
long-term leases, because they provided better returns. As a result, mortgage
loans represented over 80% of FFCA's new investments in 1999 and this trend is
likely to continue. With increasing demand for FFCA's mortgage financing
products, FFCA began exploring alternative sources of capital. The result was an
alliance with Washington Mutual, the nation's eighth largest financial services
company, which decreases FFCA's dependence on the public capital markets, both
debt and equity, by providing a consistent source of capital to fund mortgage
loan products. This new alliance, along with FFCA's traditional capital sources,
including the mortgage loan securitization market, has increased FFCA's
financial flexibility. FFCA will continue to consider appropriate new investment
opportunities in the future.
FFCA now provides financing to the nation's three largest chain store
industries: restaurant, convenience store, and automotive aftermarket. These
three chain store industries have so many established locations that the markets
are consolidating more often than growing through new store creation. Because of
this continuing trend, financing existing store locations, and not new store
construction, has accounted for over 90% of FFCA's growth in the past five
years.
FFCA controls investment risk by financing real estate diversified by
geographical area, by concept and by operator. As of June 30, 2000, FFCA had
investments in more than 5,300 locations
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throughout the United States and Canada, though investments in Canada are not
significant. Much of FFCA's new financing business comes from existing
customers. The financing transactions are with approximately 490 different
operators represented within FFCA's investment portfolio. Most of these are
multi-unit operators, though no single operator represented more than 8% of
FFCA's total portfolio revenues for the six months ended June 30, 2000. These
experienced multi-unit operators conduct business under nationally or regionally
recognized brand names. FFCA's portfolio includes over 160 different chains,
including well-known chains like Applebee's, Arby's, Burger King, Checker Auto
Parts, Chevron, Circle K, Citgo, Cracker Barrel Old Country Store, Hardee's,
Jack in the Box, Long John Silver's, Midas Muffler Shops, Pizza Hut, 7-Eleven,
Taco Bell, Texaco, Valvoline Instant Oil Change and Wendy's. As FFCA continues
to grow, FFCA expects the portfolio to continue to become more diversified.
FFCA structures its investments to enhance the stability of its cash flows.
FFCA's sale-leaseback transactions are generally 20-year, 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 that it owns and leases to chain store operators.
Both FFCA's sale-leaseback and mortgage financings are generally for twenty-year
terms and mortgage products are generally fully amortizing over the term of the
loans. The sale-leaseback transactions entered into by FFCA are retained in its
portfolio and generally provide for base rentals plus additional payments based
upon a participation in the gross sales from the properties or specified
contractual increases. The mortgage loans originated by FFCA will generally be
pooled and sold under the recently negotiated Washington Mutual agreement with
FFCA retaining the mortgage servicing rights. Mortgages also may be sold in
securitized offerings where FFCA retains the mortgage servicing rights as well
as interests in the securitized loan pool in the form of subordinated
securities.
FFCA continually monitors and administers its investments to enhance the
stability of its cash flows. Financial data is regularly collected on the
properties financed by FFCA to determine their profitability. Lease and mortgage
payments are generally collected by electronic account debits on the first day
of each month. An in-house appraisal staff inspects FFCA's properties to assess
asset condition. In-house property management and legal services personnel
administer underperforming and nonperforming leases and loans and also supervise
the in-house administration of property dispositions and tenant substitutions.
FFCA has an established record of resolving underperforming and nonperforming
leased assets, with a current vacancy rate of less than 1% and the vacancy level
in the portfolio maintained at less than 2% since FFCA became a REIT in 1994.
INVESTMENT CRITERIA
Real estate investment opportunities undergo an underwriting process
designed to maintain a conservative investment profile. The process includes a
review of the following factors:
CHAIN STORE PROFITABILITY. FFCA seeks to invest in chain store real estate
where the unit level economics from operations provide adequate cash flow to
support lease or mortgage payments related to the site.
CHAIN STORE INVESTMENT AMOUNT. FFCA seeks to invest in properties for
amounts that do not exceed the sum of the fair market value of the land and the
replacement cost of the building and improvements.
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 area market 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
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borrower recourse, which means the tenant or borrower is personally liable for
the obligation. Many of FFCA's leases and mortgages also have recourse to
guarantors who are owners or affiliates of the tenant or borrower. FFCA reviews
tenant, borrower and guarantor financial strength to assess the availability of
alternate sources of payment in the event that cash flow from operations might
be insufficient to provide the funds necessary to make lease or mortgage
payments. In general, FFCA 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. FFCA has a staff of appraisal
professionals who conduct physical site inspections of each property financed by
FFCA.
CHAIN STORE SUITABILITY. FFCA seeks to primarily invest in real estate used
by large national and regional chain store systems having annual system-wide
sales of more than $250 million.
ENVIRONMENTAL CONSIDERATIONS. For each property in which it invests, FFCA
either obtains an environmental insurance policy from a third-party insurance
carrier or a Phase I environmental assessment, and a Phase II environmental
assessment or other environmental tests, if recommended by the related Phase I.
In the case of properties FFCA acquires or finances that have underground
storage tanks present, or where other petroleum products are being dispensed,
FFCA always obtains environmental insurance.
PROPERTIES
PROPERTY CHARACTERISTICS. FFCA provides real estate financing to multi-unit
operators of chain restaurants, convenience stores and automotive services and
parts outlets, primarily through long-term real estate leases and mortgage loan
financing. At June 30, 2000, FFCA had interests in 5,308 properties consisting
of investments in 3,395 chain restaurants, 1,554 convenience stores, 349
automotive outlets and 10 other retail properties. FFCA's portfolio included
2,446 chain store properties represented by investments in real estate mortgage
loans and properties subject to leases and 2,862 properties represented by
securitized mortgage loans in which FFCA holds a residual interest.
Of the 2,446 properties included in FFCA's investment portfolio at June 30,
2000, FFCA has an ownership interest in 2,278 properties on a fee-simple basis
in which FFCA holds title to the property, or the "owned" properties. The real
estate owned by FFCA at June 30, 2000 consists of the land and buildings
comprising each chain property, except for 11 properties on which FFCA holds
title to the land only and made mortgage loans for the related buildings, or the
"hybrid mortgages". The properties owned by FFCA and the land related to the
hybrid mortgages are leased to the chain operators under long-term net leases.
The remaining properties represent mortgage loan financing transactions in which
FFCA generally holds a first mortgage on the land and buildings comprising the
properties, or the "financed properties." On approximately 20 of the financed
properties, FFCA made mortgage loans for the buildings and improvements and the
borrowers lease the land from third parties under ground leases.
FFCA's chain store properties are typically located on commercial corridors
with significant automobile traffic and are characterized by high visibility and
easy access required for retail property. Locations generally fall into five
categories, including shopping center and mall pad or out parcel sites,
interstate highway locations, central business district locations, residential
neighborhood locations and retail and commercial corridor locations. Generally,
all properties owned or financed by FFCA are freestanding and surrounded by
paved parking areas. A chain store is located on each of the properties except
nine, which were converted to other uses, like a bank and an optical retail
outlet.
The land size for a typical fast food restaurant generally ranges from
30,000 to 45,000 square feet, with original acquisition costs generally ranging
from $300,000 to $450,000. Full service restaurant land averages range from
40,000 to 95,000 square feet and from $480,000 to $1,100,000 in land acquisition
costs. The buildings are principally of the current design of the restaurant
concept and are rectangular
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<PAGE>
buildings constructed from various combinations of stucco, steel, wood, brick
and tile. Fast food restaurant buildings generally range from 1,500 to 4,000
square feet in size, with the larger stores having a greater seating capacity
and equipment area. Site preparation varies depending upon the area in which the
fast food restaurant is located and on the size of the building and site.
Building and site preparation costs generally range from $250,000 to $725,000
for each property. Full service restaurant building averages range from 4,500 to
9,500 square feet and from $550,000 to $1.5 million in building 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, like tobacco, beverages and snacks, to 5,000 square feet for a store that
has a bakery, a sit down restaurant area or a pharmacy, with many of these
locations also selling gasoline. The typical convenience stores generally range
in size from 2,000 to 3,000 square feet. The original investment per new store
averages $1,050,000 for a rural convenience store, which is approximately 27%
for land, 39% for the building and 33% for the equipment, and $1,556,000 million
for an urban convenience store, which is approximately 35% for land, 34% for the
building and 31% for the equipment.
Automotive services and parts outlets range in size depending on the type
of store. Automotive parts outlet buildings generally range from 6,000 to 9,000
square feet with total original acquisition costs ranging from $800,000 to $1.8
million. Quick lube buildings are typically 2,500 square feet and are on 17,000
to 25,000 square feet of land. Most are located within shopping centers and have
2-6 bays, with total acquisition costs ranging between $500,000 and $700,000.
Combination specialty stores, offering brakes, mufflers, lube, etc., are
typically free standing, drive-through buildings generally ranging from 2,200 to
3,400 square feet on a lot or shopping center pad of approximately 15,000 to
25,000 square feet. Total acquisition costs range from $550,000 to $900,000.
The financing agreements with FFCA require each chain store operator to
carry various types and amounts of insurance. There are, however, some types of
losses, like ones resulting from wars or earthquakes, that may be either
uninsurable or not economically insurable in some or all locations. In some
circumstances FFCA may permit a chain store operator to self-insure for
particular types of losses. An uninsured loss could result in a loss to FFCA of
both its capital investment and anticipated revenue from the affected property.
FFCA believes that its chain store properties are covered by adequate
comprehensive liability, fire, flood and extended loss insurance provided by
reputable companies, with commercially reasonable and customary deductibles and
limits.
FFCA's lease and mortgage loan financing documents require each chain store
operator to make any expenditure necessary to comply with applicable laws and as
may be required under any applicable franchise agreement; therefore, FFCA is
generally not required to make significant capital expenditures in connection
with any property it financed. Capital expenditures amounted to approximately
$120,000 in 1998. There were no material capital expenditures on properties for
the six months ended June 30, 2000, and the years ended December 31, 1999 and
1997.
Approximately 70% of revenues for the six months ended June 30, 2000 were
derived from net lease equity real estate investments. The leases are generally
twenty years in length and have been originated by FFCA and its predecessors
since May 1981. The expiration schedule of the initial term of FFCA's leases
extends through 2020, with a weighted life of the investments of 11.8 years as
of June 30, 2000. Approximately 10% of FFCA's lease revenues are derived from
leases which expire in 2019. In all other years the lease expirations are less
than 10% of total lease revenues.
As of June 30, 2000, all but 34 of FFCA's 5,308 properties were being
leased or were performing under a mortgage loan agreement. All of the
nonperforming properties are currently held for sale or lease. Vacant properties
held for sale represent less than 1% of FFCA's total real estate investment
portfolio.
GEOGRAPHICAL DIVERSIFICATION. FFCA's portfolio is geographically diverse.
As of June 30, 2000, FFCA owned or had financed 5,308 properties, not including
mortgage loans which were sold, but are still serviced by FFCA, in all 50
states, Washington D.C. and Canada. No one property is a principal property of
FFCA because each property represents less than one half of one percent of
FFCA's total
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<PAGE>
assets. Generally, the loans are first mortgage loans on the land, buildings
and/or equipment of restaurants, convenience stores or automotive services and
parts outlets. Based upon property revenues for the period from January 1, 2000
to June 30, 2000, FFCA's investments were located: 39% in the South; 20% in the
East; 24% in the Midwest; and 17% in the West. Particular states of
concentration include: Florida and Texas, each with 9% of property revenue;
Georgia and Ohio, each with 6% of property revenue; and California with 5% of
property revenue.
No other state comprises more than 5% of property revenue.
A map illustrating geographic distribution of FFCA's real estate
investments is included in the inside front cover page of this prospectus
supplement. The following table shows information regarding the diversification
of FFCA's real estate investments by geographic region:
GEOGRAPHIC DIVERSIFICATION
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
(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 .................... $ 15,069 14% 782 15%
Northeast .................. 7,183 6 467 9
MIDWEST
East North Central ......... 19,099 17 1,009 19
West North Central ......... 8,062 7 357 7
SOUTH
Southeast .................. 27,250 25 1,243 23
Southwest .................. 15,399 14 801 15
WEST
Mountain ................... 11,617 10 382 7
Pacific .................... 7,559 7 264 5
CANADA ........................ 7 -- 3 --
-------- --- ----- ---
$111,245 100% 5,308 100%
======== === ===== ===
</TABLE>
------------
(1) Excludes other miscellaneous income.
Industry Sector Diversification. FFCA's portfolio continues to become more
diverse in terms of industry sectors, with interests in 3,395 chain restaurant
properties, 1,554 convenience stores, 349 automotive services and parts stores
and 10 other retail properties as of June 30, 2000. Chain restaurant properties
represented 64% of FFCA's investments as of June 30, 2000, as compared to over
99% of the company's investments as of December 31, 1996. The following table
shows information regarding the diversification of FFCA's real estate
investments among different industry sectors:
INDUSTRY SECTOR DIVERSIFICATION
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
(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>
Restaurant ............................ $ 84,390 76% 3,395 64%
Convenience Stores .................... 20,328 18 1,554 29
Automotive Services and Parts ......... 6,203 6 349 7
Other ................................. 324 -- 10 --
-------- --- ----- ---
Total .............................. $111,245 100% 5,308 100%
======== === ===== ===
</TABLE>
------------
(1) Excludes 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 490
national and regional operating companies as of June 30, 2000. Multi-unit
operators are the predominant operators of FFCA's investments. Additionally,
approximately 160 retail chains are represented in the portfolio. FFCA
anticipates its portfolio will continue to become more diverse in terms of
operators and chains as a result of future financings. The following table shows
information regarding the diversification of FFCA's real estate investments by
chain:
CHAIN DIVERSIFICATION
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL PERCENT OF NUMBER OF PERCENT OF
CHAIN(1) REVENUES(2)(3) TOTAL REVENUES PROPERTIES TOTAL PROPERTIES
-------- -------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
Burger King ................... $ 14,522 13.1% 494 9.3%
Arby's ........................ 9,352 8.4 362 6.8
Wendy's ....................... 6,402 5.8 176 3.3
Long John Silver's ............ 5,942 5.3 406 7.6
Hardee's ...................... 5,576 5.0 337 6.4
Pizza Hut ..................... 5,309 4.8 291 5.5
Jack in the Box ............... 5,017 4.5 171 3.2
Clark/On the Go ............... 2,690 2.3 369 7.0
Taco Bell ..................... 2,554 2.3 86 1.6
Quincy's ...................... 2,544 2.3 112 2.1
E-Z Serve ..................... 2,526 2.3 144 2.7
Applebee's .................... 2,265 2.0 78 1.5
KFC ........................... 2,244 2.0 123 2.3
Dairy Mart .................... 2,228 2.0 40 0.8
7-Eleven ...................... 2,048 1.8 92 1.7
Denny's ....................... 1,859 1.7 48 0.9
Checker Auto Parts ............ 1,765 1.6 40 0.8
Fuddrucker's .................. 1,623 1.5 24 0.5
Popeye's ...................... 1,488 1.3 49 0.9
Max & Erma's .................. 1,463 1.3 15 0.3
Black-Eyed Pea ................ 1,409 1.3 24 0.5
Midas Muffler Shops ........... 1,303 1.2 54 1.0
Mrs. Winner's ................. 1,185 1.1 85 1.6
P.F. Changs ................... 1,105 1.0 5 0.1
Flying J Travel Plaza ......... 1,102 1.0 28 0.5
Other ......................... 25,724 23.1 1,655 31.1
-------- ----- ----- -----
Totals ..................... $111,245 100.0% 5,308 100.0%
======== ===== ===== =====
</TABLE>
------------
(1) The names of the concepts are a trademark or service mark of their
respective owners.
(2) Excludes other miscellaneous income.
(3) Includes revenues of the retained piece of the securitized mortgages.
The chain distribution shown above does not represent concentration of
specific operators under lease or mortgage loan agreements. These agreements are
with the operators, not the chains. Among these operators 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 7.2% of the company's total rental and mortgage loan interest
revenues during 1999 and 7.7% for the six months ended June 30, 2000 (a portion
of which is guaranteed by Arby's, Inc. and Triarc Companies, Inc.). RTM, Inc.
accounted for 9.2% and 9.0% of the company's total rental and mortgage loan
interest revenues during 1998 and 1997, respectively. Foodmaker, which
predominantly operates Jack in the Box restaurants, contributed 6.5% of the
company's total rental and mortgage loan interest revenues (generated from its
investment portfolio) during 1999 and 4.5% for the six
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<PAGE>
months ended June 30, 2000. Foodmaker accounted for 7.7% and 9.6% of the
company's total rental and mortgage loan interest revenues during 1998 and 1997,
respectively.
Composition of Investments. As of June 30, 2000, fee-owned properties
subject to lease agreements comprised approxomately 80% of the company's
investments. The remainder of FFCA's investments are shown in the following
table:
TOTAL INVESTMENT MIX
AS OF JUNE 30, 2000
(DOLLARS IN THOUSANDS)
PERCENT OF
GROSS INVESTMENT TOTAL INVESTMENTS
------------------ ------------------
Real estate investments, at cost ..... $1,489,708 80%
Real estate investment securities .... 191,634 10
Mortgage loans held for sale ......... 112,097 6
Mortgage loan investments ............ 53,630 3
Other investments .................... 15,773 1
---------- --
Total ............................... $1,862,842 100%
========== ===
INFORMATION SYSTEMS
To enhance its investment evaluation and origination, FFCA has invested
extensively in information systems that are specific to the chain store
industry. FFCA's databases 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. FFCA has also recently developed a competitive database,
similar to the restaurant industry database, for the convenience store industry
and the automotive services and parts industry. FFCA has the ability to
integrate the information in its locations, participants and restaurant-level
financial databases in a geographic information system that contains
demographic, retail space, traffic count and street information for every
significant market in the United States. FFCA has also collected extensive data
regarding management practices within the chain restaurant industry, franchisor
practices and industry trends.
The information collected by FFCA is actively used to assess investment
opportunities, measure prospective investment risk, evaluate portfolio
performance and manage underperforming and nonperforming assets. FFCA publishes
extensive research on the chain restaurant and convenience store industries,
that include observations of industry issues and trends, areas of growth, and
the economics of chain restaurant operation. FFCA employs its client and
collections data to develop statistical models that aid in the evaluation of
potential investments. FFCA intends to continually develop, improve and use its
real estate industry knowledge through research and broader application of
information technology to lower portfolio risk, improve performance and improve
its competitive advantage.
FFCA continues to invest in its information systems technology. During
1999, FFCA implemented improvements to its underwriting and origination systems
to accommodate a higher volume of transactions. The design and implementation of
these new systems was necessary to develop a more efficient loan and lease
origination system that would permit a high level of growth in FFCA's
origination activity while containing operating costs. In addition, investments
in information systems infrastructure made during the year, like high bandwidth
Internet access, position FFCA to be able to take advantage of new and emerging
technologies in communications and commerce.
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<PAGE>
COMPETITIVE CONDITIONS
The financing of chain store real estate for multi-unit chain store
operating companies continues to be both competitive and fragmented. Competition
exists in every geographic market in which FFCA seeks to invest. Competing
participants include banks, insurance companies, finance companies, leasing
companies and other real estate investment trusts. FFCA believes that it has
several competitive advantages that enable it to be selective with respect to
its real estate investments. FFCA's large market capitalization permits it to
make both large and small real estate investments and to obtain capital from
numerous sources at competitive rates. FFCA's real estate investments are
comprised of properties that are diversified by industry, chain store operator,
chain store concept and geographic location. Diversification reduces risk and
has a favorable impact upon FFCA's access to, and cost of, capital. FFCA's
"Preferred Client Program" is designed to offer forward financing commitments
and a streamlined financing process for leading chain store operators in order
to build on long-term business relationships instead of the historic industry
practice of financing real estate on an inefficient, transaction-by-transaction
basis. FFCA believes it offers superior client service resulting from continuity
of its management and industry specialization and knowledge. FFCA, with the
ability to provide both sale-leaseback financing and mortgage loans, improves
the chain store operators' financing flexibility and provides a competitive
advantage to FFCA in providing financing opportunities.
FOODSERVICE INDUSTRY
In 1999, the foodservice industry achieved sales of nearly $360 billion, or
3.9% of the Gross Domestic Product, making it one of the largest sectors of the
nation's economy as defined by the Department of Commerce. The foodservice
industry includes three major segments:
* commercial -- restaurants, bars, taverns, lodging, food contractors
and other commercial;
* institutional -- colleges, universities and hospitals; and
* military.
The food service industry, in its ninth year of real expansion, tracks the
growth of the U.S. economy, which is entering its 10th year of growth. Average
daily sales in the foodservice industry exceed $1 billion, and nearly half of
all adults are restaurant patrons on any given day.
The foodservice industry as a whole grew 5.2% in 1999 according to the
National Restaurant Association, or "NRA," with the greatest growth in the other
commercial and the full service restaurant segments. In real terms, or constant
dollars, the industry grew 2.9%, outpacing inflation which was 2.2%. Overall
sales for eating places (i.e. restaurant industry) increased 3.1% in real terms,
while commercial sales for the foodservice industry increased 3.0% in real
terms. The largest increase in real terms for the foodservice industry was 5.3%
in the other commercial segment, led by significant increases in food sales at
other retail outlets, recreation and sports events, vending and non-store
retailers. The fastest-growing areas of the U.S., the Southwest/Mountain states
like Arizona, Nevada, Colorado and Texas, are expected to show the most growth
in restaurant sales with an estimated 6.2% between 1999 and 2000, while the
slow-growing Mid-Atlantic states like New York, New Jersey and Pennsylvania, are
expected to show only 3.8% growth. The booming economy, coupled with increases
in disposable personal income, is contributing to the industry's growth, which
is anticipated to reach $576.9 billion by the year 2010. However, projections
for the foodservice industry would be dramatically revised if the U.S.
experienced an economic downturn.
In 2000, total industry sales are expected to grow 5%, or 2.2% in real
terms. Estimates for real Gross Domestic Product growth in 2000 range from
3.3%-3.8%, while inflation, measured by the Consumer Price Index (CPI) is
expected to remain moderate at 2.2%-2.4%. Economists are forecasting continued
growth and stable prices with no economic downturn in 2000, which would be
beneficial for the industry. Wholesale food prices, however, are expected to
increase 1.5% in 2000, compared to relatively flat growth between 1997 and 1999,
which increases the cost of doing business. Accordingly, 2000 menu prices are
anticipated to increase 2.8%. Menu prices increased 2.5% in 1999, driven by
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<PAGE>
increasing labor costs, compared to a 2.2% increase in CPI. Labor costs rose
4.1% in 1999, versus 4.8% in 1998, and are expected to increase another 4.5% in
2000. Restaurants are already offering $8-$9 per hour starting wages in this
tight labor market. The industry employs over 7.9 million people, or 6.1% of the
non-farm workforce, according to the Bureau of Labor Statistics. The top
challenge in the year 2000, according to the NRA, is finding qualified and
motivated labor. Full service operators are in a better position with their wide
menu variety to pass price increases on to customers. The limited menu of most
fast food operators, as well as heavy competition and discounting, make it more
difficult for these operators to pass along the increase.
Expenditures on food away from home are replacing purchases for food at
home, according to the Bureau of Labor Statistics. Growth in the industry
reflects that more than 44% of total food dollars are spent on food away from
home, which is projected to reach 53% by 2010, compared to 25% in 1955. In
addition, 42% of adults cook fewer meals than they did just two years ago and
78% of households purchase takeout or delivery food at least once a month.
Full service sales increased 6.7% between 1998 and 1999, or 3.1% on a real
basis. For 2000, full service sales are projected to increase 5.9% in total, or
3.1% in real terms. A lack of growth in the number of restaurant units implies
that full service restaurants are increasing either their average ticket sales
or customer count. The 1999 average ticket increased for both fast food and full
service operations with an average ticket per person under $10. The wide variety
of tastes and experiences available at full service locations are drawing
customers and driving sales. Many full service operators are beginning to
heavily target takeout food, which would increase customer count. In addition,
full service operators, who traditionally do not heavily discount, can raise
menu prices more easily than fast food operators. In 1999, fast food sales
increased 4.9%, or 2.3% in real dollars. For 2000, fast food sales are projected
to increase 4.4%, only 1.6% in real terms. In addition, margins for fast food
are expected to decrease in 2000, with the anticipated increase in beef prices
and labor costs.
Growth in the number of restaurants has slowed in the past two years, but
particularly in 1999 to just 0.2% versus approximately 5.0% growth in 1995, 1996
and 1997. The lack of growth is attributable to increased competition, scarcity
of prime real estate, saturation and the capital markets' general lack of
confidence in the industry. In addition, newer concepts are growing more slowly
than others have in the past to avoid mistakes and problems caused by too rapid
expansion.
Despite the upward trend in sales, the industry is facing a number of
challenges. These challenges include consolidation, increased competition,
increased cost of doing business, tight labor markets and demanding consumers.
Heightened competition has led to a divergence in how operators respond. Some
companies are divesting non-core chains, while others are acquiring new
concepts. There are an increasing number of multi-concept operators as companies
attempt to diversify and spread costs over more units, with many having both
fast food and casual locations. Many franchisors own more than one concept to
offer selections to franchisees, test products in various chains and secure
growth for their company. There are also, however, several multi-concept
operators who have reverted to operating only one concept. Even though this
divergence exists, there appears to be a common trend -- operators and
restaurant companies are focusing heavily on their primary brands and
operational fundamentals. Some companies are consolidating to gain economies of
scale or to increase sales. Consolidation should continue as operators strive to
grow, capital is available and increasing size offers a meaningful operational
advantage. Chains will continue to find ways to reduce costs, through technology
and other means. Presenting a further challenge to the industry, consumers are
demanding consistency, quality and freshness from all operators in addition to
fast, convenient service from fast food operators.
Overall, in 1999, FFCA saw very little new unit expansion. Instead,
operators focused on operations and improving same-store sales. While customers
ate out more, much of the market share gains attained by chains were largely at
the expense of other chains. In addition, the industry is learning to cope with
one of its major challenges -- the labor shortage. Operators are increasing
their use of technology and developing innovative ways to retain workers and
limit employee turnover. Many restaurant companies have realized that the
economic boom, which has caused the labor
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<PAGE>
shortage, is also responsible for the increase in disposable personal income. If
the unemployment rate were to rise and labor became abundant, disposable
personal income would decrease, resulting in lower industry sales.
THE CONVENIENCE STORE INDUSTRY
The convenience store ("c-store") and petroleum marketing industry is
defined as those retailers primarily engaged in the retail sale of gasoline
and/or convenience products. Using various government and industry sources, FFCA
estimates the total size of the industry to be $216 billion, which equates to
2.5% of Gross Domestic Product. This industry total encompasses c-store
merchandise, c-stores selling gasoline and gasoline sold apart from c-stores.
The growth in the convenience store and petroleum marketing industry has largely
been driven by six factors: (1) disposable personal income; (2) increased desire
for convenience; (3) increased travel; (4) increased number of vehicles on the
road; (5) trends in the industry designed to increase c-store demand; and (6)
price increases in key categories.
C-store operators and marketers are becoming stronger retailers in response
to changes in the marketplace. Operators are using consumer research techniques
and scanned data to understand their customer base. This understanding is
enhancing their merchandising and marketing skills and focusing their attention
on meeting consumer needs. Recent changes in the industry include: image
improvements, brand differentiation focus, improved customer service, a wide
variety of ancillary services offered and tested, technology improvements to
enhance and expedite service, volatile oil prices, new location designs,
consolidation among large oil companies, relationship changes between the oil
companies and their distributors, and other channels of trade targeting the
convenience and gasoline businesses. With people on the move, convenience will
play more of a part in choosing where to shop, and c-stores have an advantage
over other channels in this area. In addition, with increasing regulation,
c-stores may become the de facto outlet for some products, like cigarettes.
Many of these changes are a reaction to volatile gasoline margins and fear
of decreased tobacco profits. Falling oil prices from late 1997 to early 1999
and volatile gasoline margins have led the majors (i.e. large, fully-integrated
oil companies like Exxon, Mobil, BP Amoco, Shell, Texaco, and Chevron) to
consolidate and streamline refining and marketing, or downstream, operations. At
the retail level, customer service, economies of scale, upgraded image, new
facilities, ancillary services, and technology are the basis of competition, as
retailers attempt to decrease their reliance on gasoline and tobacco profits.
Another profound change in the c-store marketplace is heightened
competition from new entrants from other retail channels, like supermarkets and
mass merchandisers. These circumstances, as well as other market pressures, are
changing the way operators do business. To increase sales, operators are adding
ancillary services like car washes, lube shops, financial services and expanded
foodservice. To increase demand, the industry is focusing on c-store operations
to attract new demographic groups, including women and upscale customers,
through upgraded facilities, improved technology, new service offerings, more
competitive merchandise prices, brand enhancement and improved customer service.
Like most other retail sectors, the industry is becoming more consumer-focused
in the face of competition. Competition, technology, facilities upgrades and new
services are increasing the cost of doing business and requiring a larger
initial and on-going investment per store. Government regulation and labor
issues also contribute to the growing cost of doing business. In 1998, several
judgments against tobacco companies in private lawsuits and the landmark
settlement with the states, which resulted in five wholesale price increases on
cigarettes, totaling nearly 50%, impacted sales and margins. These circumstances
suggest further company and operator consolidations to provide increased buying
power and other economies of scale. Through consolidation, the larger chains are
becoming larger and more cost efficient, while others are refocusing on core
markets and divesting assets outside those markets, as well as closing
unprofitable locations. These market dynamics place even more pressure on
smaller operators, increasing their likelihood of closure or sale to larger
operators.
At c-stores, in-store sales increased, as did total gasoline gallons sold.
In-store sales were driven by the strong economy, the increase in total number
of c-stores, increased tobacco prices and
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<PAGE>
increased foodservice sales. Total c-store sales have increased every year since
1971, according to the National Association of Convenience Stores. Prior years
were estimated and not considered. The top product category in 1998 was
cigarettes at 28.9% of in-store sales, followed by foodservice at 13.9%, beer at
12.7%, and packaged beverages at 12.3%. These four categories comprise over 67%
of in-store sales. Gross margin for foodservice at 55.2%, which was the category
average, was the highest in the top 10 categories, and was second only to ice
over all categories. Within foodservice, food prepared on site (53.2%), cold
fountain drinks (60.6%) and hot beverages (68.5%) had gross margins at or above
50% in 1998. For the industry, both in-store and gasoline cents per gallon
margins decreased in 1998. Gasoline prices reached the lowest inflation-adjusted
level in history during the price slump that lasted from late 1997 to early
1999. The decline in price is attributed to the warm winters in the past two
years, which led to a drop in heating oil demand and carried over into gasoline
prices. In addition, overproduction and lower demand in Asia contributed to an
oversupply of crude. Other contributors to lower oil prices include enhanced
exploration and production, or upstream, technology, and the United Nation's
raising of Iraq's oil-for-food allowance. In March 1999, after gasoline prices
hit inflation adjusted historic lows in February, OPEC members announced their
agreement to cut production by approximately 2.7% of world supply, and non-OPEC
producers followed suit, contributing to the decrease in supply. Refinery fires
and pipeline problems compounded the decrease in supply and the recovering Asian
and Latin American economies increased demand for crude. Gasoline prices rapidly
went from their lowest inflation adjusted levels in history to record highs, not
adjusted for inflation, in some areas, most notably the west. Tremendous
pressure was put on marketers in 1999 by rapidly rising gasoline prices.
According to industry experts, every dollar increase in crude prices per barrel
translates to a 2.5-cent increase in retail gasoline prices. Marketers saw their
margins reduced as they were prevented from passing along all of the wholesale
price increase to consumers.
Similar to many other retail industries, the c-store and petroleum
marketing industry is facing a shortage of employees; which is especially acute
in areas saturated with retail, such as the northeast. The cause of the shortage
is the decline in teenagers and the low unemployment level. In addition, OSHA's
1998 safety guidelines recommend maintaining two employees on duty at all times,
and operators' cleanliness and customer service focus require additional
employees. Unemployment remains low and competition for labor is high. With the
increase in services offered, most prominently foodservice, the number of
employees per store has grown significantly. The industry, which typically pays
higher than minimum wage, will need to continue to do so to attract employees.
Because of image upgrades, operators are now looking for customer-service
oriented employees, which puts more pressure on operators to find qualified
workers. In the face of the difficulty in recruiting labor, c-store operators
routinely compete for labor and hire from one another's staff. In addition,
c-store operators are competing with all other retail segments and with
entry-level white collar and technical jobs for employees. With the increasing
need for retail skills, competition for quality employees is getting even
steeper.
The industry is facing new challenges as well as volatile gasoline margins.
Most companies in the industry are changing operations to be competitive and
adding services to counteract volatile gasoline margins and tobacco's uncertain
future. C-stores have become the prevailing channel for cigarette sales, though
with the price increases seen in 1998, margins on this category may be
pressured. Many additional areas are causing concern among industry executives.
The top concern is availability of labor. Tied for second place are government
regulation and employee theft. Rounding out the top 6 concerns are technology,
tobacco legislation and competition within the industry. Many concerns pertain
to the increasing cost of doing business: competition, attracting new employees,
upgrading technology, employee theft, and looking for new sources of capital.
Despite all the urgency placed on brand differentiation through facilities and
ancillary service offerings, location and customer service are still viewed to
be the key success factors for a c-store. Convenient location and customer
service, coupled with competitive gasoline prices, are ways to generate sales.
To increase the bottom line, operators need to become more efficient, taking
advantage of economies of scale and scope where possible.
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THE AUTOMOTIVE AFTERMARKET INDUSTRY
The automotive aftermarket industry is defined as products and services
sold after the initial purchase of a new motor vehicle, including
non-manufacturer options at the time of original sale. FFCA estimates the
automotive aftermarket reached $160 billion in product and service sales in
1998, up from $155 billion in 1997, based on several sources of industry
information available. This represents 1.8% of gross domestic product and 2.7%
of personal consumption expenditures in 1998. Total aftermarket sales are
heavily correlated with gross domestic product, disposable personal income,
vehicle miles driven and vehicle age. Total sales of $160 billion encompasses
aftermarket product sales and service, including labor, charges for all cars,
light trucks and heavy trucks, but does not include auto body parts, crash
parts, communication equipment, sound accessories, audio equipment, fuel and
miscellaneous accessories or the cost of labor performed in-house by fleets in
their own repair facilities.
Consumers have three basic choices for repairing or personalizing their
vehicle: (1) take the vehicle to an automobile dealer; (2) select an independent
mechanic or specialty chain; and/or; (3) perform the repair themselves. Thus,
the aftermarket is divided into two segments based on these decisions: parts and
service. The parts segment is comprised of accessories and replacement parts
that are sold to consumers who typically perform their own vehicle maintenance.
The service segment encompasses the sale of professionally installed parts and
labor to consumers. The service segment includes functions like fluids (lube
shops), under-the-car (brake shops), under-the-hood (tune-up shops and
transmission shops), tires, auto body and paint, and combinations of these
sectors. Both specialty chains and dealers are included in the service segment.
Most major chains generally specialize in one segment or the other. In the
service segment, some locations are focusing on single services while others are
developing a menu of services to increase the average ticket per customer.
There are approximately 370,000 outlets that compete in the automotive
aftermarket. Most are owned by independent operators, as evidenced by the fact
that the top 50 chains in the aftermarket account for approximately 9% of all
outlets. On the other hand, according to the Automotive Parts and Accessories
Association, general repair shops and service stations, like independents,
perform nearly 45% of all services on light cars and trucks. This implies that
chains are more efficient, capturing a large share of the market despite their
fewer number of units. Competitive factors in the industry for both parts and
service include location, quality of service, quality of products, price,
concept name and recognition, and speed of service.
Competitors within the aftermarket include: (1) full service gasoline
stations; (2) auto dealerships; (3) general repair garages; (4) tire outlets;
(5) discounters/mass retail merchandisers; (6) parts retailers; and (7)
specialty repair shops. Specialty repair shops have been a driving factor behind
the growth in the aftermarket. The specialty service business encompasses the
service of specific automotive needs like mufflers, tune-ups, transmissions,
paint and bodywork, oil changes, and auto glass. Some companies adopt a single
service/product line while others have expanded to multiple lines.
Maintainers are persons responsible for the repair and maintenance of an
automobile, truck, sport utility vehicle, or van. A maintainer can be a vehicle
owner, lessee, or caretaker. There are two types of maintainers -- vehicle
owners that prefer to repair or accessorize their vehicle, or for a friend,
relative, etc., themselves known as the do-it-yourselfer, or DIYer, and those
that prefer to have a professional work on their vehicle known as the
do-it-for-me, or DIFM. These two groups are not mutually exclusive. Many light
DIY consumers, like those who change their own oil, prefer to take their
vehicles to the shop for more difficult or time-consuming maintenance/repairs.
While DIY sales grew slowly over the past decade, purchased services and product
sales at DIFM establishments increased at a faster rate. The booming economy and
aging population are changing many DIY customers into DIFM customers.
Of the 370,000 outlets that compete in the automotive aftermarket, 330,000
are service outlets, including specialty repair shops, tire stores, and
independent garages and service stations. The top 40 chains account for
approximately 8% of the total outlets in the service segment. However, the
Automotive Service Industry Association estimates that chain repair shops were
responsible for 42%
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of sales, while independent garages captured 58% of sales. By far, the largest
group in the industry is independent repair shops. The top 50 companies in terms
of units account for 9.0% of the estimated 370,000 locations that compete in the
industry. The number of service station and garages that perform auto repair
declined significantly between 1980 and 1999, slipping from 227,000 to 148,000.
Only an estimated 40,000 gasoline stations still perform some form of automotive
repair. In addition, their market share of products installed by mechanics in
light cars and trucks has dropped as well. Most chains in this industry are
comprised of small franchisees with 1-5 stores, rather than large franchise
operators like those found in the restaurant industry. As a result, franchisees
in this industry rely heavily on the franchisor for services like inventory,
training, site selection, and even financing. Independent shop owners and small
franchisees often work in their shops. This fact, in combination with the growth
of chains, increasing competition, increasing cost of technology, and increasing
cost of labor, is forcing a change in the industry. Chains, especially quick
lube chains, are purchasing independents. With industry growth slowing, many
independents are fighting for survival. This has lead them to (1) specialize in
services, like electrical and engine rebuilds, that chains choose not to perform
because they are either too hard to estimate correctly, too hard to perform to
consumer's satisfaction or unprofitable; and (2) join service program groups
being created by parts warehouse distributors and jobbers.
The face of the service segment is changing through specialization,
consolidation, assimilation and teaming. Most chains specialize in one or more
services. There are no real general repair shop chains in the aftermarket.
Specialization, the concentration of efforts in a particular field or activity,
occurs when companies focus on one area of business, rather than being all
things to all people. Quick lubes are an example of chains that specialize in
one service, while tune-up shops typically offer several services, including
tune-ups and oil changes. Chains specialize for many reasons including:
decreasing bay downtime, increasing profitability, reducing labor, and
increasing brand awareness. Consolidation is also occurring in the mature
industry. Larger chains are acquiring smaller chains and independents to
increase store size and spread costs over more locations. Assimilation of
independents through jobber and warehouse program groups is allowing
independents to have brand awareness and legitimacy (i.e. customer confidence)
through the program's brand name, as well as discounts or rebates on purchases.
Teaming/co-branding typically occurs to save construction costs or gain brand
acceptance for a concept new to an area.
Specialty stores, a growth area in the DIFM market, have increased business
because customers believe these outlets perform more efficient and accurate work
than themselves or the local garage. These chains have developed brand
awareness, and with it, customer expectations of quality. Customers' trust in
specialty stores has grown, as well as trust in the gas stations that have
survived. Quality is the number one factor affecting consumers' choice of where
to get their car serviced, according to a Lang Marketing study, with a 44%
significance rating. Following quality is convenience at 29%, price at 14%,
service at 8% and products at 5%. Quality and convenience have both increased in
significance since 1987, with quality increasing 5% and convenience increasing
6%, at the expense of service and products.
Approximately 46% of vehicle owners desert dealerships, choosing non-dealer
maintenance options once vehicle warranties expire, according to J.D. Power &
Associates. However, extended warranties and automobile leasing have
strengthened consumers bond with automobile dealers. The dealer service market
product share has increased since 1990 and is expected to continue to increase
in the foreseeable future. Dealers are exploring several new strategies to lure
customers in for service, including freestanding neighborhood repair shops and
convenience services at the dealerships. Some dealers began selling tires in
1999 in an effort to keep DIFM service dollars flowing to dealerships. In
addition, new car manufacturers are adding options that used to be exclusively
sold in the aftermarket, like window tinting and auto alarms, to increase sales.
A challenge to the industry is that most consumers have a "general lack of
desire" to have routine maintenance performed on their vehicles, and the leasing
trend is encouraging more of this attitude. Many industry participants are
focusing on consumer education, to ensure that consumers understand the benefits
of performing scheduled maintenance, as defined by both the manufacturer
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and industry averages, like higher resale value and giving their vehicle a
longer useful life. On the other hand, neglecting regular maintenance can cost
money, through problems like corroded brakes from not changing brake fluid,
engine seizure from not changing the oil, and replacing tires more often because
they were not rotated.
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. The properties, which FFCA
either purchases or finances, are subject to various requirements and potential
liabilities under federal, state and local environmental laws and regulations.
Some 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 the substances. Under various environmental laws,
a lender may, under limited circumstances, be deemed to be an "owner" or
"operator" of a property, thereby imposing liability upon the 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. Federal and state environmental laws have established
a regulatory program for the detection, prevention and clean up of leaking
underground storage tanks.
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 (1) a Phase I environmental assessment
which concludes that no further investigation is necessary; if the Phase I
assessment recommends further investigation, a Phase II environmental assessment
which concludes that no remediation or further action is required or, (2) an
environmental insurance policy from a third-party insurance carrier. Properties
acquired from FFCA's predecessors did not have environmental investigations
performed either at the time FFCA acquired the properties from its predecessors
or when the properties were acquired by the predecessor entities. FFCA is not
currently a party to any litigation or administrative proceeding with respect to
a property's compliance with environmental standards, which could reasonably be
expected to have a material adverse effect upon FFCA. However, FFCA is
investigating the nature and extent of contamination, primarily
trichloroethylene, tetrachloroethylene and hydrocarbons, in the soil and
groundwater associated with a property FFCA owns in Buffalo, New York. The New
York State Department of Environmental Conservation, or NYSDEC, has approved the
workplan for the investigation, and the investigation is proceeding under
NYSDEC's voluntary cleanup program. FFCA is currently unable to estimate the
costs associated with the cleanup, but does not anticipate it will have a
material adverse effect on FFCA's operations.
In the case of properties to be acquired or financed in which underground
storage tanks are present or gasoline or other petroleum products are being
dispensed, FFCA has adopted a policy that environmental insurance must be
obtained for the benefit of FFCA. This insurance provides coverage for
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. In the
event of a loss, as defined in the policy, the insurer must pay the outstanding
principal balance due under the applicable mortgage loan, less a deductible
amount. With regard to some of the policies that were purchased prior to 1999,
in the event of a loss, the insurer must pay the lesser of (1) the cost of
remediation and other clean-up costs and expenses, or (2) 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, title is acquired in the name of a special purpose subsidiary of
FFCA formed solely for the purpose of holding title to the property. The
environmental insurance policy that is issued where FFCA purchases the property
is for a term of 20 years, subject to renewals for ten-year periods. In
assessing the environmental risk associated with the ownership of potentially
contaminated real property, FFCA obtains from its insurer an environmental risk
assessment upon
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<PAGE>
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.
INSURANCE
FFCA believes that all of our 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. In most cases, specified types and amounts of insurance are required to
be carried by each operator under the financing agreements with the company.
There are, however, types of losses, like those resulting from wars or
earthquakes, which may be either uninsurable or not economically insurable in
some or all locations. An uninsured loss could result in a loss to FFCA of both
its capital investment and anticipated profits from the affected property.
LEGAL PROCEEDINGS
FFCA is not presently involved in any material litigation nor, to its
knowledge, is any material litigation threatened against the company or its
properties, other than routine litigation arising in the ordinary course of
business.
MANAGEMENT AND DIRECTORS OF THE COMPANY
The directors and executive officers of the company are:
<TABLE>
<CAPTION>
NAME OFFICE AGE
---- ------ ---
<S> <C> <C>
Morton H. Fleischer ........... Director, Chairman of the Board and Chief Executive 63
Officer
Christopher H. Volk ........... Director, President, Chief Operating Officer, Assistant 44
Secretary and Assistant Treasurer
John R. Barravecchia .......... Executive Vice President, Chief Financial Officer, 45
Treasurer and Assistant Secretary
Dennis L. Ruben ............... Executive Vice President, General Counsel and 47
Secretary
Stephen G. Schmitz ............ Executive Vice President, Chief Investment Officer 46
and Assistant Secretary
Catherine F. Long ............. Senior Vice President--Finance, Principal Accounting 44
Officer, Assistant Secretary and Assistant Treasurer
Willie R. Barnes .............. Director 68
Kelvin L. Davis ............... Director 36
Kathleen H. Lucier ............ Director 46
Dennis E. Mitchem ............. Director 69
Louis P. Neeb ................. Director 61
Kenneth B. Roath .............. Director 64
Casey J. Sylla ................ Director 57
Shelby Yastrow ................ Director 64
</TABLE>
The following is a description of the name, principal occupation or
employment during the past five years and other directorships of the directors
and executive officers of FFCA:
Morton H. Fleischer is Director, Chairman of the Board 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 has acted as an individual general partner
(or general partner of the general partner) of the eleven public limited
partnerships that were consolidated to form the company in 1994. In addition, he
was a general partner (or general
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<PAGE>
partner of the general partner) in the following public limited partnerships
which invested in travel plazas and were liquidated in 1999: Participating
Income Properties 1986, L.P., Participating Income Properties II, L.P.; and
Participating Income Properties III Limited Partnership. Mr. Fleischer is
currently the general partner of the general partner of Scottsdale Land Trust
Limited Partnership, a publicly owned limited partnership involved in
commercial land development.
Christopher H. Volk is Director, President, Chief Operating Officer,
Assistant Secretary and Assistant Treasurer of the company. Mr. Volk previously
served as Executive Vice President of the company from July 28, 1995 to December
31, 1999, 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.
John Barravecchia is Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary of the company. 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 LLP.
Dennis L. Ruben is Executive Vice President, General Counsel and Secretary
of the company. 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 to 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 LLP.
Stephen G. Schmitz is Executive Vice President, Chief Investment Officer
and Assistant Secretary of the company. Mr. Schmitz served as Senior Vice
President-Corporate Finance from June 1, 1994 to January 28, 1997. Mr. Schmitz
previously served in various other 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 of the company. 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 LLP.
Willie R. Barnes, Esq. 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 Transaction. He is currently a director and secretary of
American Shared Hospital Services.
Kelvin L. Davis is a partner in The Texas Pacific Group, an international
private equity investment firm. Mr. Davis joined The Texas Pacific Group in
March 2000. Prior to joining The Texas Pacific Group, Mr. Davis was the
President and Chief Operating Officer of Colony Capital, Inc., an international
real estate-related investment firm. Mr. Davis was employed with Colony since
its formation in 1991. 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. Mr. Davis is currently a director of Crestline Capital
Corporation and a director of Harvey's Casino Resorts.
Kathleen H. Lucier is Principal of Stiglich Lucier & Co., a strategic
visioning firm focused on international and national banking, finance and
retail enterprises. Ms. Lucier has been with Stiglich Lucier & Co. since its
formation in August 1999. She previously served as Executive Vice President for
the Southwest Region for Wells Fargo Bank with responsibility for Arizona and
Nevada from November 1996 to November 1998. Prior to that time, she held
various management, sales, marketing and operation positions at Wells Fargo.
Dennis E. Mitchem has been the Director of Corporate Relations, Northern
Arizona University since October 1998. Mr. Mitchem has also served as Executive
Director of Habitat for Humanity,
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<PAGE>
Valley of the Sun, from April 1996 to October 1998, 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 LLP, where he became a partner in 1967 and retired as a senior partner
in June 1993.
Louis P. Neeb has been Chairman of the Board and Chief Executive Officer
of Mexican 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 CEC Entertainment, Inc., (formerly ShowBiz Pizza Time, Inc.) and
Silver Diner Development Inc. and was previously a director of On the Border
Cafes, Inc.
Kenneth B. Roath is the Chairman, President 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 and
a past member of the executive committee of the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT"). Mr. Roath is an Ex-Officio member of
the Board of Governors of NAREIT.
Casey J. Sylla is the Senior Vice President and Chief Investment Officer of
Allstate Insurance Company. From 1992 until July 1995, Mr. Sylla was an
Executive Officer and Vice President and head of the Securities Department of
The Northwestern Mutual Life Insurance Company.
Shelby Yastrow is an attorney and counsel to the law firm of Sonnenschein
Nath & Rosenthal in Chicago, Illinois. He joined McDonald's Corporation in 1978
as Vice President, Chief Counsel of Litigation and Assistant Secretary. He was
appointed Vice President, General Counsel of McDonald's Corporation in 1982 and
Senior Vice President in 1988, before being named Executive Vice President in
1995. He retired from McDonald's Corporation in December 1997. Mr. Yastrow
received his law degree from Northwestern University in 1959.
DESCRIPTION OF THE NOTES
The notes offered by this prospectus supplement and the accompanying
prospectus constitute a separate series of debt securities, which are more fully
described in the accompanying prospectus, to be issued under an indenture dated
as of November 21, 1995, between FFCA and Wells Fargo Bank Arizona, National
Association, as trustee, as supplemented by board resolutions and an officer's
certificate establishing the terms of the notes. The following description of
the particular terms of the notes supplements and replaces inconsistent
provisions contained in the description of the general terms and provisions of
the debt securities contained in the prospectus.
Investors are directed to the description of the debt securities under
"Description of Debt Securities" in the accompanying prospectus. The terms of
the notes include provisions contained in the Trust Indenture Act of 1939, or
the TIA, and holders of notes are referred to the indenture and the TIA for
further information. The following summary of the provisions of the indenture is
not complete and is qualified in its entirety by reference to the indenture,
including the definitions in the indenture of terms used below. Copies of the
indenture and the notes are available for inspection at the office of the
trustee located at 100 West Washington, Phoenix, Arizona 85003. As used in this
section, the "company" means Franchise Finance Corporation of America exclusive
of its subsidiaries.
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<PAGE>
GENERAL
The notes will be limited in aggregate principal amount to $150,000,000.
The notes will be direct, senior unsecured obligations of the company and will
rank equally with all other senior unsecured indebtedness of the company from
time to time outstanding. The notes will be effectively subordinated to mortgage
and other secured indebtedness, if any, of the company and to indebtedness and
other liabilities of the company's subsidiaries, as defined below.
As of June 30, 2000, on a pro forma basis after giving effect to the sale
of the notes offered in this prospectus supplement and the application of the
net proceeds of the offering, the total outstanding indebtedness of the company
and its subsidiaries would have been approximately $767.7 million. Subject to
the limitations in the notes as described below, the indenture will permit the
company and its subsidiaries to incur additional secured and unsecured
indebtedness.
The notes will be issued only as global securities in fully registered
book-entry form without coupons, except under the limited circumstances
described below.
Reference is made to the section titled "Description of Debt
Securities-Certain Covenants" in the accompanying prospectus and "-- Additional
Covenants of the company" below for a description of the covenants applicable to
the notes. Compliance with these covenants generally may not be waived by the
trustee unless the holders of at least a majority in principal amount of
outstanding notes consent to the waiver with respect to the affected series.
However, the defeasance and covenant defeasance provisions of the indenture
described in the accompanying prospectus will apply to the notes.
Except as described under "Description of Debt Securities -- Merger,
Consolidation or Sale of Assets" in the accompanying prospectus or "--
Additional Covenants of the Company" below, the indenture does not contain any
other provisions that would give holders of the notes protection in the event of
(1) a highly leveraged or similar transaction involving the company, (2) a
change of control, or (3) a reorganization, restructuring, merger or similar
transaction involving the company that may adversely affect the holders of the
notes. In addition, subject to the limitations under "Description of Debt
Securities -- Merger, Consolidation or Sale of Assets" in the accompanying
prospectus, the company may, in the future, enter into transactions like the
sale of all or substantially all of its assets or the merger or consolidation of
the company with another entity that would increase the amount of the company's
indebtedness or substantially reduce or eliminate the company's assets, which
may have an adverse affect on the company's ability to service its indebtedness,
including the notes.
The company has no present intention of engaging in a highly leveraged or
similar transaction involving the company. In addition, restrictions on
ownership and transfers of the company's capital stock designed to preserve its
status as a REIT may act to prevent or hinder any transaction of that type or a
change of control.
INTEREST AND MATURITY
The notes will bear interest at the rate on the cover page of this
prospectus supplement from the date of issuance or the most recent interest
payment date, as defined below, to which interest has been paid or provided for,
payable semi-annually on April 15 and October 15 of each year, each an interest
payment date, beginning on April 15, 2001, to the person in whose name a note is
registered at the close of business on April 1 or October 1, as the case may be,
immediately before the interest payment date.
The notes will mature on October 15, 2010. The notes are not subject to any
sinking fund provisions.
OPTIONAL REDEMPTION
The notes will be redeemable, at the option of the company, in whole or in
part at any time or from time to time, upon not less than 30 and not more than
60 days' notice, on any date prior to maturity, referred to as a "redemption
date." The redemption price will be equal to 100% of the
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<PAGE>
principal amount of the notes to be redeemed plus accrued interest to the
redemption date, subject to the right of holders of record on the relevant
record date to receive interest due on an interest payment date that is on or
prior to the redemption date, plus a make-whole premium, if any, together
referred to as the "redemption price." The redemption price will never be less
than 100% of the principal amount of the notes plus accrued interest to the
redemption date.
The amount of the make-whole premium with respect to any note, or portion
of a note, to be redeemed will be equal to the excess, if any, of:
(1) the sum of the present values, calculated as of the redemption date,
of:
(a) each interest payment that, but for the redemption, would have been
payable on the note, or portion of a note, being redeemed on each interest
payment date occurring after the redemption date, excluding any accrued
interest for the period prior to the redemption date; and
(b) the principal amount that, but for the redemption, would have been
payable at the final maturity of the note, or portion of the note, being
redeemed; over
(2) the principal amount of the note, or portion of the note, being
redeemed.
The present values of interest and principal payments referred to in clause
(1) above will be determined in accordance with generally accepted principles of
financial analysis. The present values will be calculated by discounting the
amount of each payment of interest or principal from the date that each payment
would have been payable, but for the redemption, to the redemption date at a
discount rate equal to the treasury yield, as defined below, plus 35 basis
points.
The make-whole premium will be calculated by an independent investment
banking institution of national standing appointed by the company; provided,
that if the company fails to make this appointment at least 30 calendar days
prior to the redemption date, or if the institution so appointed is unwilling or
unable to make this calculation, the calculation will be made by Salomon Smith
Barney Inc., or its affiliate, or, if Salomon is unwilling or unable to make the
calculation, by an independent investment banking institution of national
standing appointed by the trustee.
For purposes of determining the make-whole premium, "treasury yield" means
a rate of interest per annum equal to the weekly average yield to maturity of
United States Treasury Notes that have a constant maturity that corresponds to
the remaining term to maturity of the notes, calculated to the nearest 1|M/12th
of a year, referred to as the remaining term. The treasury yield will be
determined as of the third business day immediately before the applicable
redemption date.
The weekly average yields of United States Treasury Notes will be
determined by reference to the most recent statistical release published by the
Federal Reserve Bank of New York and designated "H.15(519) Selected Interest
Rates" or any successor release. If the release contains a weekly average yield
for United States Treasury Notes having a constant maturity that is the same as
the Remaining Term, then the treasury yield will be equal to this weekly average
yield. In all other cases, the treasury yield will be calculated by
interpolation on a straight-line basis, between the weekly average yields on the
United States Treasury Notes that have a constant maturity closest to and
greater than the remaining term and the United States Treasury Notes that have a
constant maturity closest to and less than the remaining term, in each case as
shown in the release. Any weekly average yields so calculated by interpolation
will be rounded to the nearest 1|M/100th of 1%, with any figure of 1|M/200th of
1% or above being rounded upward.
If weekly average yields for United States Treasury Notes are not available
in the release or otherwise, then the treasury yield will be calculated by
interpolation of comparable rates selected by the independent investment banker.
Any notice to the holders of notes of a redemption need not contain the
redemption price of the notes but need only contain the calculation of the
redemption price as described above. The redemption price, calculated as
described above, will be shown in an Officers' Certificate (as defined in the
indenture) delivered to the trustee no later than two business days before the
redemption date.
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In the case of any partial redemption, selection of the notes for
redemption will be made by the trustee on a pro rata basis, by lot or by any
other method as the trustee in its sole discretion deems to be fair and
appropriate, although no note of $1,000 in original principal amount or less
will be redeemed in part. If any note is to be redeemed in part only, the notice
of redemption relating to that note will state the portion of the principal
amount of that note to be redeemed. A new note in a principal amount equal to
the unredeemed portion will be issued in the holder's name upon cancellation of
the original note.
ADDITIONAL COVENANTS OF THE COMPANY
Reference is made to the section titled "Description of Debt Securities" in
the accompanying prospectus for a description of the covenants applicable to the
notes. In addition to those covenants, the following covenants of the company
will apply to the notes for the benefit of the holders of the notes:
LIMITATION ON INCURRENCE OF TOTAL DEBT. The company will not, and will not
permit any Subsidiary to, incur any Debt (as defined below) if, immediately
after giving effect to the incurrence of the additional Debt and the application
of the proceeds from the Debt, the aggregate principal amount of all outstanding
Debt of the company and its Subsidiaries on a consolidated basis determined in
accordance with generally accepted accounting principles is greater than 60% of
the sum of (1) the company's Total Assets (as defined below) as of the end of
the calendar quarter prior to the incurrence of the additional Debt and (2) the
increase in Total Assets from the end of the quarter including, without
limitation, any increase in Total Assets caused by the incurrence of the
additional Debt.
LIMITATION ON INCURRENCE OF SECURED DEBT. In addition to the above
limitation on the incurrence of Debt, the company will not, and will not permit
any Subsidiary to, incur any Debt secured by any mortgage, lien, charge, pledge,
encumbrance or security interest of any kind on any of its properties, and will
not otherwise grant or convey any mortgage, charge, pledge, encumbrance or
security interest of any kind, if immediately after giving effect to it, the
aggregate principal amount of all outstanding Debt of the company and its
Subsidiaries on a consolidated basis determined in accordance with generally
accepted accounting principles which is secured by any mortgage, charge, pledge,
encumbrance or security interest of any kind on property of the company or any
Subsidiary is greater than 40% of the sum of (1) the company's Total Assets as
of the end of the calendar quarter prior to the incurrence of the Debt, and (2)
any increase in Total Assets from the end of the quarter including, without
limitation, any increase in Total Assets caused by the incurrence of the
additional Debt.
DEBT SERVICE COVERAGE. In addition to the foregoing limitations on the
incurrence of Debt, the company will not, and will not permit any Subsidiary to,
incur any Debt if the ratio of Consolidated Income Available for Debt Service
(as defined below) to Annual Service Charge (as defined below) for the four
consecutive calendar quarters most recently ended prior to the date on which the
additional Debt is to be incurred is less than 1.5 to 1.0 on a pro forma basis
after giving effect to the incurrence of the Debt and the application of the
proceeds from the Debt.
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS. The company will maintain at all
times Total Unencumbered Assets (as defined below) of not less than 150% of the
aggregate outstanding principal amount of all outstanding unsecured Debt of the
company and its Subsidiaries.
As used in this section:
"Annual Service Charge" means the interest expense of the company and
its Subsidiaries for the four consecutive fiscal quarters most recently
ended, including, without limitation, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, net costs pursuant to hedging obligations, the interest
component of all payments associated with Capitalized Leases, amortization
of debt issuance costs, amortization of original issue discount, non-cash
interest payments and the interest component of any deferred payment
obligations.
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"Capitalized Lease" means any lease of property by the company or any
Subsidiary as lessee that is reflected on the company's consolidated
balance sheet as a capitalized lease in accordance with generally accepted
accounting principles.
"Consolidated Income Available for Debt Service" for any period means
Consolidated Net Income (as defined below) of the company and its
Subsidiaries plus amounts which have been deducted, and minus amounts which
have been added, for (1) interest on Debt of the company and its
Subsidiaries, (2) provision for taxes of the company and its Subsidiaries
based on income, (3) amortization of debt discount, (4) provisions for
gains and losses on properties, (5) depreciation, (6) the effect of any
non-cash charge resulting from a change in accounting principles in
determining Consolidated Net Income for the period and (7) amortization of
deferred charges.
"Consolidated Net Income" for any period means the amount of
consolidated net income (or loss) of the company and its Subsidiaries for
the period determined on a consolidated basis in accordance with generally
accepted accounting principles.
"Debt" means any indebtedness of the company or any Subsidiary,
whether or not contingent, in respect of (1) borrowed money or evidenced by
bonds, notes, debentures or similar instruments, (2) indebtedness secured
by any mortgage, pledge, lien, charge, encumbrance or any security interest
existing on property owned by the company or any Subsidiary, (3) letters of
credit or amounts representing the balance deferred and unpaid of the
purchase price of any property except any balance that constitutes an
accrued expense or trade payable or (4) Capitalized Leases, in the case of
items of indebtedness under (1) through (3) above to the extent that any of
those items (other than letters of credit) would appear as liabilities on
the company's consolidated balance sheet in accordance with generally
accepted accounting principles, and also includes, to the extent not
otherwise included, any obligation by the company or any Subsidiary to be
liable for, or to pay, as obligor, guarantor or otherwise (other than for
purposes of collection in the ordinary course of business), indebtedness of
another person (other than the company or any Subsidiary) (it being
understood that Debt will be deemed to be incurred by the company or any
Subsidiary whenever the company or the Subsidiary creates, assumes,
guarantees or otherwise becomes liable in respect of the Debt).
"Subsidiary" means (1) any corporation, association, joint venture or
other business entity of which more than 50% of the total voting power of
shares of stock or other ownership interests entitled to vote in the
election of the directors, managers, trustees or other persons having the
power to direct or cause the direction of the management and policies
thereof is at the time owned or controlled, directly or indirectly, by the
company or one or more of the other Subsidiaries of the company, and (2)
any partnership or limited liability company in which the company or one or
more of the other Subsidiaries of the company, directly or indirectly,
possesses more than a 50% interest in the total capital or total income of
the partnership or limited liability company.
"Total Assets" as of any date means the sum of (1) Undepreciated Real
Estate Assets and (2) all other assets of the company and its Subsidiaries
determined in accordance with generally accepted accounting principles (but
excluding accounts receivable and intangibles).
"Total Unencumbered Assets" means Total Assets minus the value of any
properties of the company and its Subsidiaries that are encumbered by any
mortgage, charge, pledge, lien, security interest or other encumbrance of
any kind, including the value of any stock of any Subsidiary that is so
encumbered. For purposes of this definition, the value of each property
will be equal to the purchase price or cost of the property and the value
of any stock subject to any encumbrance will be determined by reference to
the value of the properties owned by the issuer of the stock.
"Undepreciated Real Estate Assets" as of any date means the amount of
real estate assets of the company and its Subsidiaries on that date, before
depreciation and amortization determined on a consolidated basis in
accordance with generally accepted accounting principles.
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BOOK-ENTRY SYSTEM
The notes will be issued in the form of a single fully registered note in
book-entry form, referred to as a global security which will be deposited with,
or on behalf of, the Depository Trust Company ("DTC") and registered in the name
of DTC or its nominee. Unless and until it is exchanged in whole or in part for
the individual notes represented, a global security may not be transferred
except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or
another nominee of DTC or by DTC or any nominee to a successor depository or any
nominee of the successor.
So long as DTC or its nominee is the registered owner of a global security,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by a global security for all purposes under the
indenture and the beneficial owners of the notes will be entitled only to those
rights and benefits afforded to them in accordance with DTC's regular operating
procedures. Except as provided below, owners of beneficial interest in a global
security will not be entitled to have any of the individual notes registered in
their names, will not receive or be entitled to receive physical delivery of any
notes in definitive form and will not be considered the owners or holders of the
notes under the indenture. The laws of some states require that purchasers of
securities take physical delivery of the securities in definitive form. These
laws may impair the ability to transfer beneficial interests in a global
security.
If any of the following occur, the company will issue individual notes in
certificated form in exchange for a global security:
* DTC is at any time unwilling or unable to continue as depository or if
at any time DTC ceases to be a clearing agency registered under the
Exchange Act, and a successor depository is not appointed by the
company within 90 days;
* an Event of Default under the indenture with respect to the notes has
occurred and is continuing and the beneficial owners representing a
majority in principal amount of the notes represented by a global
security advise DTC to cease acting as depository; or
* the company, in its sole discretion, determines at any time that the
notes will no longer be represented by a global security.
In any of these instances, an owner of a beneficial interest in a global
security will be entitled to physical delivery of individual notes in
certificated form of like tenor, equal in principal amount to their beneficial
interest and to have the notes in certificated form registered in its name.
Notes issued in certificated form will be issued in denominations of $1,000 or
any integral multiple thereof, and will be issued in registered form only,
without coupons.
DTC has advised the company of the following information regarding DTC:
DTC is:
* a limited-purpose trust company organized under the New York Banking
Law;
* a "banking organization" within the meaning of the New York Banking
Law;
* a member of the Federal Reserve System;
* a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
* a "clearing agency" registered under the provisions of Section 17A of
the Exchange Act.
DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among its participants of securities transactions,
like transfers and pledges, in deposited securities through electronic
computerized book-entry changes in its participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Direct participants of DTC include securities brokers and dealers, banks,
trust companies, clearing corporations and other organizations. DTC is owned by
a number of its direct participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others like
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securities brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Purchases of notes under the DTC system must be made by or through direct
participants, which will receive a credit for the notes on DTC's records. The
ownership interest of each actual purchaser of each note, known as a beneficial
owner, is in turn recorded on the direct and indirect participants' records. A
beneficial owner does not receive written confirmation from DTC of its purchase.
The beneficial owner is expected to receive a written confirmation providing
details of the transaction, as well as periodic statements of its holdings, from
the direct or indirect participant through which the beneficial owner entered
into the transaction.
Transfers of ownership interests in notes are accomplished by entries made
on the books of participants acting on behalf of beneficial owners. The
beneficial owners do not receive certificates representing their ownership
interests in notes, except in the event that use of the book-entry system for
the notes is discontinued.
To facilitate subsequent transfers, the notes are registered in the name of
DTC's partnership nominee, Cede & Co. The deposit of the notes with DTC and
their registration in the name of Cede & Co. effects no change in beneficial
ownership. DTC has no knowledge of the actual beneficial owners of the notes;
DTC records reflect only the identity of the direct participants to whose
accounts notes are credited, which may or may not be the beneficial owners. The
participants remain responsible for keeping account of their holdings on behalf
of their customers.
Delivery of notices and other communications by DTC to direct participants,
by direct participants to indirect participants, and by direct participants and
indirect participants to beneficial owners are governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Redemption notices will be sent to Cede & Co. If less than all of the notes
represented by a global security are to be redeemed, DTC's practice is to
determine by lot the amount of the interest of each direct participant to be
redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the notes.
Under its usual procedures, DTC mails a proxy, known as an omnibus proxy, to the
issuer as soon as possible after the record date. The omnibus proxy assigns Cede
& Co.'s consenting or voting rights to those direct participants to whose
accounts the notes are credited on the record date, which is identified on a
list attached to the omnibus proxy.
Principal and interest payments on the notes will be made by the company to
the trustee and from the trustee to DTC. DTC's practice is to credit direct
participant's accounts on the payable date in accordance with their respective
holdings as shown on DTC's records unless DTC has reason to believe that it will
not receive payment on the payable date. Payments by participants to beneficial
owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of the participant
and not of DTC, the trustee or the company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal and interest to DTC is the responsibility of the company or the
trustee, disbursement of the payments to direct participants is the
responsibility of DTC, and disbursement of the payments to the beneficial owners
is the responsibility of direct and indirect participants.
DTC may discontinue providing its services as securities depository with
respect to the notes at any time by giving reasonable notice to the company or
the trustee. Under these circumstances, in the event that a successor securities
depository is not appointed, note certificates are required to be printed and
delivered.
The company may decide to discontinue use of the system of book-entry
transfers through DTC, or a successor securities depository. In that event, note
certificates will be printed and delivered.
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None of the company, the trustee, any paying agent, the security registrar
or the underwriters will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a global security for any notes or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests or for any
other aspect of the relationship between DTC and its participants or the
relationship between the participants and the owners of beneficial interests in
a global security owned through the participants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
FFCA is a real estate investment trust. Recently, legislation was enacted
that modifies some of the rules that apply to REITs. Specifically, the
legislation includes a provision that limits, in some cases, a REIT's ability to
own more than 10%, by vote or value, of the stock of another corporation. In
general, a REIT cannot currently own more than 10% of the outstanding voting
securities of any one issuer. The legislation allows a REIT to own any
percentage of the voting stock and value of a taxable REIT subsidiary, provided
all of the REIT's taxable REIT subsidiaries do not represent more than 20% of
the REIT's total assets and at least 75% of the REIT's total assets are real
estate assets or other qualifying assets. This legislation may require FFCA to
restructure its interest in FFCA Funding because FFCA is considered to own more
than 10% of the value of FFCA Funding. Additionally, the legislation includes a
provision that prevents a taxable REIT subsidiary from deducting interest on
debt funded directly or indirectly by a REIT if tests regarding the taxable REIT
subsidiary's debt to equity ratio and interest expense are satisfied. The
legislation also includes a provision that reduces the REIT distribution
requirement from 95% to 90% of a REIT's taxable income as described in the
prospectus. The provisions discussed above are generally effective for taxable
years ending after December 31, 2000. In addition, the legislation includes a
provision that provides transition rules to allow C corporations, like FFCA
Funding, to convert into "taxable REIT subsidiaries" tax free.
The Treasury Department recently published temporary regulations that
include rules that are similar to the rules contained in Internal Revenue
Service Notice 88-19. The temporary regulations provide that a REIT must file an
election to be subject to the rules of Section 1374 of the Internal Revenue Code
and regulations thereunder with respect to the net built-in-gain of C
corporation assets that become assets of a REIT, by the qualification of the C
corporation as a REIT or by the transfer of the assets of a C corporation to a
REIT in a transaction in which the assets have a carryover basis in the hands of
the REIT, if the C corporation is to avoid the recognition of any gain arising
from the qualification or transaction. For additional federal income tax
considerations, see the section entitled "Certain Federal Income Tax
Considerations" in the accompanying prospectus.
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
dated the date of this prospectus supplement, FFCA has agreed to sell to each of
the underwriters named below, and each of the underwriters has severally agreed
to purchase from FFCA, the principal amount of the notes shown opposite its name
below:
Principal Amount of
Underwriter the Notes
Salomon Smith Barney Inc. ................................... $ 80,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................................... 40,000,000
Donaldson, Lufkin & Jenrette Securities Corporation ......... 20,000,000
Banc of America Securities LLC .............................. 10,000,000
------------
Total ...................................................... $150,000,000
In the underwriting agreement, the several underwriters have agreed,
subject to the terms and conditions in the agreement, to purchase all of the
notes offered in this prospectus supplement if any notes are purchased.
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The underwriters have advised FFCA that they propose initially to offer the
notes to the public at the public offering price shown on the cover page of this
prospectus supplement, and to selected dealers at this price less a concession
not in excess of .40% of the principal amount of the notes. The underwriters may
allow, and the dealers may reallow, a concession to other dealers not in excess
of .25% of the principal amount of the notes. After the initial public offering,
the public offering prices and concessions may be changed from time to time.
FFCA has agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in respect of those liabilities.
The underwriters have advised FFCA that they intend to make a market in the
notes after the completion of the offering; however, the underwriters are not
obligated to do so, and any market-making, if begun, may be terminated at any
time without notice. No assurance can be given as to the liquidity of the
trading market, if any, for the notes.
SOME PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
PURCHASES OF THE NOTES TO STABILIZE THEIR MARKET PRICES, PURCHASES OF THE NOTES
TO COVER SOME OR ALL OF A SHORT POSITION IN THE NOTES MAINTAINED BY THE
UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
Until the distribution of the notes is completed, rules of the SEC may
limit the ability of the underwriters and selling group members to bid for and
purchase the notes. As an exception to these rules, the underwriters are
permitted to engage in transactions that stabilize the price of the notes. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the notes.
If the underwriters create a short position in the notes in connection with
this offering, the underwriters may reduce that short position by purchasing
notes in the open market. A short position would occur if the underwriters sell
more notes than are shown on the cover page of this prospectus supplement. The
underwriters may also impose a penalty bid on selling group members. This means
that if the underwriters purchase notes in the open market to reduce the
underwriters' short position or to stabilize the price of the notes, they may
reclaim the amount of the selling concession from the selling group members who
sold those notes as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither FFCA nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the notes.
In addition, neither FFCA nor any of the underwriters makes any
representation that the underwriters will engage in those transactions or that
those transactions, once commenced, will not be discontinued without notice.
The underwriters and their respective affiliates have from time to time,
provided investment banking and commercial banking services to FFCA, for which
they received customary fees. In addition, the underwriters and their affiliates
may provide, in the future, these services to FFCA. An affiliate of Banc of
America Securities LLC is a lender under FFCA's credit facility. FFCA intends to
use the net proceeds from the sale of the notes to repay amounts outstanding
under the credit facility.
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LEGAL MATTERS
The legality of the notes to be issued in connection with this offering is
being passed upon for FFCA by the law firm of Kutak Rock LLP, Denver, Colorado.
Various 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 LLP own an aggregate of approximately 35,000
shares of common stock of FFCA.
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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
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THE COMPANY
Franchise Finance Corporation of America (the "Company") is a specialty
retail finance company dedicated primarily to providing real estate financing to
the chain restaurant industry, as well as to the convenience store and
automotive parts and service industries. The Company's primary strategy is to
provide all necessary financing for multi-unit operators and franchisors who
operate retail properties in which the Company invests. The Company's
investments are diversified by geographic region, operator and chain. The
Company's Common Stock trades on the New York Stock Exchange (the "NYSE") under
the symbol FFA. The Company is a Delaware corporation and maintains its
corporate offices at 17207 North Perimeter Drive, Scottsdale, Arizona 85255 and
its telephone number is (602) 585-4500.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include investment in additional
properties, the expansion and improvement of certain properties in the Company's
portfolio and the repayment of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The ratio shown for the year ended December 31, 1993 is derived
from the combined historical financial information of Franchise Finance
Corporation of America I, a Delaware corporation, and eleven real estate limited
partnerships, the predecessors to the Company (the "Combined Predecessors"). The
ratio shown for the year ended December 31, 1994 is derived from the financial
information of both the Combined Predecessors and the Company. The ratios shown
for the years ended December 31, 1995, 1996 and 1997 are for the Company.
The Company commenced operations on June 1, 1994 as a result of the merger
of the Combined Predecessors. The information for the periods prior to that date
is, in effect, a restatement of the historical operating results of Franchise
Finance Corporation of America I and eleven real estate limited partnerships as
if they had been consolidated since January 1, 1993. The predecessor companies
were primarily public real estate limited partnerships which were prohibited
from borrowing for real estate acquisitions and had no opportunity for growth
through acquisitions; therefore, the investment objectives of the Company are
different than the objectives of the Combined Predecessors, and the information
presented below does not necessarily present the ratios of earnings to fixed
charges as they would have been had the Company operated as a REIT for all
periods presented.
Year Ended December 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
43.73 16.78 4.16 3.54 3.04
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income (including gain
or loss on the sale of property) before REIT transaction related costs plus
fixed charges. Fixed charges consist of interest expense (including interest
costs capitalized, if any) and the amortization of debt issuance costs. To date,
the Company has not issued any Preferred Stock; therefore, the ratios of
earnings to combined fixed charges and preferred share dividends are the same as
the ratios presented above.
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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, in connection
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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
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(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 that may be
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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
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a 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 directors and in respect
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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 liquidating
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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 conversion price or manner of calculation thereof, the conversion period,
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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 Company would not qualify as "real estate assets,"
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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 similarly affect these
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calculations. The Company does not expect to generate nonqualifying income in
quantities which would cause it to fail either at the foregoing 75% or 95% gross
income tests.
If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
test was due to reasonable cause and not willful neglect and the Company
attaches a schedule of its income sources to its tax return that does not
fraudulently or intentionally exclude any income sources. As discussed above,
even if these relief provisions apply, a tax would be imposed with respect to
such excess income.
ANNUAL DISTRIBUTION REQUIREMENTS. Each year, the Company must have a
deduction for dividends paid (determined under Section 561 of the Code) to its
stockholders in an amount equal to (a) 95% of the sum of (i) its "REIT taxable
income" as defined below (computed without a deduction for dividends paid and
excluding any net capital gain), (ii) any net income from foreclosure property
less the tax on such income, minus (b) any "excess noncash income," as defined
below. "REIT taxable income" is the taxable income of a REIT subject to certain
adjustments, including, without limitation, an exclusion for net income from
foreclosure property, a deduction for the excise tax on the greater of the
amount by which the REIT fails the 75% or the 95% income test, and an exclusion
for an amount equal to any net income derived from prohibited transactions.
"Excess noncash income" means the excess of certain amounts that the REIT is
required to recognize as income in advance of receiving cash, such as original
issue discount on purchase money debt, over 5% of the REIT taxable income before
deduction for dividends paid and excluding any net capital gain. Such
distributions must be made in the taxable year to which they relate, or in the
following taxable year if declared before the REIT timely files its tax return
for such year and is paid on or before the first regular dividend payment after
such declaration.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (a) the actual receipt of income and the actual
payment of deductible expenses and (b) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company.
Furthermore, principal payments on Company indebtedness, which would have the
effect of lowering the amount of distributable cash without an offsetting
deduction to Company taxable income, may adversely affect the Company's ability
to meet this distribution requirement. In the event that such timing differences
or reduction to distributable cash occurs, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possible long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year that may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay to the IRS interest based on the amount of any deduction
taken for deficiency dividends.
Congress is currently considering several proposals which, if adopted,
would modify the requirements applicable to REITs. Among such requirements is
one which would preclude a REIT from owning more than 10% of the value of the
stock of any subsidiary, other than a qualified REIT subsidiary. An additional
proposal would prohibit an existing corporation from deferring built-in gains
upon filing an election to be treated as a REIT. If an entity's election to be
treated as a REIT were terminated, such provision, if enacted, would make
requalification as a REIT substantially more difficult. It is not possible to
predict which, if any, of the current proposals will be enacted or the effect of
such proposals on the Company.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, thereby reducing the amount of cash available for
distribution to its stockholders. Distributions to stockholders in any year in
which the Company fails to
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qualify would not be deductible by the Company nor would they be required to be
made. In such an event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders would be taxable as ordinary income
and, subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends-received deduction. Unless entitled to relief under
specific statutory relief provisions, the Company would also be disqualified
from taxation as a REIT for the four taxable years following the year during
which such qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
STATE AND LOCAL TAXES
The Company may be subject to state or local taxes in other jurisdictions
such as those in which the Company may be deemed to be engaged in activities or
own property or other interests. Such tax treatment of the Company in states
having taxing jurisdiction over it may differ from the federal income tax
treatment described in this summary. Each stockholder should consult his or her
tax advisor as to the status of the Company and the Securities under the
respective state laws applicable to them.
PLAN OF DISTRIBUTION
The terms of any offering of Securities under this Registration Statement
will be set forth in the applicable Prospectus Supplement. The Company may sell
the Securities to one or more underwriters for public offering and sale by them
or may sell the Securities to investors directly or through agents or dealers.
Any such underwriter or agent involved in the offer and sale of the Securities
will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
relating to such prevailing market prices or at negotiated prices. The Company
also may, from time to time, authorize dealers acting as the Company's agents to
offer and sell the Securities upon the terms and conditions as are set forth in
the applicable Prospectus Supplement. In connection with the sale of Securities,
underwriters may receive compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any underwriting
compensation paid by the Company to underwriters or agents in connection with
the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Dealers and agents participating in the
distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock. The Common Stock is currently listed on the NYSE.
Unless otherwise specified in the related Prospectus Supplement, any shares of
Common Stock sold pursuant to a Prospectus Supplement will be listed on the
NYSE, subject to official notice of issuance. The Company may elect to list any
series of Debt Securities or Preferred Stock on the NYSE or other exchange, but
is not obligated to do so. It is possible that one or more underwriters may make
a market in a series of Securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. Therefore, there can
be no assurance as to the liquidity of, or the trading market for, the
Securities.
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If so indicated in the Prospectus Supplement, the Company will authorize
agents and underwriters or dealers to solicit offers by certain purchasers to
purchase Securities from the Company at the public offering price set forth in
the Prospectus Supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. Such contracts will be
subject to only those conditions set forth in the Prospectus Supplement, and the
Prospectus Supplement will set forth the commission payable for solicitation of
such offers.
LEGAL MATTERS
Certain legal matters relating to the Securities to be offered hereby, and
certain REIT matters relating to the Company, will be passed upon for the
Company by the national law firm of Kutak Rock, 717 Seventeenth Street, Suite
2900, Denver, Colorado 80202.
EXPERTS
The financial statements and schedules for the fiscal year ended December
31, 1997 incorporated by reference in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report, with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
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================================================================================
$150,000,000
FRANCHISE FINANCE
CORPORATION OF AMERICA
8.75% Senior Notes due 2010
[LOGO]
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PROSPECTUS SUPPLEMENT
September 18, 2000
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Salomon Smith Barney
Merrill Lynch & Co.
Donaldson, Lufkin & Jenrette
Banc of America Securities LLC
================================================================================
